The Balance Sheet - Intro.pptx - The Balance Sheet...

This preview shows page 1 - 8 out of 28 pages.

The Balance Sheet
IntroductionReports the company’s resources (assets) and how those resources were funded (liabilities and shareholder equity) on a particular date (EOQ/EOY snapshot)Fundamental equationHistorical and Conservatism Principle RevisitedRecall that financial statements report company’s resources at the acquisition (historical) costBy not allowing assets to be overstated, the historical cost principle is an example of conservatism. Governed by the historical cost principle, the balance sheet does not report the true market value of a company – only its resources and funding at their historical cost.
AssetsAssets represent the company’s resources. To qualify as an asset, the following requirements must be met: A company must own the resource The resource must be of value The resource must have a quantifiable, measurable costAssetDescriptionCashMoney held by the company in its bank accountsMarketable SecuritiesDebt or equity securities held by the companyAccounts Receivable (A/R)Payment owed to a business by its customers for products and services already delivered to themInventoriesInventories represent any unfinished or finished goods that are waiting to be sold, and the direct costs associated with the production of these goodsPrepaid expensesWhen a company prepays for things like utilities, insurance and rents, the right to the future services become assets.Property, Plant & Equipment (PP&E)Land, buildings, and machinery used in the manufacture of the company’s services and productsIntangible Assets & GoodwillNon-physical assets such as patents, trademarks, and goodwill acquired by the company that have value based on the rights belonging to that companyCommon asset typesLess LiquidMore Liquid
Cash is the most liquid asset. Usually followed by A/R and inventory.Also notice the “Current assets” designationAssets that can be converted into cash within 12 months are considered “current” and classified as such on the balance sheet.PPE never a current assetNet of depreciationSometimes will see line item specifically identifying depreciaiton
Exercise: Identifying AssetsWhich of the following accounts are assets for AppleApple’s cash reservesAn office building owned by AppleApple’s iPad inventoriesThe cost of Apple’s software developersThe value of Apple’s trademarkThe value of Apple management’s personal carsApple’s iPhone revenueThe dividends that Apple issues to shareholders
Liabilities & EquityLiabilities and Equity represent the company’s sources of funds (how it pays for assets).Liabilities represent what the company owes to others:They must be measurableTheir occurrence is probable (pending lawsuits and product warranties)Equity represents sources of funds through:Equity investmentRetained earnings (what the company has earned through operations since its inception)
Liabilities & Equity LiabilitiesDescriptionAccounts Payable

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture