MODULE 3.1
THE BALANCE SHEET
Balance Sheet
1
BALANCE SHEET
 Use of the Balance Sheet
 Balance Sheet Overview
 Balance Sheet Format
 Balance Sheet Classifications
Assets
Liabilities
Owners’ Equity
 Balance Sheet Example (Home Depot)
Balance Sheet
2
BALANCE SHEET OVERVIEW
Purpose: indicate the financial position, including what
the company owns and owes.
Time: relates to a single point in
time, rather than a period of time.
Two Parts:
 Assets – are owned and have probable future
benefits
 Equities – indicate how assets were acquired, two
types:
 Debtors’ equity, known as liabilities
 Stockholders’ equity
The balance sheet is also called the
“Statement of Financial Position.”
In fact, that is the preferred term
used by international standards.
Balance Sheet
3
Use of the Balance Sheet
Based on formula:
Everything we have came from somewhere…
Both sides of the equation
should be the same!
Assets = Liabilities + Owners’ Equity
The balance sheet is used to evaluate:
 Liquidity – time needed to change an asset into cash or to
cancel a liability
 Solvency – ability to pay long-term debts as they mature
Balance Sheet
4
The Balance Sheet
(from an Individual’s Aspect)
Persona
Consumer Balance Sheet
Annual, %
Trillions of dollars outstanding, not seasonally adjusted
12%
$80
10%
What you own
$70
8%
Total Assets: $68 tn
Economy
6%
$60
4%
Homes: 27%
2%
$50
0%
Other tangible: 7%
$40
Deposits: 11%
'60
What you owe
Househ
Debt payme
15%
$30
Pension funds: 17%
Revolving (e.g.: credit cards): 6%
Non-revolving: 11%
Other Liabilities: 10%
$20
$10
Other financial
assets: 38%
Total Liabilities: $14 tn
14%
13%
12%
1Q8
11.
11%
Mortgages: 73%
10%
$0
'80 '8
Source: (Left chart) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizatio
J.P. Morgan Asset Management.
Personal savings rate is calculated as personal savings (after-tax income – personal outlays) divided by after-t
February.J. Employer
andAsset
employee
contributions3/31/10
to retirement funds are included in after-tax income but not in
Source:
P. Morgan
Management
implicitly included in personal savings.
Savings rate data are as of Feb. 2010. All other data are as of 4Q09.
Balance Sheet
5
BALANCE SHEET FORMAT
Balance Sheet
XXX Corporation
At Dec. 31, 20XX
Assets
Current Assets
Investments
Fixed Assets
Intangible Assets
Other Assets
Liabilities
17,000
1,000
80,000
1,500
500
Current Liabilities
Deferred Taxes
Long-Term Liabilities
Total Liabilities
8,000
2,000
30,000
40,000
Owners’ Equity
Capital Stock
Retained Earnings
Total Equity
Total Assets
100,000
40,000
20,000
60,000
Total Liabilities and Equity
100,000
The balance sheet explains how assets were obtained:
CONTRIBUTION
BY OWNERS
(Capital Stock)
BORROWING
(Liabilities)
REINVESTING
INCOME
(Retained Earnings)
ASSETS
Balance Sheet
6
BALANCE SHEET CLASSIFICATION
Asset Classification
( Cons Stmt 6, 1985)
Asset – Probable future economic benefit obtained or
controlled by the entity
Assets are recorded if:
You own it!
 Rights are acquired
It has value!
 Possesses future economic benefits
Balance Sheet
7
Balance Sheet Classification
Asset Classifications
Five Major Categories
 Current Assets - Expected to be realized in cash, sold,
or used up within one year.
 Investments - Securities or property held longer than
one year for the purpose of enhancing income.
 Fixed Assets - Property, plant and equipment used in
business.
 Intangibles - Lack physical existence.
 Other assets – do not fit in above categories
Balance Sheet
8
Balance Sheet Classification
Current Assets
Current Assets – Expected to be realized in cash, sold, or used
up within one year.
Examples:
Cash – coin, currency, and funds on deposit in the bank; most
liquid asset
Accounts Receivable – claims against customers and others for
money, goods, or services (amounts owed to us)
Prepaid Expenses – cash paid to others before receipt of goods
or performance of services
Inventories – raw materials, work in process, or finished goods
held for further manufacturing or sale
Short-Term Investments – securities held for less than a year,
usually for cash management purposes
Balance Sheet Classification
Long-Term Investments
Securities or property held longer than one year for the
purpose of enhancing income (rather than cash
management).
Balance Sheet
9
Balance Sheet Classification
Fixed Assets
Fixed Assets - Property, plant and equipment used in
business (does not include property held for investment).
