Key Things to Know
Key Things To Know
Purpose of the Balance Sheet:
Report the company’s financial position as of a particular point in time (date).
The balance sheet reports the following things:
1) How funds (money) were raised to operate the business.
2) Items the company owns or controls and uses to operate the business.
3) Amounts owed
Money to buy assets to operate the business comes from the following two sources:
1) Investors: Owners contribute funds to the company in exchange for ownership.
2) Creditors: The Company borrows money that must be repaid with interest
Assets reported on the balance sheet must have all three characteristics:
1) Provide probable future economic benefit.
2) Be owned or controlled by the company.
3) Be a result of a past transaction.
Future economic benefit: generates cash through sale or use
Expense costs that do not provide future economic benefit
Assets will eventually be collected or reported as an expense when the asset is used and loses its probable future economic benefit.
Liabilities reported on the balance sheet must have all three characteristics:
1) Be owed to an outside party.
2) Be a result of a past transaction (an event has occurred to create the debt).
3) Be repaid with an asset (normally cash).
Listed in the Order of Liquidity:
time before an asset is converted to cash or a liability is paid
1. Reports book value rather than fair market value
most assets and liabilities are reported at historical cost
2. Some assets are not reported (employees, internal goodwill)
3. Many items are reported at an estimated value (receivables)
The amount of time it takes to convert materials to a product, sell the product and collect from the customer (cash back to more cash)
Assets expected to become cash or be consumed within one year or the operating cycle, whichever is longer
Liabilities expected to be paid within one year or the operating cycle, whichever is longer
Classify the balance sheet using the following categories:
Liquid LT Investments and Receivables
Property, Plant & Equipment
Cash and Cash Equivalents:
Cash on hand and in banks, commercial paper, money market funds –
Risk free, highly liquid maturity of < 9 months
Amounts customers owe the company for goods or services provided; normally collected in 30 to 90 days (trade)
Non trade loans to other companies supported by a formal agreement (usually earning interest)
Items held only for sale to the customer
Paid in advance before the service is provided; gives future benefit (rent, insurance)
Items that are used up in day to day operations
The company takes their excess cash and invests in stocks or bonds to earn a return.
Investments can be short-term or long-term
Assets used long-term to generate revenues; they have physical substance
(Buildings, Equipment, Autos, Land, Computers)
– Accumulated Depreciation:
The total amount for all prior years (cumulative) depreciation expense.
A contra account subtracted from plant, and equipment
No physical substance – used long-term to generate revenues
The company has the exclusive right to do something;
Includes trademarks, copyrights, patents, franchises, goodwill
Long Term assets that do not fit into other L/T categories
(Non liquid investments, deferred charges, L/T prepaids)
Amounts owed to suppliers, normally paid in 30-60 days
Suppliers provide inventory or goods and services over and over again
Accrued Expense / Accrued Liabilities:
Both of these are expenses that have not yet been paid that the company owes Examples: employee taxes, legal, advertising, bonuses, retirement plans
_________ Payable: (Salaries, Rent, Interest, Taxes)
Expenses incurred that have not yet been paid
An item gets its own line item if an amount is large enough
Smaller amounts will be included in accrued expenses.
Unearned Revenues / Deferred Revenues:
Cash received from customers before the good or service is provided. The company owes the customer a good/service
Written promises to pay cash, requires interest to be paid
L/T Notes Payable and L/T Debt
Amounts owed to banks and other financing companies that will be paid later than one year from now
Current Maturities of Long-term Debt:
Amounts due within a year that are part of paying off long-term debt are reported as current maturities of long-term debt
Amounts borrowed from investors; normally long-term
Common Stock and Contributed Capital / Additional Paid in Capital:
Funds received from investors in exchange for ownership
Common stock is reported at par value x number of shares issued
Capital is the difference in the total amount received and the value of common stock
Total of all (cumulative) profits and losses less dividends paid to owners
Retained Earnings, at the beginning of the year (prior year ending balance)
+ Current year earnings; reported on the income statement
– Dividends declared to stockholders during the current year
= Retained Earnings, at the end of the year (reported on the balance sheet)
The company buys and holds its own stock
Other Comprehensive Income (OCI)
Gains and losses reported as part of stockholders’ equity until the time comes
to report it on the income statement (some are never reported on the income statement).
Only certain types of gains and losses are reported as OCI:
Foreign currency, long-term investments, derivatives, and employee pensions.
The Format of the Balance Sheet:
|Accounts Receivable||Accrued Expenses (Liabilities)|
|Prepaid Expenses||“_______” Payables|
|Short-term Investments||Income Taxes Payable|
|Short-term Notes Receivable||Short-term Notes Payable|
Total Current Assets
| Current Portion of Long-term Debt
Total Current Liabilities
|Long-term Investments||Bonds Payable|
|Long-term Notes Receivable||Long-term Debt|
| Long term Notes Payable
| Less Accumulated Depreciation
|Intangible Assets||Common Stock|
|Goodwill||Additional Paid in Capital|
|Patents, net||Retained Earnings|
|Trademarks, net||less Treasury Stock|
| Copyrights, net
Total Intangible Assets
Total Stockholder’s Equity
|Total Assets||must = Total Liabilities &
Financial Statement Disclosures:
Provide details on significant reported accounts
Significant Accounting Policies:
Describes how the company accounts for items
A material event that occurs after the company’s fiscal year end and before the financial statements are issued
Examples: issue debt, merger, issue stock, sale assets
Related Party Transactions:
Transactions with owners or their families, management, or affiliated companies
Disclose the nature of the relationship and the transaction
Errors and Irregularities
Unintentional misstatements of the financial statements
Bribes, kickbacks, illegal political contributions
Management is responsible for the preparation and reporting of financial
Management is responsible for ensuring adequate internal controls
The wording of the report is specified by the AICPA and the PCAOB
Unqualified Opinion is in conformity with GAAP
Explanatory Paragraph, however, in conformity with GAAP:
1. lack of consistency
2. uncertainty – contingency
3. emphasis of a significant event
Financial Statements contain an exception to GAAP, inadequate disclosures, or limited scope