Chapter 3 notes

Chapter 3 notes - Chapter 3 Balance Sheet and Financial...

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Chapter 3 – Balance Sheet and Financial Disclosures Preparation: Company’s name Balance Sheet At December 31, 2011 Assets Current Assets: Cash AR Less: Allowance for uncollectible Note receivable (>1 year) Inventories Prepaid expenses Total Current Assets Investments Land Buildings Machinery Less: Accumulated depreciation Intangible assets: Patent Total assets Liabilities and SE Current liabilities: Payables Current maturities of long-term debt Total liabilities Long-term liabilities: Notes payable Bonds payable Total long-term liabilities Shareholders’ equity Common stock, no par, # of shares authorized, # of shares issued and outstanding Retained earnings Total Shareholders’ equity
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Total liabilities and shareholders’ equity The Balance sheet Presents assets, liabilities, and shareholder’s equity at a point in time. A company’s book value is assets minus liabilities. Benefits: o It describes many of the company’s resources which are available to generate future cash flows. o It provides information useful for assessing future cash flows, liquidity, and long term solvency. Limitations: o It does not portray the market value of the company. o It does not portray the liquidity value of the company. o o The balance sheet does not portray the market value of the entity (number of common stock shares outstanding multiplied by price per share) for a number of reasons. Most assets are not reported at fair value, but instead are measured according to historical cost. Also, there are certain resources, such as trained employees, an experienced management team, and a good reputation, that are not recorded as assets at all. Therefore, the assets of a company minus its liabilities, as shown in the balance sheet, will not be representative of the company’s market value. Classification of elements within the balance sheet Assets Current assets Investments Intangible assets Liabilities Current liabilities Long-term liabilities Shareholders’ Equity Paid-in capital Retained earnings Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed during one year, or within the normal operating cycle of the business if the operating cycle is longer than one year. Current assets: Cash and cash equivalents Short-term investments Current Liabilities: Current maturities of long-term debt Short-term notes payable
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Accounts receivable Inventories Prepaid expenses Accrued liabilities Accounts payable
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Chapter 3 notes - Chapter 3 Balance Sheet and Financial...

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