UNDERSTANDING BALANCE
SHEET
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ELEMENTS OF THE BS
• The balance sheet: reports the firm’s financial
position at a point in time. The BS consists of
assets, liabilities and equity.
• Assets: resources controlled as a result of past
transactions that are expected to provide the
future economic benefits.
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• Liabilities: obligations as a result of past
events that are expected to require an outflow
of economic resources.
• Equity: the owners’ residual interest in the
assets after deducting the liabilities. Equity is
also referred to as stockholders’ equity,
shareholders’ equity, or owners’ equity.
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LIMITATION OF THE BS
• The BS should not be interpreted as market
value or intrinsic value.
• The BS consists of a mixture of values.
• There are a number of assets and liabilities
that do not appear on the BS but certainly
have value.
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ALTERNATIVE FORMATS OF BS
PRESENTATION
• The current/ noncurrent format: classified
balance sheet and is useful in evaluating
liquidity.
• Under IFRS: firms can choose to use a liquidity
based format if the presentation is more
relevant and reliable.
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DISTINGUISH SOME COMPONENTS
• Current assets: likely to convert into cash or
used up within one year or one operating
cycle.
• Current liabilities: obligations that will be
satisfied within one year or one operating
cycle, whichever is greater.
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• Working capital: CA – CR
• Noncurrent assets: do not meet the definition
of CA but also easily to convert into cash or
used up within one year or operating cycle.
• Noncurrent liabilities: do not meet the
definition of CL, provide information about
the firm’s long- term financing activities.
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GOODWILL
• Is the excess of purchase price over the fair
value of the identifiable net assets (assets
minus liabilities) acquired in a business
acquisition.
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EXAMPLE
• Wood corporation paid $600 million for the outstanding stock
of Pine corp. At the acquisition date, Pine reported the
following condensed BS
Book Value (million)
CA
$80
Plant and equipment, net
760
Goodwill
30
Liabilities
400
Stockholders’ equity
470
• The fair value of the plant and equipment was $120 million
more than its recorded book value. The fair value of all other
identifiable assets and liabilities were equal to their recorded
book values. Calculate the amount of goodwill Wood should
report on its consolidatedĐặng
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• Goodwill is only created in a purchase
acquisition. Internally generated goodwill is
expenses as incurred.
• Goodwill is not amortized but must be tested
for impairment at least annually.
• Accounting goodwill # economic goodwill.
Economic goodwill derives from the expected
future performance of the firm, while
accounting goodwill is the result of past
acquisitions.
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ESSAY
• Explain the concept of Goodwill. Give an
example of a brand name of a Vietnamese
company that would require additional costs
above book value to acquire. (Each group
write within 250 -300 words for this essay)
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FINANCIAL ASSETS
• are measured at historical cost, amortized cost
or fair value.
• Measured at amortized cost = held to maturity
securities.
• Measured at fair value = mark to market
accounting
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Historical cost
Amortized cost Fair value
•Unlisted equity Held to maturity
investments
securities
•Loans and
receivables
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•Trading
securities
•Available for
sale securities
•Derivaties
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EXAMPLE
• Triple D Cor. Purchased a 6% bond, at par, for
$1.000.000 at the beginning of the year.
Interest rates have recently increased and the
market value of the bond declined $20.000.
Determine the bond’s effect on Triple D’s
financial statements under each classification
of securities.
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COMMON SIZE BS
• A vertical common size balance sheet:
expresses each item of the BS as a percentage
of total assets.
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East
West
Cash
$2.300
1.500
Accounts receivable
3.700
1.100
Inventory
5.500
900
Current assets
11.500
3.500
Plant and equipment
32.500
11.750
Goodwill
1.750
0
Total assets
45.750
15.250
Current liabilities
10.100
1.000
Long term debt
26.500
5.100
Total liabilities
36.600
6.100
Equity
9.150
9.150
Total liabilities & equity
45.750
15.250
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East (%)
West (%)
Cash
5
10
Accounts receivable
8
7
Inventory
12
6
Current assets
25
23
Plant and equipment
71
77
Goodwill
4
0
Total assets
100
100
Current liabilities
22
7
Long term debt
58
33
Total liabilities
80
40
Equity
20
60
Total liabilities & equity
100
100
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CALCULATE
Currentass ets
Currentrat io 
Currentlia bilities
Cash  Marketable sec urities  Re ceivables
Quickratio 
Currentlai bilites
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Cash  Marketable sec urities
Cashratio 
Currentlia bilities
Totaldebt
totaldebttoequity 
Totalequity
totaldebt
debtratio 
totalasset s
totalassets
Financialleverage
totalequity
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EXERCISE 1
•
-
Create the Balance sheet:
Cash on hand: 25.000 USD
Cash in bank: 300.000 USD
Payable to suppliers: 289.000 USD
Rights to use land: 150.000 USD
Workshops: 360.000
Capital: 600.000
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EXERCISE 2
• The company ABC was established with the
initial capital is 600 million USD, which included
400 million cash in the bank and 200 million cash
on hand.
1. Buy the fixed assets and pay cash is 80 million
USD
2. Buy materials about 60 million USD which pay
by cash is 50 million USD and the rest will be
paid within 60 days
3. Buy tools about 2 million USD and pay by cash.
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