1. COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. The Balance Sheet and Notes to the Financial Statements. Chapter 3 S t I c e | S t I c e | S k o u s e n Intermediate Accounting 16E Prepared by: Sarita Sheth | Santa Monica College

2. Learning Objectives 1.Describe the specific element of the balance sheet (assets, liabilities, and owners’ equity), and prepare a balance sheet with assets and liabilities properly classified into current and noncurrent categories. 2.Identify the different formats used to present balance sheet data. 3.Analyze a company’s performance and financial position through the computation of financial ratios.

3. Learning Objectives (cont.) 4.Recognize the importance of the notes to the financial statements and outlined the types of disclosures made in the notes. 5.Understand the major limitations of the balance sheet.

4. The Balance Sheet Presents a listing of an organization’s assets and liabilities at a certain time point. The difference between assets and liabilities is called equity. Represented by the basic accounting equation: Assets = Liabilities + Owners’ Equity

5. How to Classify Items on the Balance Sheet Current (less than 1 year) Noncurrent (more than 1 year) Order of liquidity Historical cost Working capital = CA - CL It is the liquid buffer available in meeting financial demands and contingencies of the near future.

6. Current Assets Cash and resources expected to be converted to cash during the entity’s normal operating cycle or one year, whichever is longer, are current assets. Cash Trading Securities Accounts Receivables Inventories Prepaid Assets

7. Noncurrent Assets Investments Property, plant, and equipment Intangible Assets Deferred income taxes

8. Property, plant, and equipment are properties of a tangible and relatively permanent nature that are used in the normal business operations. Plant, Property, and Equipment

9. Intangible assets are long-term rights and privileges of a nonphysical nature acquired for use in business operations. Intangible Assets

10. Current liabilities are obligations expected to be paid using current assets or by creating other current liabilities. Accounts and notes payable Accrued expenses Current portion of long-term obligations Unearned revenues Generally, if a liability is expected to be paid within 12 months, it is classified as current as long as it is paid within the operating cycle. Current Liabilities

11. If the terms of the agreement for a callable obligation is due on demand or will become due on demand within one year from the balance sheet date, the obligation should be classified as current. Callable Obligations

12. Noncurrent Liabilities Current liabilities do not usually include: –Debts to be liquidated from a noncurrent sinking fund. Sinking fund- cash and investment securities that have been accumulated for payment of a specific loan. –Short-term obligations to be refinanced.

13. Noncurrent Liabilities Long-term debt Long-term lease obligations Deferred income tax liability Pension obligations

14. Noncurrent Liabilities Long-term debt is reported at its discounted present value. When a note, bond issue, or a mortgage becomes payable within a year, it should be reclassified as a current liability. For a capital lease, the present value of the future minimum payments is recorded as long-term liability. Most large companies include deferred taxes liabilities on the balance sheet.

15. Contingent Liabilities Past activities or circumstances may give rise to possible future liabilities. Contingent liabilities- Potential obligations that do not exist on the balance sheet date. An estimated liability is a definite liability, so it is not a contingent liability.

16. Owners’ Equity Can also be called stockholders’ or shareholders equity. Generally divided into two parts: 1.Contributed capital also known as paid- in-capital 2.Retained Earnings

17. Contributed Capital Two parts of contributed capital: 1.Capital Stock- the number of shares x the par value. a.Preferred stock- usually paid a fixed annual cash dividend and have rights to their investment in bankruptcy b.Common stock- real owners of the corporation, have voting power, but are last in line for assets in bankruptcy 2.Additional paid-in capital- investment by shareholders in excess of par value of capital stock.

18. Retained Earnings Retained Earnings (RE)- the amount of undistributed earnings of past periods. RE Deficit- an excess of dividends and losses over earnings results in a negative retained earnings balance. Sometimes, RE is restricted and unavailable for cash dividends.

19. Treasury Stock Treasury Stock- when a company buys back its own shares. Treasury shares can be retired, or they can be retained and reissued later. X Corporation Common Stock Par $10

20. Other Equity The FASB requires companies to summarize changes in owners’ equity exclusive of net income and contributions by and distributions to owners. Unrealized gains and losses on available-for-sale securities are shown as a separate equity item. Adjustments arising from the change in the equity of foreign subsidiaries (as measured in U.S. dollars) resulting from changes in foreign currency exchange rates are shown in the equity section. Some of the unrealized gains and losses from the fluctuations in the value of derivatives are reported as part of accumulated other comprehensive income.

21. Format of the Balance Sheet Generally, assets and liabilities are presented in their order of liquidity. Some industries with significant investments in land and buildings will list these items first on the balance sheet. Generally, a balance sheet is presented in comparative form, including data from both the current year and the previous year. Foreign balance sheets frequently list the current assets and current liabilities together.

22. Balance Sheet Analysis Balance sheet information is analyzed two ways: 1.Relationships between balance sheet amounts 2.Relationships between balance sheet and income statement amounts. Financial ratios show the relationships between financial statement amounts.