The Balance Sheet
and Financial Disclosures
Chapter 3
Learning Objectives
PART A: BALANCE SHEET (Statement of Financial Position)
1. Describe the purpose of the balance sheet and understand its usefulness
and limitations.
2. Distinguish among current and noncurrent assets and liabilities.
3. Identify and describe the various balance sheet asset classifications.
4. Identify and describe the two balance sheet liability classifications.
PART B: Financial Disclosures (SELF-STUDY)
5. Explain the purpose of financial statement disclosures.
6. Explain the purpose of the management discussion and analysis disclosure.
7. Explain the purpose of an audit and describe the content of the audit report.
10. Discuss the primary differences between U.S. GAAP and IFRS with
respect to the balance sheet and financial disclosures.
PART C: NOT COVERED
8. Describe the techniques used by financial analysts to transform financial
information into forms more useful for analysis.
9. Identify and calculate the common liquidity and financing ratios used to
assess risk.
3-3
Classifications
Liabilities
Assets
Shareholders’
Equity
BALANCE SHEET CLASSIFICATIONS
Assets:
Current assets
Investments
Property, plant, and equipment
Intangible assets
Other assets
Liabilities:
Current liabilities
Long-term liabilities
Shareholders’ equity:
Paid-in capital
Retained earnings
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The Balance Sheet
Reports a company’s financial position on a particular date.
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.
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
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Current Assets
Current
Assets
Will be converted
to cash or
consumed within
one year or the
operating cycle,
whichever is
longer.
1.
2.
3.
4.
5.
6.
Cash
Cash Equivalents
Short-term Investments
Receivables
Inventories
Prepaid Expenses
Cash and Cash Equivalents
3-8
Cash
Currency, coins and amounts on deposit in bank
accounts: checking accounts, and many savings
accounts. Also includes items such as customer checks,
cashier checks, certified checks, and money orders.
Cash Equivalents
Short-term, highly liquid investments that are:
1. Readily convertible to a known cash amount.
2. Close to maturity date and not sensitive to
interest rate changes
3. US Treasury Bills & Notes: 3-month maturity.
4. 3-month CDs and Money Market Funds
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Cash & Cash Equivalents
On Dec. 31, 2010, ABC Co's total CASH COUNT =$1,000,000
The following items are included in the CASH COUNT:
 Petty cash funds=$12,000,
 Customers Checks =$3,000,
 Coins =$1,000 and
 Stamps =$100.
The following items are not included in cash count:
 -Three-month CD: $10,000
 -Two-month Treasury Note (Bill): $7,000
Required:
Prepare the Current Assets Section of the Balance Sheet
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Noncurrent Assets
Noncurrent
Assets
Not expected to
be converted to
cash or
consumed within
one year or the
operating cycle,
whichever is
longer.
1. Investments
2. Property, Plant, &
Equipment
3. Intangible Assets
4. Other Assets
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Noncurrent Assets
Investments
1.
2.
Not used in the operations of the
business.
Include both debt and equity securities of
other corporations, land held for
speculation, noncurrent receivables, and
cash set aside for special purposes.
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.
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), except for land
which is not depreciated.
Other Assets
1.
Include long-term prepaid
expenses and any noncurrent
assets not falling in to one of the
other classifications.
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Current Liabilities
Current
Liabilities
Obligations expected to be
satisfied through current
assets or creation of other
current liabilities within one
year or the operating cycle,
whichever is longer.
1.
2.
3.
4.
5.
Accounts Payable
Notes Payable
Accrued Liabilities
Unearned Revenues
Current Maturities
of Long-Term Debt
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Long-Term Liabilities
Long-Term
Liabilities
Obligations that
will not be
satisfied within
one year or the
operating cycle,
whichever is
longer.
1.
2.
3.
4.
5.
Long-term Notes
Mortgages
Long-term Bonds
Pension Obligations
Lease Obligations
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Dell Inc.
Balance Sheet
(In millions)
Stockholders' equity
Common stock and capital in excess of
$.01 par value; shares authorized: 7,000;
shares issued: 3,369 and 3,351, respectively;
shares outstanding: 1,918 and 1,957,
respectively
Treasury stock, at cost: 976 and 919 shares,
respectively
Retained earnings
Accumulated other comprehensive (loss)
Total stockholders' equity
January 28, 2011
January 29, 2010
11,797
11,472
$
(28,704)
24,744
(71)
7,766 $
(27,904)
22,110
(37)
5,641
Shareholders’ equity is the residual interest in the
assets of an entity that remains after deducting
liabilities.
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U.S. GAAP vs. IFRS
There are more similarities than differences in balance
sheets prepared according to U.S. GAAP and those
prepared applying IFRS.
Some differences are highlighted below.



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.



Specifies a minimum list of items
to be presented in the balance
sheet.
Statement title changed to
statement of financial position,
although title is not required.
Does not prescribe the format of
the balance sheet, but balance
sheets prepared using IFRS often
report noncurrent items first.
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U. S. GAAP vs. IFRS
A recent survey of large companies that prepare their
financial statements according to IFRS reports that in 2009,
73% of the surveyed companies list noncurrent items first.
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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.
Statement of Financial Position
Business
Operating assets and liabilities
Investing assets and liabilities
Financing
Debt
Equity
Income Taxes
Discontinued Operations
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).
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Disclosure Notes (Self-Study)
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-party transactions,
errors and irregularities, and illegal
acts.
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Management Discussion and Analysis
Provides a biased but
informed perspective of
a company’s operations,
liquidity, and capital
resources.
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Management’s Responsibilities

Preparing the financial
statements and other information
in the annual report.

Maintaining and assessing the
company’s internal control
procedures.
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Auditors’ Report
Expresses the auditors’ opinion
as to the fairness of
presentation of the financial
statements in conformity with
generally accepted accounting
principles.
The auditors’ report must
comply with specifications of
the Public Companies
Accounting Oversight Board
(PCAOB).
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Auditors’ Opinions
Unqualified
Issued when the financial statements
present fairly the financial position,
results of operations, and cash flows
and are in conformity with U.S. 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.
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.
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End of Chapter 3