acct 3001 ch 5 - C HAPTER5THEBALAN CESHEET 1. 2. 3. 4. 5....

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CHAPTER 5 – THE BALAN CE SHEET 1. Usefulness 2. Limitations 3. Classification 4. Additional information reported 5. Techniques of disclosure 6. IFRS Insights Note: Our coverage will omit Section 2 Statement of Cash Flows  coverage (pages 227-235). Section 3 is included in our coverage. 1. Usefulness of the Balance Sheet Evaluating the capital structure. o Co mbo of debt and equity to finance the assets Assess risk and future cash flows. o Balance of inventory (is there unsold inventory?) o Receivables  o Payables (how many/what kind?) Analyze the co mpany’s:  o Liquidity, (short term) o Solvency, (can I stay in business, what’s my debt? Can I pay  off my debt?) and  o Financial flexibility. (ability to adjust to unexpected  developments)   2. Limitations of the Balance Sheet Most assets and liabilities are reported at historical cost. o What is problem of reporting assets at historical cost? 
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CHAPTER 5 – THE BALAN CE SHEET prices change real estate Use of judgments and estimates. o Depreciation, useful lives, salvage value Many items of financial value are omitted. o Internally generalized intangible assets 3. Classification in the Balance Sheet Three General Classifications  Assets, Liabilities, and Stockholders’ Equity Co mpanies further divide these classifications: Assets Current assets Long-term investments Property, plant and equipment Intangible assets Other assets Liabilities and Owners’ equity Current liabilities Long-term debt Owners’ equity o Capital stock o Additional paid-in capital o Retained earnings
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CHAPTER 5 – THE BALAN CE SHEET Elements of the Balance Sheet Asset – Probable (not definite) future economic benefit obtained or controlled by a particular entity as a result of past transactions or event. Liability – Probable future sacrifice of economic benefit arising from a present obligation of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Equity – Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Current Assets Cash and other assets a company expects to convert into cash, sell, or  consume either in one year  or  in the operating cycle , whichever is   longer -most co mpanies operating cycles are less than a yr Item Basis of Valuation Cash and cash equivalents Fair value Short-term investments Generally fair value Receivables Estimated amount collectible Inventories Lower of cost or market Prepaid expenses historical Cost Cash Generally any monies available “on demand.” (access to money   immediately) 
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This note was uploaded on 03/09/2012 for the course ACCOUNTING 3001 taught by Professor Moffitt during the Fall '11 term at LSU.

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acct 3001 ch 5 - C HAPTER5THEBALAN CESHEET 1. 2. 3. 4. 5....

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