1. Chapter 2: The Balance Sheet
“Old accountants never die; they just lose their balance”
--Anonymous
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2. The Balance Sheet
Also called the statement of condition or the statement of financial position
Shows the financial condition or financial position of a company on a particular date
Fiscal year end
Summarizes what the firm owns and what the firm owes to outsiders and to internal owners
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3. Financial Condition Assets = Liabilities + Stockholders’ equity
Assets are what the firm owns.
Liabilities are what the firm owes to outsiders.
Stockholders’ equity is what the firm owes to internal owners.
Represents their investment
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4. Consolidation
When a parent owns more than 50% of the voting stock of a subsidiary, the financial statements are combined even though they are separate legal entities.
The statements are consolidated, because the companies are in substance one company, given the proportion of control by the parent.
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5. Common-Size Balance Sheet
Expresses each item on the balance sheet as a percentage of total assets
Reveals the composition of assets
Form of vertical ratio analysis that allows comparison of firms
Useful for evaluating trends within a firm and to make industry comparisons
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6. Assets Segregated according to how they are utilized Current Assets
Life less than 365 days
Property, Plant, and Equipment
Accumulated depreciation and amortization
Usually shown net with PP&E
Other Assets
Goodwill, trademarks, etc
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7. R.E.C. Inc. Consolidated Balance Sheets as December 31, 2010 and 2009 (in Thousands)
Cash $ 4, $ 2,382
Marketable securities , ,004
Accounts receivable, less doubtful accounts , ,350
Inventories , ,769
Prepaid expenses
Total current assets , ,264
Property, Plant, and Equipment
Land
Buildings and leasehold improvements , ,928
Equipment , ,768
40, ,507
Less accumulated depreciation and amortization 11, ,530
Net property, plant, and equipment , ,977
Other Assets
Total Assets $95, $75,909
_________ _________
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8. Molson Coors (TAP)

9. Property, Plant, and Equipment (PP&E)
Encompasses a company’s fixed assets
Also called tangible, long-lived, and capital assets
Not used up during annual operations
Produce economic benefits for more than one year
Have physical substance
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10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Property, Plant, and Equipment Proportion of fixed assets at the manufacturing level
Net Fixed Asset as A % of Total Assets
Manufacturing %
Wholesale
Retail
Pharmaceutical Prep.
24.0
Drugs
9.7
Pharmacy and Drug Stores
12.8
Household Furniture
23.6
Furniture
11.9
Furniture Stores
19.5
Sporting and Athletic Goods
14.9
Sporting and Recreation
9.5
Sporting Goods Stores
15.9
Source: Data from The Risk Management Association, Annual Statement Studies, Philadelphia, PA, © “2008” by RMA-The Risk Management Association. All Rights Reserved.
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11. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Molson Coors (TAP)
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12. Other Assets Can include many other noncurrent items:
Property held for sale
Start-up costs in connection with a new business
Long-term investments
Intangible assets
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13. Other Assets Intangible Assets
Goodwill recognized in business combinations
Patents
Trademarks
Copyrights
Brand Names
Franchises
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14. Other Assets Goodwill
Most important intangible asset for analytical purposes because of potential materiality
Arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired
Evaluated annually
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15. Liabilities Represent claims against assets and include
Current Liabilities
(accounts payable, notes payable, current maturities of long-term debt, accrued liabilities, unearned revenue or deferred credits, deferred federal income taxes)
Noncurrent liabilities
(long-term debt, capital lease obligations, postretirement benefits other than pensions, commitments and contingencies, hybrid securities)
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16. Liabilities Current liabilities
Current liabilities must be satisfied in one year or one operating cycle and include
Accounts payable
Notes payable
Current portion of long-term debt
Accrued liabilities
Deferred taxes
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17. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Molson Coors (TAP)
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

18. Noncurrent Liabilities
Obligations with maturities beyond one year
Long-term debt
Capital lease obligations
Postretirement benefits other than pensions
Commitments and contingencies
Hybrid securities
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19. Noncurrent Liabilities Long-term debt
Bonds
Long-Term Notes Payable
Mortgages
Obligations under leases
Pension Liabilities
Long-Term Warranties
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20. Noncurrent Liabilities Capital lease obligations
Are, in substance, a “purchase” rather than a “lease”
Affect both balance sheet and income statement
Disclosures found in the notes, often under both the property, plant, and equipment note and the commitments and contingencies note
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21. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
Molson Coors (TAP)
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

22. Stockholders’ Equity Final section of balance sheet
Also called shareholders’ equity
Residual interest in assets that remains after deducting liabilities
Owners bear greatest risk and benefit from greatest rewards.
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23. Stockholders’ Equity Common Stock
Shareholders
do not ordinarily receive a fixed return
have voting privileges in proportion to ownership interest
can benefit through price appreciation
can suffer through price depreciation
Dividends are declared at the discretion of a company’s board of directors.
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24. Stockholders’ Equity Retained Earnings
Sum of every dollar a company has earned since its inception, less any payments made to shareholders
Funds a company has elected to reinvest in the operations of the business rather than pay out in stock
Measurement of all undistributed earnings
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25. Stockholders’ Equity Retained Earnings
Key link between income statement and balance sheet
Beginning Net Ending
retained ± income – Dividends = retained
earnings (loss) earnings
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