acct 3001 ch 5 - C HAPTER5THEBALAN CESHEET 1 2 3 4 5 6...

CHAPTER 5 – THE BALANCE 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
Combo 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 company’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?

CHAPTER 5 – THE BALANCE 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
Companies 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

CHAPTER 5 – THE BALANCE 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 companies 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)
•
Cash equivalents