ACCT303 Chapter 4A - Balance Sheet, Teaching Pp
Transcript of ACCT303 Chapter 4A - Balance Sheet, Teaching Pp
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The Balance Sheet Statement
Learning Objectives1.How balance sheet accounts are measured,classified and presented.
2.How balance sheet information is used.3.Balance sheet terminology and formatoutside the U.S.
4.How footnotes aid to the understandingof the firms accounting policies, contingentliabilities, subsequent events, and related-party transactions
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The Accounting Equation
Assets = Liabilities + Equity
Shareholders Equity:Whats left of the companys assets
after paying off liabilities.
It also referred to as net assets.
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Balance sheet classification:Overview
Current assets Property, plant andequipment
Investments Other assets
Current liabilities Long-term debt Otherliabilities
Preferred andcommon stock
Additional paid-incapital
Retained earnings
ASSETS LIABILITIES EQUITY= +
ContributedCapital
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Elements of the balance sheet
Probable future economic benefits Obtained from past transactions or events
Probable future sacrifices of economic benefits
Arising from present obligations To transfer assets or provide services in the future As a result of past transactions or events
The residual interest in net asset
ASSETS LIABILITIES EQUITY= +
How the money isinvested Where the money came from
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Balance sheet Classification and Account
Measurement - Current assets
Amortized costor currentmarket value
Netrealizablevalue
Lower of cost orcurrent marketvalue
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Assetsclassification and measurement
n Resources with future economic benefit to abusiness entity as a result of a past transaction.
n Current Assets: cash and other assets that arereasonably expected to be realized in cash orsold, or consumed during a normal operatingcycle or one year, whichever is longer
Examples: Cash and cash equivalents, short-
term investments (reported at the fair value),receivables (estimated amount collectible),inventory (LCM), prepaid expenses, etc.
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Balance Sheet Classification and Account
Measurement -PPE, Investments and Intangibles
Historical cost minus
accumulateddepreciation except thatfair market value is usedwhen impaired
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Assets (contd.)
Long-term Investments: Comprise of thefollowing
Securities (i.e., bonds, stock, long-term notes)
Fixed assets (i.e., land, building)
Special funds (i.e., pension fund, bond sinking
fund) Nonconsolidated subsidiaries or affiliated
companies
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Assets (contd.)
Property, Plant, Equipment (i.e., building,Land, Machinery and equipment, capitalleases): assets used in firms operationsand meet the following criteria:
1. Economic life > 1 year;
2. Acquired for use in operation;
3. Not for resale to customers;
4. $ is material. (materiality)
Depreciation will be applied except for land.
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Assets (contd.)
Intangible Assets: assets with nophysical substance but have valuebased on rights or privileges thatbelong to the owner (i.e., goodwill,patents, franchises, trademarks,).
Amortization for limited life
intangibles (i.e., patents, franchises)and impairment test for indefinite-lifeintangibles (i.e., goodwill).
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Balance Sheet Classification and
Measurement - Liabilities
Amount dueat maturity
Historicalcost
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Discounted
presentvalue
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Liabilities
n Legal obligations required futurepayments of assets or services as aresult of a business entitys past
transactions or events.
A. Current Liabilities
B. Long-term Liabilities
C. Other Liabilities
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A. Current Liabilities
n Obligations must be fulfilled in oneyear or one operating cycle,
whichever is longer. (will require theuse of current assets or the creationof current liability) (i.e., A/P, N/P,
accrual payable, unearned revenue,income tax payable, current portion ofL-T debt)
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Contingent Liabilities
n Obligations may arise because of theoccurrence or not occurrence of
future event(s). (i.e., warrantyobligations)
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B. Long-Term Liabilities
n Obligations are not due in next year
or next operating cycle, whichever is
longer. (i.e., bonds payable, pensionliability)
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C. Other Liabilities
n Long-term advances from customers,deferred income taxes.
