1. Chapter 4
The Balance Sheet

2. Individual Balance Sheet Accounts

3. Current Assets
Current assets include assets that are expected to be used within one year or the operating cycle, if longer
The operating cycle involves the use of cash to buy inventories, selling the inventory to create accounts receivable, and the collection of those receivables
In practice, one year is the common definition
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

4. The Operating Cycle Cash Collections Purchases Receivables Inventories
Sales
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5. Current Assets
Cash includes coins and currency on hand; bank accounts; and short-term securities
Accounts receivable are amounts owed by customers
An estimate of uncollectible accounts is deducted
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

6. Current Assets
Inventory represents goods held for sale in the normal course of business
Prepaid expenses are payments in advance for operating expenses, e.g., insurance and rent
Investment securities are publicly-traded stocks and bonds held with the intent to sell within a year
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7. Current Assets
Current assets are listed on the balance sheet in the order of their liquidity, with the most liquid assets listed first
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8. Long-Term Assets Expected to last longer than one year
Common categories include
Investments
Property, plant, and equipment
Intangible assets
Other assets
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9. Long-Term Assets
Long-term investments include ownership of stocks and bonds to
Exercise influence over other companies (stocks)
Earn income from
Interest (bonds)
Dividends (stocks)
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

10. Long-Term Assets
Property, plant, and equipment (PP&E) are fixed assets that benefit more than one accounting period
They include land, buildings, machinery, tools, furniture, and vehicles
Accumulated depreciation reflects the wear and tear since the original purchase and decreases PP&E
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

11. Long-Term Assets
Intangible assets have no physical existence, but have some intrinsic value, generally from contract rights
Patents
Trademarks
Copyrights
Franchises
Goodwill
only recorded when one company buys another and pays more than the fair value of the identifiable assets
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

12. Long-Term Assets
The other assets category contains long-term assets not reportable under the previous categories
e.g., a deferred tax asset occurs when a loss or expense is recognized for financial reporting purposes, but will be deducted on the tax return in a later year
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13. Current Liabilities
Obligations expected to be paid out of current assets within one year
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14. Current Liabilities
Accounts payable are created when a company buys merchandise or supplies on credit
Accrued liabilities represent expenses incurred (e.g., salaries, interest, taxes), but not yet paid
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15. Current Liabilities
Short-term loans payable are formal, interest-bearing loans expected to be paid within one year
The current portion of long-term debt is the portion of these liabilities expected to be paid within one year from the balance sheet date
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

16. Current Liabilities
Unearned revenue is the obligation to provide services to customers who have paid in advance
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17. Long-Term Liabilities
Long-term liabilities are obligations not expected to be paid or otherwise satisfied within one year
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18. Long-Term Liabilities
Long-term debt includes long-term notes, bonds, and mortgages
Capital lease obligations represent leases of plant assets which are equivalent to debt-financed purchases
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19. Long-Term Liabilities
Deferred tax liability: income tax expected to be paid in future years on income already reported on the income statement
Pension obligations and other post-retirement obligations relate to a company’s promise to pay benefits after the employees’ retirement
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20. Stockholders’ Equity The residual interest in a corporation
The owners’ paid-in capital can take the form of common stock or preferred stock
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21. Stockholders’ Equity Common stockholders
Have the most risk
Have the potential to reap the greatest return
Common stock amounts are reported at
Par value (the amount printed on the certificates)
Additional paid-in capital (the amount paid above par)
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

22. Stockholders’ Equity Preferred stockholders
Usually have a fixed return on their investment
Have fewer ownership rights than common stockholders
Typically do not have voting rights
Have lower risk than common stockholders
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

23. Stockholders’ Equity
Retained earnings is the cumulative amount of profit that has not been distributed to stockholders as dividends
Increased by
net income
Decreased by
net losses
dividends
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

24. Stockholders’ Equity
Treasury stock: the company’s own shares that have been repurchased
The amount of treasury stock is subtracted from stockholders’ equity
A company purchases treasury stock to
Show confidence in the value of the shares
Distribute cash to stockholders
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

25. Stockholders’ Equity Accumulated other comprehensive income
Reports the movement of market prices from certain investments and certain exchange rates
May arise from
Foreign currency translation adjustments
Unrealized gains and losses on available-for-sale-securities
Unrealized gains and losses on derivatives
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26. Accumulated Other Comprehensive Income
Foreign currency translation adjustments
Arise from the change in equity of foreign subsidiaries as a result of changes in foreign currency exchange rates
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27. Accumulated Other Comprehensive Income
Unrealized gains and losses on available-for-sale-securities
Unrealized gains and losses are fluctuations in the market prices of securities before they are sold
Available-for-sale-securities are those a company does not intend to sell in the short-run
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

