Balance Sheet Assets, Liabilities & Shareholders’ Equity “Old accountants never die; they just lose their balance” --Anonymous

The Balance Sheet Also called the statement of condition or statement of financial position Financial Condition Liabilities + Stockholders’ equity Liabilities + Stockholders’ equity Assets = Assets = What the firm owns Liabilities = What the firm owes to outsiders Stockholders’ equity = What the firm owes to Internal owners

Assets Should provide probable future economic benefits Owned or controlled by the entity As a result of past transactions/events Cost/value should be determinable Generally presented in order of liquidity

A Few Definitions Current Assets-Cash or other assets expected to be converted into cash within one year or one operating cycle, whichever is longer Operating Cycle-Time required to purchase or manufacture inventory, sell the product, and collect the cash

Current Assets-1 Cash and Cash Equivalents Valued at fair value- nominal amounts Short-term Investments a.k.a-TRADING SECURITIES a.k.a-FINANCIAL ASSETS a.k.a-MARKETABLE SECURITIES Valued at fair value or amortized cost

Current Assets-2 RECEIVABLES Trade Receivables Accounts Receivable Notes Receivable Post dated cheques receivable Due From Related Parties Receivable from Employees Others Valued at amortized cost (net of interest) and reported at NET REALIZABLE VALUE - Allowance for Doubtful Accounts Net Realizable Value = Accounts Receivable

A Word on the “Allowance…” Management must estimate the dollar amount of accounts receivable they expect to be uncollectible Affects balance sheet valuation AND bad debt expense on income statement Can be important in assessing earnings quality--changes should be analyzed

Analysis of Receivables

Current Assets-3 Inventories Measured by FIFO or Weighted Average Valued at Lower of Cost or Net Recoverable Amount Biological Assets (at fair value until the point of harvest) Assets Held for Sale Other Current Assets Deferred Tax Assets

Long-term Assets-1 Trade Receivables Other Receivables Biological Assets Long-term Financial Investments Valued at fair value or amortized cost or equity method of accounting Deferred Tax Assets

Long-term Assets-2 Property, plant and equipment 1. Option: Property, plant & equipment are valued at cost less accumulated depreciation and allowance for impairment 2. Option: Property, plant & equipment are valued at revalued amount less accumulated depreciation and allowance for impairment Book value = original cost/revalued amount - accumulated depreciation to date – impairment losses

Long-term Assets-2 Intangible Assets Identifiability- Control- Future economic benefits- Reliable measurement of cost recorded at cost initially and then carried at cost less any accumulated amortization and any accumulated impairment losses. The life can be limited or indefinite Limited  amortize over the useful life Indefinite  NO AMORTIZATION

Long-term Assets-3 GOODWILL Arise from business combinations Investment Property

Liabilities  obligations of an entity to make a future payment or to deliver goods or services to the third parties in the future in return for cash borrowed or service used or goods acquired  Classified according to their due dates  due within one year or the operating cycle are classified as current liabilities  loans or credits that mature in more than one year are classified as long-term liabilities

Liabilities-1 Current Portion of Long-term Debt Financial Liabilities Bank Loans Bonds issued Finance Lease Liabilities

Liabilities-2 Trade Payables Accounts Payable Notes Payable Other Payables Due to Related Parties Payable to employees Taxes payable, etc…

Liabilities-3 Accrued Liabilities Unearned Revenues, a.k.a. Deferred Income, Advances Received Deferred Taxation Result of temporary differences in the recognition of revenue and expense for taxable income relative to reported financial income

Deferred Taxation

Provisions and Contingent Liabilities a potential liability arising from a past transaction and that depends on a future event could be disclosed in the body of the balance sheet with the liabilities could be disclosed within notes to financial statements certainty of the amount and the payment date determines where they will be disclosed

Is the amount of the liability known? YES Recognize liability on the balance sheet NO Can the amount of Liability be reasonably Estimated? YES Is the liability likely to occur? (Probable) YES Disclose in the notes To the financial Statements (CONTINGENT LIABILITY) NO

Provisions Post Retirement Benefits Restructuring Provisions Environmental Liabilities Product Warranties, Others such as litigations,

On November 24, 2003, 26 passengers on Paris Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $ were filed onJanuary 11, 2004 against the airline by the 18 injured passengers. The airline carries no insurance. Legal counsel has studied each case and advised Paris that it can reasonably expect to pay 60% of the damages claimed. The financial statements for the year ended 31 December 2003 were issued February 27, 2004.

Shareholders’ Equity Share Capital Additional paid-in Capital Treasury Stocks (contra equity) Revaluation Fund Retained Earnings

Comprehensive Income Non-owner changes to equity and includes Net Income for the year Other comprehensive income Adjustments to fair value for available-for-sale securities Foreign currency translation adjustment Gains/losses on cash flow hedge derivatives Gains/losses on investment hedge instruments Adjustments related to under funding a defined benefit pension plan

Statement of Shareholders’ Equity Provides details of changes in Equity Stock Other comprehensive income Retained earnings Includes beginning and ending balances in accounts