© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• “Statement of Financial Position”
Assets = Liabilities +
Stockholders'
Equity
• Dated as of a specific date
• Format
– Account (side by side)
– Report (assets at top and liabilities and stockholders’ equity at bottom of statement) dominate in the U.S.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #2

Current assets
Plant and equipment
Goodwill an other assets
Total assets
Quarker Chemical Corporation
Balance Sheet (In Thousands)
December 31, 20XX
ASSETS
$200,826
60,995
123,618
$385,439
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Long-term liabilities
Total liabilities
Noncontrolling interest
Total shareholders' equity
Total liabilities and stockholders' equity
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
$83,864
171,700
255,564
3,952
125,923
$385,439
Chapter 3, Slide #3

• Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events
– Current Assets -operating cycle or one year which ever is longer to convert or conserve cash.
– Long-Term (noncurrent) assets – take longer than one year or operating cycle to convert or conserve cash.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #4

• Cash and assets that will be converted into cash during the operating cycle or within a year, whichever is longer
• Presented in order of liquidity
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #5

• Cash
– Negotiable checks, unrestricted balance in checking accounts, savings accounts
• Marketable Securities
– Debt or equity securities
– Carried at fair value
– Intention to convert into cash during the current period
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #6

• Accounts Receivable
– Amounts due from sales or services
– Carried at net realizable value (net of allowances)
– All allowances are presented in on allowance account
• Other receivables due from nontrade sources
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #7

• Inventories
– Carried at lower of cost or market
– Categories
• Merchandise on hand- Retail or wholesale firms
• Raw materials
• Work in process
• Finished goods
Manufacturer
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #8

• Prepaids
– Expenditures made in advance of the use of the service or goods.
– Examples
• Insurance
• Advertising
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #9

• Land
– Carried at acquisition cost
– Not subject to depreciation
– Natural resources are depleted
• Buildings
– Cost plus permanent improvements
– Depreciated ( expensed ) over the estimated useful life
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #10

• Machinery
– Acquisition cost plus costs of delivery, installation, and permanent improvements
– Depreciated over the useful life
• Construction in Progress
– Assets under construction
– Transferred to permanent asset account upon completion
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #11

• Accumulated Depreciation
– Carries the to-date depreciation of plant assets
– Factors used in depreciation calculation
• Asset cost
• Length of the life of the asset
• Estimated salvage (residual) value of asset when retired
– Depreciation methods
– Straight Line – Declining Balance
– Sum-of-the-Years’-Digits – Units of Production
• Balance sheet presentation
Cost of the asset
– Accumulated depreciation
= Net book value
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #12

Cost............................. $10,000
Estimated life..............
5 years
Estimated salvage.......... $2,000
Cost - Salvage Value
= Annual Depreciation
Estimated Life
10,000 - 2,000
= $1,600
5 years
Year
1
4
5
2
3
Deprec. for the
Year
$1,600
1,600
1,600
1,600
1,600
Accumulated
Depreciation Asset Cost
$1,600 $10,000
3,200
4,800
6,400
8,000
10,000
10,000
10,000
10,000
Book
Value
$8,400
6,800
5,200
3,600
2,000
The salvage value is not depreciated and it equals book value at end of useful life.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #13

Cost............................. $10,000
Estimated life..............
5 years
1
5
1
Estimated Life
Estimated salvage.......... $2,000
Double the straight-line rate is the maximum rate
Year
Asset
Cost
1 $10,000
2
3
4
5
10,000
10,000
10,000
10,000
Beginning
Accum.
Dep.
$0
4,000
6,400
7,840
8,000
Beginning
Book Value
$10,000
6,000
3,600
2,160
2,000
Deprec. for the Year
$4,000
2,400
1,440
160
-
Ending
Book
Value
$6,000
3,600
2,160
2,000
2,000
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Salvage value is not used in the depreciation formula but depreciation ends when the book value is equal to the salvage value.
Chapter 3, Slide #14

Depreciation:
Sum-of-theYears’-Digits Method
Cost............................. $10,000
Estimated life..............
5 years
Number of Remaining Years
Sum of Digits of Estimated Life

5

1+2+3+4+5

 
Estimated salvage.......... $2,000

Year
1
2
3
4
5
Cost
Minus
Salvage Fraction
$8,000 5/15
8,000
8,000
8,000
8,000
4/15
3/15
2/15
1/15
Deprec. for the Year
Ending
Accum.
Dep.
$2,666.67
$ 2,666.67
2,133.33
1,600.00
4,800.00
6,400.00
1,066.67
533.33
7,466.67
8,000.00
Ending
Book
Value
$ 7,333.33
5,200.00
3,600.00
2,533.33
2,000.00
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #15

Depreciation:
Units-of-Production Method
Cost............................. $10,000 Estimated salvage.......... $2,000
Estimated total hours..... 16,000
Cost - Salvage Value
Estimated Life in Capacity
= Per Unit Depreciation
10,000 - 2,000
= $0.50
16,000 hours
• Actual Hours of Operation × Rate = Depreciation
• Asset is depreciated until book value equals salvage value
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #16

• Capital lease
– In-substance ownership
– Recorded as an long term asset net of amortization
– Operating lease if not a Capital lease
Not recorded as asset and lease payments are expensed.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #17

• Debt or equity securities
– Held to maintain business relationship or to exercise control
• Debt classification
– Held-to-maturity carried at amortized cost
– Available-for-sale carried at fair value
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #18

• Equity securities
– Carried at fair value which have 3 levels for input:
1. Level 1: Quoted price for identical item in active market.
2. Adjusted quoted price of similar asset.
3. Present value of expected cash flows
– Exception: with the ability to exercise significant influence the equity method is used: cost is adjusted for the proportionate share of the rise/fall in the retained profits of the subsidiary (investee)
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #19

