Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA The Balance Sheet and Financial Disclosures Chapter 3

3-2 The Balance Sheet Limitations:  The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value.  Resources such as employee skills and reputation are not recorded in the balance sheet. Limitations:  The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value.  Resources such as employee skills and reputation are not recorded in the balance sheet. Usefulness:  The balance sheet describes many of the resources a company has for generating future cash flows.  It provides liquidity information useful in assessing a company’s ability to pay its current obligations.  It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure. Usefulness:  The balance sheet describes many of the resources a company has for generating future cash flows.  It provides liquidity information useful in assessing a company’s ability to pay its current obligations.  It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure. Reports a company’s financial position on a particular date.

3-3 Assets Liabilities Shareholders’ Equity Classifications

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3-5 1.Cash 2.Cash Equivalents 3.Short-term Investments 4.Receivables 5.Inventories 6.Prepaid Expenses 1.Cash 2.Cash Equivalents 3.Short-term Investments 4.Receivables 5.Inventories 6.Prepaid Expenses Current Assets Will be converted to cash or consumed within one year or the operating cycle, whichever is longer. Current Assets Cash equivalents include certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills.

3-6 Operating Cycle of a Typical Manufacturing Company Use cash to acquire raw materials Convert raw materials to finished product Deliver product to customer Collect cash from customer

3-7 Noncurrent Assets 1.Investments 2.Property, Plant, & Equipment 3.Intangible Assets 4.Other Assets 1.Investments 2.Property, Plant, & Equipment 3.Intangible Assets 4.Other Assets Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer. Noncurrent Assets

3-8 Noncurrent Assets Other Assets 1.Include long-term prepaid expenses and any noncurrent assets not falling in to one of the other classifications. Investments 1.Not used in the operations of the business. 2.Include both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes. Property, Plant, and Equipment 1.Are tangible, long-lived, and used in the operations of the business. 2.Include land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells. 3.Reported at original cost less accumulated depreciation (or depletion for natural resources), except for land which is not depreciated. Intangible Assets 1.Used in the operations of the business but have no physical substance. 2.Include patents, copyrights, and franchises. 3.Reported net of accumulated amortization. ©

3-9 Liabilities represent obligations to other entities. The information value of reporting these amounts is enhanced by classifying them as current liabilities and long-term liabilities.

3-10 Current Liabilities 1.Accounts Payable 2.Notes Payable 3.Accrued Liabilities 4.Unearned Revenues 5.Current Maturities of Long-Term Debt 1.Accounts Payable 2.Notes Payable 3.Accrued Liabilities 4.Unearned Revenues 5.Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle, whichever is longer. Current Liabilities

3-11 Long-Term Liabilities 1.Long-term Notes 2.Mortgages 3.Long-term Bonds 4.Pension Obligations 5.Lease Obligations 1.Long-term Notes 2.Mortgages 3.Long-term Bonds 4.Pension Obligations 5.Lease Obligations Obligations that will not be satisfied within one year or the operating cycle, whichever is longer. Long-Term Liabilities

3-12 Shareholders’ equity is the residual interest in the assets of an entity that remains after deducting liabilities.

3-13 U.S. GAAP vs. IFRS  Does not specify a minimum list of items to be presented in the balance sheet.  Some U.S. companies use the statement of financial position title as well.  Presents current assets and liabilities before noncurrent assets and liabilities.  Specifies a minimum list of items to be presented in the balance sheet.  Statement title changed to statement of financial position, although title is not required.  Does not prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first. There are more similarities than differences in balance sheets prepared according to U.S. GAAP and those prepared applying IFRS. Some differences are highlighted below.

3-14 U. S. GAAP vs. IFRS A recent survey of large companies that prepare their financial statements according to IFRS reports that in 2009, 73% of the surveyed companies list noncurrent items first.

3-15 U. S. GAAP vs. IFRS The FASB and IASB are working together on the Financial Statement Presentation project to establish a common standard for presenting information in the financial statements. Each of the financial statements will include classifications by operating, investing, and financing activities, as well as income taxes, discontinued operations, and equity (if needed).

3-16 Disclosure Notes Summary of Significant Accounting Policies Conveys valuable information about the company’s choices from among various alternative accounting methods. Subsequent Events A significant development that occurs after the company’s fiscal year-end but before the financial statements are issued or available to be issued. Noteworthy Events and Transactions Transactions or events that are potentially important to evaluating a company’s financial statements, e.g., related-party transactions, errors and irregularities, and illegal acts.

3-17 Management Discussion and Analysis Provides a biased but informed perspective of a company’s operations, liquidity, and capital resources.

3-18 Management’s Responsibilities  Preparing the financial statements and other information in the annual report.  Maintaining and assessing the company’s internal control procedures.

3-19 Auditors’ Report Expresses the auditors’ opinion as to the fairness of presentation of the financial statements in conformity with generally accepted accounting principles. The auditors’report must comply with specifications of the Public Companies Accounting Oversight Board (PCAOB).

3-20 Auditors’ Opinions Unqualified Issued when the financial statements present fairly the financial position, results of operations, and cash flows and are in conformity with U.S. GAAP. Qualified Issued when there is an exception that is not of sufficient seriousness to invalidate the financial statements as a whole. Adverse Issued when the exceptions are so serious that a qualified opinion is not justified. Disclaimer Issued when insufficient information has been gathered to express an opinion.

3-21 Compensation of Directors and Top Executives Proxy Statement Information  Summary Compensation Table  Salary  Bonus  Stock Awards  Option Awards  Other Compensation A proxy statement is sent each year to all shareholders, usually in the same mailing with the annual report.