BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains...
-
date post
21-Dec-2015 -
Category
Documents
-
view
214 -
download
1
Transcript of BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains...
![Page 1: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/1.jpg)
BALANCE SHEET
Accounting ASW
Summer 2007
![Page 2: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/2.jpg)
Assets = Liabilities + Owners’ Equity
• Net Worth
• Explains the components of net worth
![Page 3: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/3.jpg)
Reason for mis-valuation
• Accounting omits many assets
• Accounting mis-values many assets
• FASB/IASB know and do it intentionally
![Page 4: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/4.jpg)
Asset Definition
• Probable net future cash inflow
• Currently right to it (often title)
• Past transaction provided right
• Future benefits reasonably quantifiable
![Page 5: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/5.jpg)
![Page 6: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/6.jpg)
Are these recognized as assets?
• Cash, accounts receivable and PP&E?
• Yes, recognized as assets
• Intangibles
- patents/R & D,
- trademarks/advertising
- goodwill?
• Recognized only if purchased externally
![Page 7: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/7.jpg)
• Executory contracts
- situations in which contracts have been signed but neither party has acted
- e.g., purchase contracts, rental agreements, etc.
• Generally not
• Employees
• Never
![Page 8: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/8.jpg)
Asset Valuation
• Most assets are value based on historical cost (e.g., inventory, PP&E, land)
- Initially at acquisition cost
- Inclusive of the cost of putting in place--e.g., labor, taxes, transportation, etc.
• PP&E is reduced by: - depreciation of normal use
- impairment if value falls below book
![Page 9: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/9.jpg)
• Inventory reduced to lower of cost or market
• Accounts receivable are reduced for estimated bad debts
• A few assets are valued at fair market value
- e.g., some debt and equity securities and financial instruments
- increasingly common, especially with financial instruments
- remains controversial
![Page 10: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/10.jpg)
Asset Classification (US)
• Current assets—one year (or operating cycle) until cash
• Noncurrent assets—longer term
– E.g., Strategic investments in other companies;
property, plant and equipment; intangible assets
• Problem 2.17
![Page 11: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/11.jpg)
Problem 2.17: Is there an asset created if? Rents space for five years, starting next month. Pays $125K for 1st year rent & $130K deposit. Commits to paying $500K later for last 4 years.
Spends $10K on partitions, $6.5K on paint & 20K on carpet.
Buys display counter for $30K less 2% discount; pays $1.2K to transport and $0.8K to install.
![Page 12: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/12.jpg)
Hires store manager at $60K.
Spends $1.5K on this month’s advertising.
Buys $160K of inventory; pays for $120K with 2% discount; $12K is returned, rest is still owed.
![Page 13: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/13.jpg)
Liability Definition
• Probable net future cash (or service/goods outflow)
• Unavoidable obligation to pay it
• Created by past transaction or exchange
• Amount (and time) can be reasonably estimated
![Page 14: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/14.jpg)
Are these recognized as liabilities?
• Accounts payable, long-term debt? • Yes, recognized as liabilities
• Contingencies and litigation? • Rarely; if probable and reasonably estimable
• Executory contracts? • No?
• Employees?
![Page 15: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/15.jpg)
![Page 16: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/16.jpg)
Liability Classification
• Current liabilities - due within a year (or operating cycle) - includes the current portion of long-
term debt • Noncurrent liabilities—longer term
- E.g., non-current long term debt; weird
liabilities like deferred taxes, pension
liabilities, etc.
![Page 17: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/17.jpg)
Liability Valuation
• Expected cash outflow for most current liabilities
- e.g., accounts. payable, salaries payable, etc.
- not worth the effort of discounting• Discounted present value of future cash
outflow for long-term debt (including current portion)
- typically clear from amount received at issuance
• Problem 2.18
![Page 18: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/18.jpg)
Problem 2.18: Is there a liability created if?
Sign contract to have landscaping done next year for $7.5K.
Receive $72 for magazine subscription starting next year.
Receive $2M toward a $10M bridge to be started next year.
![Page 19: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/19.jpg)
Issue common stock for $7.6M.
Receive $100K bank loan, 6% interest to be paid.
Sign a contract to purchase at least $60K of supplies next year.
Place a $15K order on the above contract.
![Page 20: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/20.jpg)
Owners’ Equity
• Residual (assets - liabilities)
![Page 21: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/21.jpg)
![Page 22: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/22.jpg)
Owners’ Equity Classification
• Contributed Capital • Par value (shares outstanding times
par value per share)--arbitrary • Capital in excess of par (proceeds
minus par value)
• Retained earnings (cumulative earnings net of dividends)
• Other--foreign currency translation etc.
![Page 23: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/23.jpg)
Basic Journal Entries
• Debits: on the left
• Credits: on the right
• Assets increase with debits
• Liabilities increase with credits
• Debits=Credits implies Assets=Liabilities + Owners’ Equity
![Page 24: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/24.jpg)
Buy inventory for cash
Buy inventory on credit
Issue stock for cash
Pay off accounts payable
Sell inventory at cost
Problem 2.27, 2.29
![Page 25: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/25.jpg)
Problem 2.27: What journal entries for: 1. Issue stock for $30K.
2. Borrow $5K from bank, 6% future interest.
3. Rent a building and prepay $12K.
4. Acquire equipment for cash of $8K.
5. Acquire $25K of inventory, $12K for cash,
the rest on credit.
![Page 26: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/26.jpg)
6. Sign a contract to provide $2K of groceries per week, receive $4K advance.
7. Buy insurance starting next year for $1.2K cash.
8. Pay $600 in advance for ads for next month.
9. Place a supplies order for $35K to be delivered
and paid for next month.
![Page 27: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/27.jpg)
Problem 2.29: Prepare balance sheet, new co. 1. Issue stock for $800K.
2. Acquire land for $50K, building for $450K.
3. Purchase inventory on account for $280K.
![Page 28: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/28.jpg)
4. Pay for $250K in 3, with 2% discount.
5. Pay $12K for one year insurance, starting next year.
6. Borrow $300K from bank on 12/31.
7. Acquire equipment on 12/31 for $80K 6% note.
![Page 29: BALANCE SHEET Accounting ASW Summer 2007. Assets = Liabilities + Owners’ Equity Net Worth Explains the components of net worth.](https://reader030.fdocuments.us/reader030/viewer/2022032521/56649d5e5503460f94a3d8f9/html5/thumbnails/29.jpg)
Contra Accounts
• Accumulate reductions in accounts
• Often used to separate historical cost frombook value
• Accumulated Depreciation - Contra-asset offsetting PP&E at cost - Credit balance
• Allowed for Doubtful Accounts - Contra to accounts receivable