StIce | StIce |Skousen
The Balance Sheet and Notes
to the Financial Statements.
Chapter 3
Intermediate Accounting
16E
Prepared by: Sarita Sheth | Santa Monica College
COPYRIGHT © 2007
Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are
trademarks used herein under license.
Learning Objectives
1. Describe the specific element of the
balance sheet (assets, liabilities, and
owners’ equity), and prepare a balance
sheet with assets and liabilities properly
classified into current and noncurrent
categories.
2. Identify the different formats used to
present balance sheet data.
3. Analyze a company’s performance and
financial position through the
computation of financial ratios.
Learning Objectives (cont.)
4. Recognize the importance of the
notes to the financial statements and
outlined the types of disclosures
made in the notes.
5. Understand the major limitations of
the balance sheet.
The Balance Sheet
• Presents a listing of an organization’s
assets and liabilities at a certain time
point.
• The difference between assets and
liabilities is called equity.
• Represented by the basic accounting
equation:
Assets = Liabilities + Owners’ Equity
How to Classify Items on the
Balance Sheet




Current (less than 1
year)
Noncurrent (more than
1 year)
Order of liquidity
Historical cost
Working capital = CA - CL
It is the liquid buffer available in meeting financial
demands and contingencies of the near future.
Current Assets
Cash and resources expected
to be converted to cash during
the entity’s normal operating
cycle or one year, whichever is
longer, are current assets.
Cash
Trading Securities
Accounts Receivables
Inventories
Prepaid Assets
Noncurrent Assets
• Investments
• Property,
plant, and
equipment
• Intangible
Assets
• Deferred
income taxes
Plant, Property, and Equipment
Property, plant,
and equipment
are properties of a
tangible and
relatively
permanent nature
that are used in
the normal
business
operations.
Intangible Assets
Intangible assets
are long-term
rights and
privileges of a
nonphysical
nature acquired
for use in
business
operations.
Current Liabilities
Generally,
if a liability
is expected
Current liabilities
are obligations
expectedto
to
be
paidusing
within
12 assets
months,
is
be paid
current
or byitcreating
classified
current as long as it is
other currentas
liabilities.
paid within the operating cycle.
Accounts and notes payable
Accrued expenses
Current portion of long-term
obligations
Unearned revenues
Callable Obligations
If the terms of the agreement for a
callable obligation is due on
demand or will become due on
demand within one year from the
balance sheet date, the obligation
should be classified as current.
Noncurrent Liabilities
• Current liabilities do not usually
include:
– Debts to be liquidated from a
noncurrent sinking fund.
• Sinking fund- cash and investment
securities that have been accumulated for
payment of a specific loan.
– Short-term obligations to be
refinanced.
Noncurrent Liabilities
• Long-term debt
• Long-term lease
obligations
• Deferred income
tax liability
• Pension
obligations
Noncurrent Liabilities
• Long-term debt is reported at its discounted
present value.
• When a note, bond issue, or a mortgage
becomes payable within a year, it should be
reclassified as a current liability.
• For a capital lease, the present value of the
future minimum payments is recorded as
long-term liability.
• Most large companies include deferred
taxes liabilities on the balance sheet.
Contingent Liabilities
• Past activities or circumstances may give
rise to possible future liabilities.
• Contingent liabilities- Potential obligations
that do not exist on the balance sheet date.
• An estimated liability is a definite liability,
so it is not a contingent liability.
Owners’ Equity
•
•
Can also be called stockholders’ or
shareholders equity.
Generally divided into two parts:
1. Contributed capital also known as paidin-capital
2. Retained Earnings
Contributed Capital
• Two parts of contributed capital:
1. Capital Stock- the number of shares x the
par value.
a. Preferred stock- usually paid a fixed annual
cash dividend and have rights to their
investment in bankruptcy
b. Common stock- real owners of the corporation,
have voting power, but are last in line for
assets in bankruptcy
2. Additional paid-in capital- investment by
shareholders in excess of par value of
capital stock.
Retained Earnings
• Retained Earnings (RE)- the amount of
undistributed earnings of past
periods.
• RE Deficit- an excess of dividends and
losses over earnings results in a
negative retained earnings balance.
• Sometimes, RE is restricted and
unavailable for cash dividends.
Treasury Stock
X Corporation
Common Stock
Par $10
• Treasury Stock- when a company buys back
its own shares.
• Treasury shares can be retired, or they can
be retained and reissued later.
Other Equity
The FASB requires
Unrealized gainsSome of the
companies to
Adjustments
and
lossesunrealized
on arising gains and
summarize
changes
from
the change
in the
available-for-sale
losses
from the
in owners’ equity
equity
foreign
fluctuations
in the
securities
areofshown
exclusive ofsubsidiaries
net value(as
as a separate equityof derivatives
measured
in
U.S. as part of
income and
are
reported
item.
dollars)by
resulting
from other
contributions
accumulated
changes
foreign
and distributions
toin comprehensive
currency exchangeincome.
rates
owners.
are shown in the equity
section.
Format of the Balance Sheet
• Generally, assets and liabilities are
presented in their order of liquidity.
• Some industries with significant
investments in land and buildings will list
these items first on the balance sheet.
• Generally, a balance sheet is presented in
comparative form, including data from both
the current year and the previous year.
• Foreign balance sheets frequently list the
current assets and current liabilities
together.
Balance Sheet Analysis
•
Balance sheet information is
analyzed two ways:
1. Relationships between balance sheet
amounts
2. Relationships between balance sheet
and income statement amounts.
•
Financial ratios show the
relationships between financial
statement amounts.