Examples:





Land
Buildings
Furniture
Equipment
Construction in Progress
Balance Sheet Classification
Intangible Assets
Intangibles – Non-financial assets with no physical substance
Trademarks – word, symbol, or phrase that identifies a particular
company or product
Patents – government granted right to use, manufacture, and sell a
product or process (20 years in US)
Copyrights – government granted right to utilize the creation of an
author, artist, or musician
Franchise Rights – right to sell certain products or services
Balance Sheet
10
Goodwill – excess cost over the fair market value of identifiable assets;
occurs only when buying another company.
Balance Sheet Classification
Most Important Assets
Discussion Questions:
What is your favorite asset?
What are the most important assets for:
 Banks?
 Manufacturers?
 Service corporations?
 Pharmaceuticals?
Balance Sheet
11
BALANCE SHEET CLASSIFICATION
Accounting for Liabilities
Liability – probable future sacrifice of an economic
benefit
Qualities of a Liability ( Cons Stmt 6, 1985):
 An asset or service must be transferred in the future
 The entity cannot avoid the transfer
 The event causing the obligation has already occurred



I borrowed $500 last week.
I need to pay it back in a year.
I can’t get out of it!
I better record a liability.
Balance Sheet
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BALANCE SHEET CLASSIFICATION
Liability Classifications
 Current Liabilities – Due within year and paid by
current assets. Example: amounts owed to suppliers
(called accounts payable).
Working Capital = Current Assets minus Current Liabilities
Negative working capital indicates the company
cannot meet cash needs over the next year.
 Long-Term Debt – Financial payments to be made
after one year. Example: mortgage on a building.
 Other Long-Term Liabilities – Obligations not
considered current liabilities or long term debt
Example: deferred income taxes and retirement
obligations
Balance Sheet
13
BALANCE SHEET CLASSIFICATION
Shareholders’ Equity
Residual interests after obligations to creditors are met.
( Cons Stmt 6, 1985):
Equity Accounts:
 Common Stock – represents voting ownership in
corporation
 Additional Paid In Capital –
common stock that exceeds “par”
For analysis purposes,
APIC is treated the same
as Common Stock.
 Preferred Stock – optional form of ownership, usually
with dividends and without voting rights
 Retained Earnings – cumulative net income that has
not been paid in dividends
 Treasury Stock – stock repurchased by the company
(contra-equity)
Discussion Question: What is the best way to finance assets?
 Debt?
 Owners’ equity?
Balance Sheet
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CONSOLIDATED BALANCE SHEETS
The Home Depot, Inc. and Subsidiaries
AMOUNTS IN MILLIONS, EXCEPT SHARE DATA
ASSETS
Current Assets:
Cash and Cash Equivalents
Receivables, net
Merchandise Inventories
Other Current Assets
Total Current Assets
Property and Equipment, at cost:
Land
Buildings
Furniture, Fixtures and Equipment
Leasehold Improvements
Construction in Progress
Capital Leases
Less Accumulated Depreciation and
Amortization
Net Property and Equipment
Notes Receivable
Goodwill
Other Assets
Total Assets
January 29,
2012
January 28,
2007
$1,987
1,245
10,325
963
14,520
$600
3,223
12,822
1,341
18,000
8,480
17737
10,040
1,372
758
588
38,975
8,355
15,215
7,799
1,391
1,123
475
34,358
14,527
7,753
24,448
26,605
135
1,120
295
343
6,314
1,001
$40,518
$52,263
Footnote Disclosures:
2012
US Stores
Canadian
Other Countries
HD Supply Stores (Business Customers)
Total Stores
Balance Sheet
1,974
180
98
2,252
2007
1,872
155
73
893
2,993
15
CONSOLIDATED BALANCE SHEETS
The Home Depot, Inc. and Subsidiaries
AMOUNTS IN MILLIONS, EXCEPT SHARE DATA
January 29,
2012
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-Term Debt
Accounts Payable
Accrued Salaries and Related Expenses
Sales Taxes Payable
Deferred Revenue
Income Taxes Payable
Current Installments of Long-Term Debt
Other Accrued Expenses
Total Current Liabilities
Long-Term Debt, excluding current
installments
Other Long-Term Liabilities
Deferred Income Taxes
Total Liabilities
STOCKHOLDERS' EQUITY
Common Stock
Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock**
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Balance Sheet
January 28,
2007
$0
4,856
1,372
391
1,147
23
30
1,557
9,376
$ —
7,356
1,307
475
1,634
217
18
1,924
12,931
10,758
11,643
2,146
340
22,620
1,243
1,416
27,233
87
6,966
17,246
293
-6694
17,898
121
7,930
33,052
310
-16,383
25,030
$40,518
$52,263
16
Test Your Balance Sheet Knowledge
1.
What are the primary assets of Home Depot?
2.
Are the assets financed primarily by debt or equity?
3.
What are the sources of debt for Home Depot?
4.
Does Home Depot appear to be growing or declining? What
evidence supports your claim?
Balance Sheet
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