1. 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 3 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 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 - 3 Resources (Assets) Claims against resources (Liabilities) Remaining claims accruing to owners (Shareholders’ Equity) Classifications

4. 3 - 4 Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

5. 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.

6. 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

7. 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

8. 3 - 8 Noncurrent Assets Other Assets 1.Include long-term prepaid expenses and any noncurrent assets not falling in 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). 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. ©

9. 3 - 9 Liabilities are 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.

10. 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

11. 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 operating cycle, whichever is longer. Long-Term Liabilities

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

13. 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. There are more similarities than differences in balance sheets prepared according to U.S. GAAP and those prepared applying IFRS. Some difference are highlighted below. Specifies a minimum list of items to be presented in the balance sheet. Statement title changed to statement of financial position. Does not prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first.

14. 3 - 14 British Airways Balance Sheet At March 31, 2009

15. 3 - 15 British Airways Balance Sheet At March 31, 2009

16. 3 - 16 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).

17. 3 - 17 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 parties, errors and irregularities, and illegal acts.

18. 3 - 18 Management Discussion and Analysis Provides a biased but informed perspective of a company’s operations, liquidity, and capital resources.

19. 3 - 19 Management’s Responsibilities Preparing the financial statements and other information in the annual report. Maintaining and assessing the company’s internal control procedures.

20. 3 - 20 Auditors’ Report Expresses the auditors’ opinion as to the fairness of presentation of the financial statements in conformity with generally accepted accounting principles. Auditors’ reports must comply with specifications of the Public Companies Accounting Oversight Board (PCAOB).

21. 3 - 21 Auditors’ Opinions Unqualified Issued when the financial statements present fairly the financial position, results of operations, and cash flows are in conformity with 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.

22. 3 - 22 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.

23. 3 - 23 Using Financial Statement Information Comparative Financial Statements Allow financial statement users to compare year-to-year financial position, results of operations, and cash flows. Horizontal Analysis Expresses each item in the financial statements as a percentage of that same item in the financial statements of another year (base amount). Vertical Analysis Involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, within the same year. Ratio Analysis Allows analysts to control for size differences over time and among firms.

24. 3 - 24 Liquidity Ratios = Current ratio Current assets Current liabilities Measures a company’s ability to satisfy its short-term liabilities = Acid-test ratio Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities

25. 3 - 25 Financing Ratios = Debt to equity ratio Total liabilities Shareholders’ equity Indicates the extent of reliance on creditors, rather than owners, in providing resources = Times interest earned ratio Net income + Interest expense + Income taxes Interest expense Indicates the margin of safety provided to creditors

26. 3 - 26 Appendix 3: Reporting by Operating Segment Reportable Operating Segment Characteristics Engages in business activities from which it may earn revenues and incur expenses. Many companies operate in several business segments as a strategy to achieve growth and to reduce operating risk through diversification. Segment reporting facilitates the financial statement analysis of diversified companies. Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Discrete financial information is available.

27. 3 - 27 What Amounts Are Reported By An Operating Segment? General information about the operating segment. Segment profit or loss, segment assets, and the basis of measurement. Reconciliations of the totals of segment revenues, reported profit or loss, assets, and other significant items. Interim period information.

28. 3 - 28 Segment Reporting Reporting by Geographic Area GAAP requires an enterprise to report certain geographic information unless it is impracticable to do so. Information About Major Customers Revenues from customers generating 10% or more of the revenue of an enterprise must be disclosed.

29. 3 - 29 End of Chapter 3