28. Accumulated Other Comprehensive Income
Unrealized gains and losses on derivatives
Derivatives are financial instruments that derive their value from the movement of a price, an exchange rate, an interest rate, or an interest rate associated with another item
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

29. Form of the Balance Sheet

30. Form of the Balance Sheet
Side-by-side form
Assets on the left-hand side
Liabilities and owners’ equity on the right-hand side
Columnar form
Assets, liabilities, and owners’ equity presented vertically
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

31. Form of the Balance Sheet
Current assets and current liabilities are listed by their liquidity
Current assets and current liabilities are normally listed before long-term assets and liabilities
Balance sheets are generally presented in a comparative format
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

32. Foreign Balance Sheets
PP&E is frequently listed first
Current assets and current liabilities are frequently netted together as working capital
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33. Recognition and Valuation

34. Recognition
Recognition: an amount is recorded and reported in the financial statements
As an alternative, disclosure conveys financial information in the form of narrative notes
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35. Recognition
Recognition is the preferred method of financial reporting when it is appropriate
An asset or liability is recognized only if it meets the definition of an asset or liability
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36. BALANCE SHEET Definitions ASSET LIABILITY EQUITY
Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events
Probable future sacrifice of economic benefit arising from a present obligation of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
Definitions
EQUITY
Residual interest in the assets of an entity that remains after deducting its liabilities
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

37. Valuation
Valuation is the process of assigning a value to an item once it is determined it should be recognized in the financial statements
The value should be
Reliable: Independent parties can agree on the value and
Relevant: Reflects information that financial statement users care about
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

38. Valuation Historical cost is an extremely reliable number
Market value is an extremely relevant number
The balance sheet reflects a mixture of different valuation methods
Market value is used when it is both relevant and reliable, e.g., investment securities
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

39. Recognition And Valuation
Reflecting economic events in financial statements
CREATION
Events create economic assets and liabilities
RECOGNITION
Decision to include an item in the financial statements
VALUATION
Measurement of the dollar amount at which an item should be recorded
INTEGRATION
Determination of the total impact of the new information on the financial statements
PREPARATION
The financial statements themselves are prepared
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

40. Introduction to Transaction Analysis

41. Assets = Liabilities + Owners Equity
Transaction Analysis
The process of determining how an economic event impacts the financial statements
A spreadsheet can be used to analyze the transactions of Veda Landscape Solutions based on the accounting equation:
Assets = Liabilities + Owners Equity
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

42. 1) Veda invests $700,000 of her own cash in the business in exchange for all 10,000 shares of common stock.
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43. 2) Borrowed $300,000 cash from Upland State Bank by signing a 10% note to be repaid in five years; interest is payable each January 1.
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44. 3) Purchased a warehouse complex for $450,000 ($50,000 was for land) by paying $100,000 down and assuming a $350,000 mortgage. 8% interest is payable each January 1; balance due in a 7 year balloon payment
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45. 4) Purchased equipment for $650,000 cash.
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46. 5) Hired 13 employees who will be paid each month for a total of $500,000 per year (no work has been done yet).
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47. 6). Leased a truck. The purchase cost would have been $65,000
6) Leased a truck. The purchase cost would have been $65,000. Lease payments are $800 a month for three years, after which the truck will be returned to the leasing company.
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

48. 7). Purchased inventory for $90,000
7) Purchased inventory for $90,000. Veda paid $10,000 cash and the balance was placed on account.
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

49. 8) Paid $15,000 in advance for a general insurance policy that is good for one year.
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

50. Assets = Liabilities + Equity
Total assets $1,430,000
Total liabil & equity $1,430,000
Use this information to prepare the balance sheet
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

51. Veda Landscape Solutions Balance Sheet January 1, 2006
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

52. Asset and Financing Mix

53. Asset and Financing Mix
Asset mix is the proportion of total assets in each asset category
Generally differs by industry
Retailers have lots of inventory
Manufacturers have lots of PP&E
Banks have lots of loans receivable
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

54. Asset and Financing Mix
Financing mix is the percentage of financing in each of two categories:
Liabilities
Equity
It is reflective of management financing decisions rather than industry
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

55. In Summary ...
The impact of a business event on the company’s financial statements is determined through critical and systematic analysis of that event
Assets and liabilities are classified as current and long-term; equity consists of paid-in capital and retained earnings. Treasury stock and other accumulated comprehensive income are part of equity.
Recognition and valuation both require professional judgment
Assets = Liabilities + Owners’ Equity
Financial Accounting, 7e Stice/Stice, 2006 © Thomson