500-4ABalanceSheet - Dr M D Chase Accounting 500 4A I...

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Dr. M. D. Chase Long Beach State University Accounting 500 4A Balance Sheet Page 1 I. PURPOSE A. The Balance Sheet shows the financial position of the company at a specific point in time (a date) 1. This differs from the Income Statement which measures revenues and expenses (net income) over a period of time from a certain date to the end of the period, another date e.g. from a date to a date. II. FORMAT A. The format of the balance sheet is in handout 1A which can be downloaded from the website 1. Please note the valuation basis of the different types of account III. LIMITATIONS A. Assets are carried at historical cost adjusted for depreciation/amortization 1. This valuation often has no relationship to fair market value B. The contra accounts used in the valuation of accounts are based on estimates that may be inaccurate C. Many items with significant financial value are either omitted (value of employees skills/efficiency) or miss-valued 1. Liabilities are often not recorded at all (off balance sheet financing e.g. liabilities of consolidated subsidiaries). IV. SPECIAL ITEMS A. Contingencies: 1. Contingencies are defined by SFAS 5 as “… existing condition, situation or set of circumstances involving uncertainty as to possible gain ( gain contingency) or loss ( loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur.” a. Gain contingencies: i. Claims or rights to receive assets or have liabilities reduced; examples include (i) Possible gifts, donations, bonuses etc. (ii) Refunds from disputes (tax disputes etc) (iii) Pending court cases where a positive result will be financially favorable (iv) Tax loss carryforwards ii. Gain contingencies are not recorded (IAW conservatism principle) b. Loss contingencies: i. Often call contingent liabilities (i) Obligations that are dependent upon the occurrence or nonoccurrence of future events ii. Disclosure depends if the likelihood of future events is (i) Probable : future event is likely to occur (ii) Reasonably Possible : Future event is more than remote but less than likely (iii) Remote : The chance of the future event occurring is slight. iii. Disclosure of contingent liabilities is made only if the likelihood of the loss occurring is both : (i) Probable and (ii) The amount can be reasonably estimated iv. Cash and Accrual basis: (i) Cash basis: 1. The only method utilized for tax purposes. 2. Warranty costs are charged to expense as they are incurred. 3. No liability is recorded for future costs 4. Required to be used if liability is not accrued in the year of sale either because a. It is not probable that a liability has occurred or b. The amount of the liability cannot be reasonably estimated. (ii)
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This note was uploaded on 10/31/2010 for the course BUSA 3250 taught by Professor Stovell during the Spring '10 term at Georgia Southwestern.

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500-4ABalanceSheet - Dr M D Chase Accounting 500 4A I...

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