Presentation on theme: "The Balance Sheet Statement"— Presentation transcript:
1 The Balance Sheet Statement Learning ObjectivesHow balance sheet accounts are measured, classified and presented.How balance sheet information is used.Balance sheet terminology and format.How footnotes aid to the understanding of the firm’s accounting policies, contingent liabilities, subsequent events, and related-party transactions4-1
2 The Accounting Equation Assets = Liabilities + EquityShareholders’ Equity:What’s left of the company’s assetsafter paying off liabilities.It also referred to as net assets.
4 Elements of the balance sheet How the money is investedWhere the money came fromASSETSLIABILITIESEQUITY=+Probable future economic benefitsObtained from past transactions or eventsProbable future sacrifices of economic benefitsArising from present obligationsTo transfer assets or provide services in the futureAs a result of past transactions or eventsThe residual interest in net assets.
5 The Balance Sheet This measurement technique is limited Consequently, a variety of measurement techniques are used to measure the elements of the balance sheetHistorical (Historical cost)Current oriented (Current value)Future oriented (Expected realizable value)
6 Asset Valuation Asset Cash Accounts receivable Marketable securities InventoryInvestmentsProperty, plant and equipmentMeasurement basisCurrent valueExpected future valueFair valueCurrent or past valueFair value or amortized costDepreciated past value
7 Balance sheet Classification and Account Measurement - Current assets Amortized cost or current market valueNet realizable valueLower of cost or current market value4-7
8 Assets – classification and measurement Resources with future economic benefit to a business entity as a result of a past transaction.Current Assets: cash and other assets that are reasonably expected to be realized in cash or sold, or consumed during a normal operating cycle or one year, whichever is longerExamples: Cash and cash equivalents, short- term investments (reported at the fair value), receivables (estimated amount collectible), inventory (LCM), prepaid expenses, etc.
9 Balance Sheet Classification and Account Measurement -PPE, Investments and Intangibles Historical cost minus accumulated depreciation except that fair market value is used when “impaired”4-9
10 Assets (contd.) Long-term Investments: Comprise of the following 4/7/2017Assets (contd.)Long-term Investments: Comprise of the followingSecurities (i.e., bonds, stock, long-term notes)Fixed assets (i.e., land, building)Special funds (i.e., pension fund, bond fund)Nonconsolidated subsidiaries or affiliated companies
11 Assets (contd.)Property, Plant, Equipment (i.e., building, Land, Machinery and equipment, capital leases): assets used in firms’ operations and 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.
12 Assets (contd.)Intangible Assets: assets with no physical substance but have value based on rights or privileges that belong to the owner (i.e., goodwill, patents, franchises, trademarks,…).Amortization for limited life intangibles (i.e., patents, franchises) and impairment test for indefinite-life intangibles (i.e., goodwill).
13 Balance Sheet Classification and Measurement - Liabilities Amount due at maturityHistorical costDiscounted present value4-13
14 LiabilitiesLegal obligations required future payments of assets or services as a result of a business entity’s past transactions or events.A. Current LiabilitiesB. Long-term LiabilitiesC. Other Liabilities
15 A. Current LiabilitiesObligations must be fulfilled in one year or one operating cycle, whichever is longer. (will require the use of current assets or the creation of current liability) (i.e., A/P, N/P, accrual payable, unearned revenue, income tax payable, current portion of L-T debt)
16 Contingent Liabilities Obligations may arise because of the occurrence or not occurrence of future event(s). (i.e., warranty obligations)
17 B. Long-Term Liabilities Obligations are not due in next year or next operating cycle, whichever is longer. (i.e., bonds payable, pension liability)
18 C. Other LiabilitiesLong-term advances from customers, deferred income taxes.
19 Balance Sheet Classification and Account Measurement -Stockholders’ equity Historical par valueHistorical costCombination of different measurement bases4-19
20 b. Accumulated Other Comprehensive Income Increase of assets without outflows of assets, increase of liabilities, increase of income or issuance of common stock (i.e.,(+) increase in market value of securities-available-for-sale (+ or -), gains or losses of foreign currency adjustments, etc.)
21 c. Retained EarningsNet income not distributed to stockholders
22 Balance sheet information 1. Rates of returnROA and ROCEASSETS2. Capital structureDebt vs. EquityHelps3. LiquidityCash conversionLIABILITIES+EQUITYassess4. SolvencyAbility to pay debt5. FlexibilityOperating and financialBalance Sheet
23 1. Rate of Return RatiosROA (return on assets) and ROCE (return on common equity) ratios:Evaluate operating efficiency and profitability.ROA =Net operating profit after taxes (NOPAT) / Average assetsROCE =(Net income – Preferred dividends) / Average common shareholders’ equity
24 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 financial statements.Three important notes:Summary of significant accounting policies.Subsequent event disclosures.Related party transactions4-24
25 Limitations of the Balance Sheet 1. Historical costs reporting for most of assets and liabilities.2. Estimations involved in the value of some assets and liabilities (i.e., the net realizable value of accounts receivable and the cost of warranty).3. the omission of some valuable items such as goodwill of the company.4. Off-balance sheet liabilities.
26 SummaryThe balance sheet shows the assets owned by a company at a given point in time, and how those assets are financed (debt vs. equity).Be alert for differences in balance sheet measurement bases, account titles, and statement format.Financial statement footnotes provide important information..4-26