Balance Sheet

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

4) Ownership

 

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

Limitations:

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)

 

Operating Cycle:
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)

 

Current:

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:
Current Assets
Liquid LT Investments and Receivables
Property, Plant & Equipment
Intangible Assets
Other Assets

Current Liabilities
Long-term Liabilities

Stockholder’s Equity

Cash and Cash Equivalents:
Cash on hand and in banks, commercial paper, money market funds –
Risk free, highly liquid maturity of < 9 months

Accounts Receivable:
Amounts customers owe the company for goods or services provided; normally collected in 30 to 90 days (trade)

Notes Receivable:
Non trade loans to other companies supported by a formal agreement (usually earning interest)

Inventory:
Items held only for sale to the customer

Prepaid Expenses:
Paid in advance before the service is provided; gives future benefit (rent, insurance)

Supplies:
Items that are used up in day to day operations

Investments:
The company takes their excess cash and invests in stocks or bonds to earn a return.
Investments can be short-term or long-term

Property/Plant/Equipment:
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

Intangible Assets:
No physical substance – used long-term to generate revenues
The company has the exclusive right to do something;
Includes trademarks, copyrights, patents, franchises, goodwill

Other Assets:
Long Term assets that do not fit into other L/T categories
(Non liquid investments, deferred charges, L/T prepaids)

Accounts Payable:
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

Notes Payable:
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

Bonds Payable:
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

Retained Earnings:
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)

Treasury Stock:
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: 

Assets:	Liabilities:
Current:	Current:
Cash	Accounts Payable
Accounts Receivable	Accrued Expenses (Liabilities)
Inventory	Unearned Revenues
Prepaid Expenses	“_______” Payables
Short-term Investments	Income Taxes Payable
Short-term Notes Receivable	Short-term Notes Payable
Supplies                     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                            Total Liabilities
Property/Plant/Equipment (P/P/E):
Land
Building
Equipment
Less Accumulated Depreciation                             Net P/P/E	Stockholder’s Equity:
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
Other Assets
Total Assets	must  =    Total Liabilities &                 Stockholder’s Equity

 

Financial Statement Disclosures:
Provide details on significant reported accounts

Significant Accounting Policies:
Describes how the company accounts for items

Subsequent Events:
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

Illegal Acts:
Bribes, kickbacks, illegal political contributions

 

Management Responsibilities:

Management is responsible for the preparation and reporting of financial
statements.

Management is responsible for ensuring adequate internal controls

Auditor’s Report:

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

Qualified Opinion:
Financial Statements contain an exception to GAAP, inadequate disclosures, or limited scope