1. Financial Accounting:
Copyright 2004 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
PowerPoint Presentation Materials
For
Financial Accounting:
A New Perspective by
Paul Solomon

2. CHAPTER 4
The Balance Sheet

3. PERFORMANCE OBJECTIVES
PO2: Identify how accounting information is used to make business/personal decisions
PO4: Explain key business terms
PO5: Apply fundamental accounting equation; analyze, prepare balance sheet
PO7: Define activities & classify accounting & cash transactions into activities

4. PERFORMANCE OBJECTIVES
PO8: Explain role of ethics
PO9: Identify types of investor/creditor decisions; describe information needed in financial statements
PO11: Differentiate balance sheet from income statement transactions, account titles

5. PERFORMANCE OBJECTIVES
PO12: Prepare statement of owners’ equity
PO13: Link, calculate balance sheet, income statement, statement owners’ equity
PO14: Navigate annual report; locate information to make informed decisions

6. USER FOCUS
Why are account titles useful to you?

7. INSIGHTS
How do corporate balance sheets differ from non-corporate balance sheets?
How are investment securities presented on balance sheet?
How did CMU avoid a negative cash balance during the year?

8. TOPICS History of the balance sheet
More balance sheet transactions at CMU
Account categories, titles

9. HISTORY OF BALANCE SHEET 1
1586 Italian Benedictine monk
Publishes accounting book
First to mention financial statements
17th century French government required reports on
Fixed, movable property
Accounts receivable, payable

10. HISTORY OF BALANCE SHEET 2
Other influences
Owner’s needs when relative ownership changed
Industrial Revolution
Importance of information on assets, liabilities

11. REVIEW BALANCE SHEET TRANSACTIONS AT CMU 1
Assets =
Liabilities +
Equity
On 1/2 Susan contributes $30,000
$30,000
On 1/2 Susan transfers $6,000 to savings
$6,000
<6,000>

12. REVIEW BALANCE SHEET TRANSACTIONS AT CMU 2
Assets =
Liabilities +
Equity
On 1/4, acquires store equipment $10,000 on credit
$10,000
On 1/6, acquires merchandise for cash
$15,000
<$15,000>

13. TRANSACTION IDENTIFICATION, EXPLANATION: E
Transaction E
Assets =
Liabilities +
Equity
On 1/9,CMU paid $2,000 security deposit to lease store

14. TRANSACTION IDENTIFICATION, EXPLANATION: C2
Transaction C2
Assets =
Liabilities +
Equity
On 2/3, paid $10,000 cash to settle credit card obligation & avoid interest charge

15. TRANSACTION IDENTIFICATION, EXPLANATION: F
Transaction F
Assets =
Liability +
Equity
On 7/ ,borrowed $5,000 with bank credit line at 8% interest

16. TRANSACTION IDENTIFICATION, EXPLANATION: G
Transaction G
Assets =
Liabilities +
Equity
From July to December, acquired $18,000 merchandise on account

17. TRANSACTION IDENTIFICATION, EXPLANATION: H
Transaction H
Assets =
Liabilities +
Equity
On 7/1, paid $7,000 to acquire used van with 5 year useful life

18. TRANSACTION IDENTIFICATION, EXPLANATION: I
Assets =
Liabilities +
Equity
On 11/1, collected $6,000 cash from customers before goods, services provided

19. TRANSACTION IDENTIFICATION, EXPLANATION: J1
Transaction J1
Assets =
Liabilities +
Equity
From 7/31 to 11/30 paid $12,000 cash to reduce accounts payable

20. TRANSACTION IDENTIFICATION, EXPLANATION: J2
Transaction J2
Assets =
Liabilities +
Equity
On 12/31, converted $6,000 account payable to 6% interest bearing note payable due 3/31

21. TRANSACTION IDENTIFICATION, EXPLANATION: K1
Transaction K1
Assets =
Liabilities +
Equity
On 12/31, paid $5,000 cash to settle credit line loan from July

22. TRANSACTION IDENTIFICATION, EXPLANATION: L
Transaction L
Assets =
Liabilities +
Equity
On 12/31, acquired $4,000 of computer, printer by signing promissory note

23. TRANSACTION ANALYSIS: E
Transaction E
Assets =
Liabilities +
Equity
On 1/9,CMU paid $2,000 security deposit to lease store
2,000
<2,000>

24. TRANSACTION ANALYSIS: C2
Transaction C2
Assets =
Liabilities +
Equity
On 2/3, paid $10,000 cash to settle credit card obligation & avoid interest charge
<10,000>
10,000

25. TRANSACTION ANALYSIS: F
Transaction F
Assets =
Liabilities +
Equity
On 7/ ,borrowed $5,000 with bank credit line at 8% interest
5,000

26. TRANSACTION ANALYSIS: G
Transaction G
Assets =
Liabilities +
Equity
From July to December, acquired $18,000 merchandise on account
18,000

27. TRANSACTION ANALYSIS: H
Transaction H
Assets =
Liabilities +
Equity
On 7/1, paid $7,000 to acquire used van with 5 year useful life
7,000
<7,000>

28. TRANSACTION ANALYSIS: I
Transaction I
Assets =
Liabilities +
Equity
On 11/1, collected $6,000 cash from customers before goods, services provided
6,000

29. TRANSACTION ANALYSIS: J1
Transaction J1
Assets =
Liabilities +
Equity
From 7/31 to 11/30 paid $12,000 cash to reduce accounts payable
<12,000>

30. TRANSACTION ANALYSIS: J2
Transaction J2
Assets =
Liabilities +
Equity
On 12/31, converted $6,000 account payable to 6% interest bearing note payable due 3/31
<6,000>
6,000

