Bal. sheet - 1 THE BALANCE SHEET. Bal. sheet - 2 BALANCE SHEET Resources (Assets) Claims against resources (Liabilities) Remaining claims accruing to.

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Presentation transcript:

Bal. sheet - 1 THE BALANCE SHEET

Bal. sheet - 2 BALANCE SHEET Resources (Assets) Claims against resources (Liabilities) Remaining claims accruing to owners (Owner’s Equity)

Bal. sheet - 3 BALANCE SHEET Fundamental Objectives  Liquidity  Liquidity - length of time until assets are realized or converted to cash (or until a liability has to be paid)  Solvency  Solvency – the ability of a firm to meet its debts as they come due  Financial flexibility  Financial flexibility - ability of company to manage its cash flows (deal with emergencies or take advantage of unexpected opportunities)

Bal. sheet - 4 Assets Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Basic Definitions - SFAC No. 6 Balance Sheet

Bal. sheet - 5 Basic Definitions - SFAC No. 6 Liabilities Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events. Balance Sheet

Bal. sheet - 6 Owners’ Equity The residual interest in the assets of an entity that remains after its liabilities are deducted. Basic Definitions - SFAC No. 6 Balance Sheet

Bal. sheet - 7 Asset Classifications Current Assets CashInventories ReceivablesPrepayments Balance Sheet Format

Bal. sheet - 8 Asset Classifications Noncurrent Assets Investments and funds Intangibles Property, Plant, & Equipment Deferred Charges Balance Sheet Format

Bal. sheet - 9 Liability Classifications Current Liabilities Accounts Payable Short-term Notes Payable Collections in advance of unearned revenue Accrued Expenses Balance Sheet Format

Bal. sheet - 10 Liability Classifications Noncurrent Liabilities Capital Leases Long-term Notes Payable Pension Liabilities Bonds Payable Balance Sheet Format

Bal. sheet - 11 Equity Classifications Owners’ Equity Capital Stock Other Contributed Capital Treasury Stock Retained Earnings Balance Sheet Format

Bal. sheet - 12 WORKING CAPITAL ANALYSIS Current assets Less:Current liabilities Equals:Working Capital Current assets Current liabilities = Current Ratio (Working Capital Ratio)

Bal. sheet - 13 Additional Reporting Issues  Loss and gain contingencies  Subsequent Events  Disclosure Notes  Valuations reported in the Balance Sheet  Comparative Statements

Bal. sheet - 14 LOSS CONTINGENCIES loss  Disclose a loss contingency when... probable or –Information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the statements, or reasonably estimated. –The amount of the loss can be reasonably estimated. both  If both conditions exist, loss contingency must be accrued (recorded)

Bal. sheet - 15 GAIN CONTINGENCIES never  Gain contingencies are never recorded prior to realization “Conservatism”  They may be disclosed in footnotes discussed within the statements only if a high probability of realization exists

Bal. sheet - 16 ACCOUNTING FOR CONTINGENCIES CONTINGENT LOSSES LikelihoodAccounting Action ProbableRecognize liability if amount can be estimated. If not disclose in a footnote Reasonably possibleDisclose in a footnote RemoteNo recognition required, may disclose in a footnote CONTINGENT GAINS LikelihoodAccounting Action ProbableIf amount can be estimated, conservative approach is to disclose in footnote. Reasonably possibleMay disclose in a footnote, but be careful to avoid misleading implications. RemoteNo recognition or disclosure

Bal. sheet - 17 SUBSEQUENT EVENTS after  Events occurring after the Balance Sheet date but before the issuance of the financial statements  They would have a material effect on the financial statements x8 Subsequent Period 3-8-x9 Balance Sheet Date Date Financials Issued

Bal. sheet - 18 SUBSEQUENT EVENTS  Reported on the Balance Sheet (recorded) existed –If they provide additional evidence about conditions that existed at the balance sheet date  Reported in notes to the Balance Sheet did not exist –If they result from conditions that did not exist at the balance sheet date, arose after that date, and do merit adjustment  Neither recorded or disclosed –Nonaccounting events or conditions that management normally communicates through other means

Bal. sheet - 19 “RESERVES”  This term may be misinterpreted as a “fund of cash”  Confusing uses of “Reserves” –Contra asset: Reserve for uncollectible accounts Reserve for depreciation –Estimated liability (Reserve for warranties) –Appropriation of Retained Earnings (Reserve for future expansion)  Term, “reserve” should really be eliminated

Bal. sheet - 20 RETAINED EARNINGS Restrictions (Appropriations)  Limit the ability of the corporation to declare dividends –Required by law or contract –Voluntary decision by the Board of Directors  Entry is reversed when the reason for the restriction ceases to exist  The term “reserve” is permitted - but should be avoided since it is misleading!!!

Bal. sheet - 21 Limitations of Balance Sheet  Current value amounts may not be shown on the Balance Sheet.  Contains many estimates.  Certain assets and liabilities are not shown on the Balance Sheet, e.g., human resources.

Bal. sheet - 22 Ratio Analysis  Liquidity (Solvency) Ratios –Current Ratio –Acid-test Ratio  Efficiency Ratios –Inventory Turnover  Equity Position and Coverage Ratios –Debt-to-Equity  Profitability Ratios –Earnings Per Share