Balance Sheet

1^st: Memorize the format of the balance sheet.

1) The balance sheet is listed in order of liquidity
How fast an item is expected to turn into cash, be used up, or be paid.

2) The subtotals (total current assets, property/plant/equipment, net, intangibles, total current liabilities, total liabilities, total stockholder’s equity) must be included on the balance sheet.

The Classified Balance Sheet
(as of a particular point in time)
(before doing business with customers)

2^nd: You must know the meaning of the common accounts stated on the balance sheet.
This topic covers balance sheet accounts that do not occur because the company does business with customers. The “Accrual Basis Balance Sheet” topic will add accounts that occur when the company does business with customers.

Assets:

Cash:
Money or any instrument that banks will accept (cash, checks, money orders, etc.).

Cash Equivalents:
Very short-term investment (typically < 90 days) with no risk of loss

Inventory:
Items held only for sale to the customer

Prepaid Expenses:
The company pays in advance before a service is provided to the company.

Supplies:
Items that are used up in day to day operations; must be continuously replaced.

Investments and Marketable Securities:
A financial instrument that is purchased for the purpose of earning money on the investment.

Notes Receivable:
Amounts owed to the company; normally interest is charged and the note is repaid in longer than 3 months.

Property/Plant/Equipment:
Assets used long-term in the day to day operations to generate revenues.
The long-term assets have physical substance.
(Land, Buildings, Equipment, Furniture, Computers, Vehicles)

Intangible Assets:
Assets used long-term to generate revenues.
The company has an exclusive right to do something and there is no physical substance.

Trademarks
Give the exclusive right from the U.S. Government to use a symbol or name.

Copyrights
Give the exclusive right from the U.S. Government to reproduce written work.
A copyright is granted for 70 years past the life of the author.

Patents
Give the exclusive right (from the U.S. Patent Office) to use a technology or drug
for a period of 20 years.
Patents are granted to protect the invention from imitators.

Franchises
Give the exclusive right to operate or sell a specific branded product.
The length of the franchise is negotiated between the franchisor and the franchisee.

Goodwill
The amount paid when acquiring a company above the fair market value of net assets acquired.

Other Long-term Assets:
Assets held for more than one year that do not fit into the other long-term asset categories.

Liabilities:

Accounts Payable:
Amounts owed to suppliers; normally paid in 30-60 days.
Suppliers are those who provide inventory and services over and over again, each month.

Commercial Paper:
Short-term amounts owed to investors.
Very short-term borrowing, usually 10 – 90 days

Current Maturities of Long-term Debt:
The portion of long-term debt that will be repaid within 1 year or less.

L/T Notes Payable or Long-term Debt:
Amounts owed to banks and other financing companies that will be paid after one year
The amount is the principle amount owed only and does not include interest.

Notes Payable:
Amounts owed from borrowing from a bank or a financing company.

Bonds Payable:
Long-term amounts owed to investors

Owner’s Equity:

Common Stock:
Money received from investors in exchange for ownership.

Retained Earnings:
Total of all years’ (cumulative) profits and losses less all years’ dividends paid to owners.

Beginning Retained Earnings
+ Net Income or – Net Loss
– Dividends Paid to Owners   
= Ending Retained Earnings (reported on the balance sheet)

3^rd: Other things you must know related to the balance sheet:

1) The balance sheet is initially reported at historical cost; the fair market value on the date of the transaction (buy the asset or borrow money).

2) Short-term or current means the cash is expected to be collected or paid in 1 year or less.

3) Long-term or non-current means the cash is expected to be collected or paid in more than 1 year.

4) The “Operating Cycle” is the time it takes the company to spend cash to do business and get the cash back again. An operating cycle is typically less than one year.

A typical operating cycle has the following transactions:
1) Purchase assets to be sold to customers
2) Pay for assets purchased
3) Sell assets or provide service to customers
4) Collect from customers.

The objective of business is to use cash and turn it into more cash.
The operating cycle indicates how quickly the goal is accomplished.