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Balance Sheet Classification and Account
Measurement -Stockholders equity
Historicalpar value
Historicalcost
Combination ofdifferentmeasurementbases
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Stockholders Equity
n Residual claims (assets-liabilities) tothe business entity from stockholdersincluding:
a. contributed capital
b. (+ or -)Accumulated OtherComprehensive Income
c. retained earnings (or - deficit)
d. (-)treasury stock
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a. Contributed Capital
n Par value of common stock
n Par value of prefer stock
n Paid-in capital in excess of par valueof common stock or preferred stock
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b. Accumulated Other Comprehensive
Income
n Increase of assets without outflows ofassets, increase of liabilities, increase
of income or issuance of common stock(i.e.,(+) increase in market value ofsecurities-available-for-sale (+ or -),
gains or losses of foreign currencyadjustments, etc.)
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c. Retained Earnings
n Net income not distributed tostockholders
u appropriated
u unappropriated
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Balance sheet information
LIABILITIES
+
EQUITY
ASSETS
1. Rates of return
2. Capital structure
3. Liquidity
4. Solvency
5. Flexibility
ROA and ROCE
Debt vs. Equity
Cash conversion
Ability to pay debt
Operating and financial
Helpsassess
Balance Sheet
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1. Rate of Return Ratios
ROA (return on assets) and ROCE (return oncommon equity) ratios: Evaluate operating efficiency and profitability.
ROA =Net operating profit after taxes (NOPAT) /Average assets
ROCE =(Net income Preferred dividends) / Average
common shareholders equity
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2. Capital Structure
The balance sheet provides criticalinformation for understanding an
entitys capital structure. Capital structure refersto how much
of an entitys assets are financed from
debtversus equitysources.
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3. Liquidity Ratios
Liquidity measures how readily assetscanbe converted to cash relat ive tohow soonliabilities will have to be paid in cash.
Current ratio: Indicate the level of currentresources available to pay current debts.
Current Ratio = Current Assets / CurrentLiabilities
Question:Does higher ratio always indicate betterfinancial status?
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4. Solvency
Solvency defines the ability of a companyto generate sufficient cash flows tomaintain its productive capacity and stillable to pay off the long-term debt.
Debt ratios provide information about theamount of long-term debt in a companysfinancial structure.
Long-term debt to assets =
Long term debt/Total assets
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Solvency (contd.)
A company that can not make timelypayments in the amount required
becomes insolvent and may becompelled to reorganize or liquidate.
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5. Flexibility
Flexibility refers to the ability to adapt orrevise to a new strategy for differentcircumstances.
The ability to adjust to unexpecteddownturn in the economic environmentin which it operates or to takeadvantage of profitable investmentopportunities when they arise.
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Analytical insights:Understanding the business
Which company is:
Deere
E-Trade
Potomac Electric Power
Wal-Mart
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Balance sheet presentation:International differences
Current Assets
Long-lived Assets
Current Liabilities
Non-current Liabilities
Stockholders Equity
Fixed Assets
Current Assets
Current Liabilities
Non-current Liabilities
Capital Employed
U.S. Format: U.K. Format:
+
=
+
+
+
-
-
=
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Financial statement footnotes Footnotes are an integral part of
companies financial reports. These notes help users better
understand and interpret the numbers
presented in the body of the financialstatements.
Three important notes:
1. Summary of significant accountingpolicies.
2.Subsequent event disclosures.
3.Related party transactions 4-3131
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Limitations of the Balance Sheet
n 1. Historical costs reporting for mostof assets and liabilities.
n 2. Estimations involved in the value of
some assets and liabilities (i.e., the netrealizable value of accounts receivableand the cost of warranty).
n 3. the omission of some valuable itemssuch as goodwill of the company.
n 4. Off-balance sheet liabilities.
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Summary
1.
The balance sheet shows the assetsowned by a company at a given point intime, and how those assets arefinanced (debt vs. equity).
2. Be alert for differences in balancesheet measurement bases, accounttitles, and statement format.
3. Financial statement footnotes provideimportant information..
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