The Balance Sheet
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This chapter starts by examining the philosophical relationship between the balance sheet and
Two separate issues emerge:
articulation between the two and which one is
to dominate, assuming articulation (asset-liability or revenue-expense approach).
are pure cases but they do illustrate the broad theoretical choices that exist.
The changes in
element definitions (assets, liabilities, and owners’ equity) are detailed from the Accounting
Terminology Bulletins, to APB Statement No. 4, to SFAC Nos. 3 and 6.
The important point is
that there is a marked reorientation to the asset-liability perspective in APB Statement No. 4 and
the conceptual framework project, away from the revenue-expense perspective of the Accounting
The chapter moves to an overview of recognition and measurement practices with respect to
major types of assets and liabilities, as well as components of owners’ equity.
The general rule
of recognition is that assets and liabilities are recorded on the basis of events in which resources
(assets) are acquired or obligations (liabilities) incurred.
Assets and liabilities are generally
measured at the exchange prices established in the transactions.
However, subsequent values of
accounts become much more varied, especially for assets.
Receivables approximate net
realizable value because of the allowance for uncollectible accounts.
amortizable) assets, inventories, and investments subject to equity accounting (APB Opinion No.
18) are all examples of arbitrary accounting book values in which the assets represent unique
accounting attributes rather than any market referent (either entry or exit prices).
From a pure
measurement theory point of view, these varied and diverse accounting
calculations/measurements are not additive.
This does not mean that the balance sheet is
uninformative, but it does legitimately raise the issue of whether or not ratio analysis on the
components of the balance sheet is meaningful.
The chapter contains extensive discussions on investments in marketable securities (SFAS No.
115), impaired assets (SFAS No. 121), and financial instruments with emphasis on derivatives.
The discussion concludes with a look at classification within the balance sheet.
is based on liquidity, but, as pointed out in the text, liquidity is perhaps better captured in the
cash flow statement, which is discussed in Chapter 13.
Alternative classification schemas are
suggested relating to how the assets are utilized, or to the nature of the liability (contractual,
constructive, equitable, contingent, and deferred charges).
Finally, one could group assets and
liabilities by the basis of measurement or accounting calculation in order to achieve a more
systematic basis of classification.