Long-Term Assets: Intangibles (nonphysical assets)
• Goodwill
– Purchase of a business where price paid exceeds the fair value of net assets
– U.S. GAAP: not amortized; test annually for impairment
• Patents
– 20 years
– Amortized over shorter of legal or useful life
• Trademarks
– Indefinite legal life
– Not amortized; test annually for impairment
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #20

• Franchises
– Life based on contract
– Amortize over shorter of legal or useful life
• Copyrights
– Life of the creator plus 70 years
– Amortize over shorter of legal or useful life
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #21

• Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the futures as a result of past transactions or events
– Current Liabilities
– Long-Term Liabilities
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #22

• Obligations whose liquidation is reasonably expected to
• Require the use of
– Existing current assets
– Creation of other current liabilities
• Within one year or the operating cycle, whichever is longer
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #23

• Payables
– Short-term obligations created by the acquisition of goods or services
• Unearned Income
– Payments collected in advance of the performance of services or delivery of goods
• Other current liabilities
– As circumstances warrant
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #24

• Due in a period beyond one year or operating cycle
• Related to
– Financing arrangements
– Operational obligations
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #25

Long-Term Liabilities:
Financing Arrangements
• Notes Payable
– Secured by property: Mortgage notes
• Credit Agreements
– Ready lines of credit that may require a compensating balance
– Not a liability until funds are drawn
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #26

Long-Term Liabilities:
Financing Arrangements (cont’d)
• Bonds Payable
– Sold at par, premium, or discount
– Premium or discount is amortized into interest expense
– Bond carrying value is amortized to par value
– Convertible bonds can be converted into common stock
– Conversion feature enhances bond selling price
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #27

Market Interest
Rate
6%
Bonds
Sold at
Premium
Bond
Contractual
Interest Rate 8%
8%
Par
(Face Value)
10%
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Discount
Chapter 3, Slide #28

Long-Term Liabilities:
Operational Obligations
• Deferred Taxes
– Difference between accounting and tax methods
– Difference in the timing of recognizing revenue and expense for accounting and tax purposes
• Warranty Obligations
– Estimated; arise from offering product warranties
– Estimated to achieve matching of sales revenue and associated expense of warranty
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #29

• Noncontrolling Interest (was minority interest)
– Reported on consolidated financial statements as equity, but separate from parents equity
– Represents the interest in the equity of a partiallyheld subsidiary by the nonmajority owners
– Analysis can be twice if material-once as a liability
(conservative) and then as equity.
• Other Noncurrent Liabilities
– As circumstances warrant
• Redeemable Preferred Stock
– Excluded from stockholders’ equity
– For analysis, treat as a liability
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 3, Slide #30

• The residual ownership interest in the assets of an entity that remains after deducting its liabilities
– Paid-in Capital
– Retained Earnings
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #31

• Par value
– In some states, referred to as “stated value”
– Considered “legal capital” by many states
– Established by the articles of incorporation
– Usually a minimal value
• No-par stock
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #32

Stockholders’ Equity:
Paidin Capital (cont’d)
• Additional paid-in capital
– Issue price in excess of par (stated) value
– Other sources
• Treasury stock transactions
• Stock dividend transactions
• Donated capital
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #33

Stockholders’ Equity:
Paidin Capital (cont’d)
• Common Stock
– Shareholder ownership
– Voting rights
• Election of board of directors
• Major corporate decisions
– Liquidation rights secondary to
• Creditors
• Preferred stock
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #34

Stockholders’ Equity:
Paidin Capital (cont’d)
• Preferred Stock
– Does not normally convey voting rights
– May carry any or all of these features:
• Preference as to dividends
• Accumulation of dividends
• Participation in dividend beyond stated dividend rate
• Convertibility into common stock at holder’s discretion
• Preference in liquidation secondary to creditors
• Callable at issuer discretion
• Redemption at future maturity value
• Donated Capital
– Donated by outside entities
– Shareholder surrender of stock
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #35

Stockholders’ Equity:
Retained Earnings
• Undistributed earnings of the corporation
– Net income for all prior periods
– Less dividends declared to shareholders for all prior periods
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #36

• Quasi-Reorganization
– Eliminates a deficit balance of retained earnings
– Retained earnings are dated for 5-10 years
• Accumulated Other Comprehensive Income
Represents retained earnings for other comprehensive income as a separate component on the face of the balance sheet.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #37

• Employee Stock Ownership Plans (ESOPs)
– A qualified pension plan
– Tax benefits for the employer and employee
– Unearned compensation reduces stockholders’ equity
• Treasury Stock
– Stock purchased and held by the issuing corporation
– Recording and disclosure
• Record at par value; deduct from paid-in capital
• Record at cost; deduct from total stockholders’ equity
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #38

• Reconciles the beginning and ending balances of all components of stockholders’ equity
• Account changes indicate
– Issuance of stock: paid-in capital increase
– Acquisition of treasury stock: treasury stock increase
– Net income: retained earnings increase
– Dividends: retained earnings decrease
– Changes in accumulated other comprehensive income.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #39

• Financial analysis is complicated by
– Many assets recorded at cost rather than fair
(replacement) value
– Varying valuation methods
• Within a firm from item to item
• Within an industry from company to company
– Not all items of value are listed as assets
– Certain contingent liabilities may be excluded
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #40

• Asset section=Usually noncurrent assets are presented first, followed by current assets.
• Liabilities and Owner’s Equity section=Capital and reserves are presented first followed by noncurrent liabilities and then current liabilities.
– Reserve section would not be part of U.S. GAAP.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 3, Slide #41