31. TRANSACTION ANALYSIS: K1
Transaction K1
Assets =
Liabilities +
Equity
On 12/31, paid $5,000 cash to settle credit line loan from July
<5,000>

32. TRANSACTION ANALYSIS: L
Transaction L
Assets =
Liabilities +
Equity
On 12/31, acquired $4,000 of computer, printer by signing promissory note
4,000

33. TRANSACTION ANALYSIS: Totals
Assets =
Liabilities +
Equity
Totals
$75,000
$13,100
$61,900

34. CMU Balance Sheet 12/31 Assets Current assets Investments
Property, plant,
equipment
$56,300
2,000
16,700
Liabilities
Current
Noncurrent
Owner’s Equity
$9,000
4,000
61,900
Total assets
$75,000
Total liabilities & Equity

35. CLASSIFIED BALANCE SHEET
Classifies assets, liabilities into current and noncurrent categories
Current categories
Accounts expected to be
Turned into cash
Sold
Exchanged
Discharged
Within one year

36. INSIGHT 4-1: How Balance Sheets Differ
Business Entity
Investment
Earnings
Sole proprietorship
Contributed Capital
Retained Earnings
Partnership
Corporation
Capital Stock

37. USER FOCUS: Why Account Titles Are Useful
Elements of financial statements
Patterns
Liability: payable, obligation
Use Appendix A to help

38. ACCOUNT CATEGORIES, TITLES: Current Assets
Cash, Cash Equivalents
Marketable Securities
Accounts, Notes Receivable
<Allowance for Uncollectibles>
Inventories
Prepayments

39. ACCOUNT CATEGORIES, TITLES: Noncurrent Assets
Investments
Property, Plant & Equipment
<Accumulated Depreciation>
Intangible Assets
Other Assets

40. ACCOUNT CATEGORIES, TITLES: Current Liabilities
Accrued Liabilities
Advances from Customers
Current Portion of Long-Term Debt

41. ACCOUNT CATEGORIES, TITLES: Noncurrent Liabilities
Mortgages Payable
Notes Payable
Bonds Payable
Capital Lease Obligations
Warranty Liabilities
Pension Obligations
Deferred Income Taxes

42. ACCOUNT CATEGORIES, TITLES: Owners’ Equity
Capital Stock
Additional Paid-In Capital
Retained Earnings
<Treasury Stock>

43. CURRENT ASSET ACCOUNTS 1
Cash & cash equivalents
Cash on hand
Highly liquid, interest bearing investments with maturities less than 3 months
Marketable Securities
Temporary, short-term investments of idle cash
Stocks, bonds, certificates of deposit

44. INSIGHT 4-2 Investments in Securities
Trading securities
Actively traded for profit
Available-for-sale securities
Debt or equity securities
Management intends to sell but not actively trade
Held-to-maturity securities
Debt securities
Management intends to hold

45. CURRENT ASSET ACCOUNTS 2
Accounts, Notes Receivable
Money company expects to collect from customers
<Allowance for Uncollectible Accounts>
Contra account
Subtracted from primary account (Accounts Receivable)

46. CURRENT ASSET ACCOUNTS: 3
Inventories
Product for resale to customers
Prepayments
Payments made in advance for
Insurance
Use of facilities (prepaid rent)
Supplies

47. NONCURRENT ASSET ACCOUNTS 1
Investments
Assets acquired for
Dividends
Increases in market value
Interest

48. NONCURRENT ASSET ACCOUNTS 2
Property, Plant, Equipment (Fixed Assets)
Land
Buildings, equipment, furniture & fixtures subject to depreciation
<Accumulated depreciation>
Contra account
Subtracted from primary account (building, equipment, etc.)

49. NONCURRENT ASSET ACCOUNTS 3
Property, Plant, Equipment (Fixed Assets)
Natural resources subject to depletion
<Accumulated depletion>
Contra account
Subtracted from primary account (oil, timber, etc.)

50. NONCURRENT ASSET ACCOUNTS: 4
Intangible Assets
No physical substance
Examples
Patents, copyrights, trademarks, franchises, computer programs, leases, goodwill
<Amortization>
Contra accountant
Subtracted from primary account (patent, etc.)

51. NONCURRENT ASSET ACCOUNTS 5
Other Assets
Assets that don’t fit elsewhere
Examples
Idle land held for future use
Organization costs

52. CURRENT LIABILITY ACCOUNTS
Cash, goods or services owed
Accrued liabilities owed to
Employees
Vendors & suppliers
Advances from customers
Deferred revenues
Unearned revenues

53. NONCURRENT LIABILITY ACCOUNTS 1
Mortgages payable
Loan on property
Bond payable
Legal instrument
Capital lease obligation
For property
Deferred income taxes
Difference between what is owed government and income tax expense

54. NONCURRENT LIABILITY ACCOUNTS 2
Warranty liabilities
Owed for product defects
Pension obligations
Retirement obligations

55. OWNERS’ EQUITY ACCOUNTS 1
Capital stock
Common
Voting rights
Right to share profits
Recorded at par value
Preferred
Preferred status for dividends, assets

56. OWNERS’ EQUITY ACCOUNTS 2
Additional Paid-In Capital
Excess owner investment above par value
Retained Earnings
Accumulated earnings
Minus losses & dividends
Treasury Stock
Shares of stock reacquired by corporation
Contra equity account

57. INSIGHT 4-3 How CMU Avoided Negative Cash Balance
Figure 4-2 shows negative cash (<$5,000>) after transaction J
Sales occurring throughout the year
Cash inflow continuous
Overcomes negative cash balance