The Balance Sheet and Financial Disclosures Sid Glandon, DBA, CPA Associate Professor of Accounting

Balance Sheet  Usefulness –Evaluating capital structure –Computing rates of return –Analyzing liquidity –Analyzing solvency –Analyzing financial flexibility

Balance Sheet  Limitations –Historical cost –Estimates are used –Items must be objectively determined –Does not report off-balance sheet financing

Balance Sheet Elements  Assets –Probable future economic benefits as a result of past transactions or events  Liabilities –Probable future sacrifices of economic benefits as a result of past transactions or events  Equity –Residual interest in the net assets

Accounting Equation

Classification of Assets  Current assets –Cash and cash equivalents –Short-term investments –Receivables –Inventories –Prepaid expenses  Investments (long-term)  Property, plant, and equipment  Intangible assets  Other assets

Classification of Liabilities and Equity  Current liabilities –Accounts payables –Notes payable –Unearned revenue –Accrued liabilities –Current portion of long-term debt  Long-term liabilities  Owners’ equity –Capital stock –Additional paid-in capital –Retained earnings

Notes to the Financial Statements –Summary of significant accounting policies  Cash equivalents  Inventories  Depreciation  Revenue recognition –Subsequent events –Related party transactions –Contingent liabilities

Auditors’ Report  Unqualified opinion (3 paragraphs) –fourth paragraph  lack of consistency  uncertainty  emphasis of a matter  Qualified opinion –exceptions  Adverse opinion –not fairly presented  Disclaimer of opinion –scope limitations

Risk Analysis  Balance sheet ratios –Liquidity ratios  Current ratio  Acid-test ratio –Financing ratios  Debt to equity ratio  Times interest earned ratio

Liquidity Ratios

Financing Ratios