1. 2 A BALANCE SHEET: More on Financial statements Chapter
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201Lec02.PPTX
More on Financial statements Chapter
A BALANCE SHEET:
i - changes constantly (every time an activity occurs)
ii - shows assets, liabilities and equities as of a specific date. Prepared at least once per year.
iii - uses original cost (historical cost principle) for most items.
Current Fair Market Value (FMV) used for some assets like marketable securities since daily price is readily available.
iv - Only shows items that can be expressed in monetary units ($) Which assets or liabilities can’t be expressed in $$$? 21

2. Accounting Mathematics
Formula of Balance sheet:
Assets = Liabilities + Stockholders’ Equity
Known as the “Accounting Equation”
If you have a million dollars are you a millionaire?
An equivalent common view is “Net Worth”
Net worth = Assets – Liabilities
Net worth + Liabilities = Assets
Assets = Liabilities + Net Worth 2

3. Generally contains the following standard classifications:
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The Classified Balance Sheet
Generally contains the following standard classifications:
ASSETS
Current Assets
Long-Term Investments
Property, Plant, and Equipment
Intangible Assets
Current Liabilities
Long-Term Liabilities
LIABILITIES
Stockholders' Equity 21

4. 9/16/2018
Current Assets
Assets that are expected to be converted to cash or used in the business within a short period of time, usually one year.
Current assets are listed in order of liquidity (convert them to cash).
Examples:
Cash
Short-term investments
Receivables
Inventories
Supplies on hand
Prepaid expenses 22

5. Assets That A Company Depreciates...
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Assets That A Company Depreciates...
CHUCK CORPORATION Balance Sheet December 31, 2017
Subtotals are usually made for current items:
Assets
Current Assets:
Cash $ 2,000
Accounts receivable 4,000
Total Current Assets $ 6,000
Long-term investments:
Stocks 5,000
Real estate 90, ,000
Property, plant & equipment:
Equipment 24,000
Less: Accumulated Depreciation - 8, ,000
Intangible assets
Patents ,000
Total assets $167,000 24

6. Long-Term Investments
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Long-Term Investments
Assets whose conversion to cash is not expected within one year.
Assets not intended for use within the business.
Examples:
Investments of stocks, notes and bonds of other corporations.
Land held for speculation
Rental buildings 23

7. Property, Plant & Equipment (PP&E)
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Property, Plant & Equipment (PP&E)
Assets with relatively long useful lives.
Assets used in operating the business.
Examples:
land
buildings
machinery
delivery equipment
furniture and fixtures 24

8. 9/16/2018
PP&E recording rules . . .
Record and keep on balance sheet the COST of the asset (NOT value).
Expense a portion of asset cost over a number of years.
Depreciation expense is recorded each year on most long lived assets used in a business.
Accumulated Depreciation appears on the balance sheet as a negative adjustment to PP&E It is the total amount of depreciation expense taken over the life of the asset. 24

9. Assets That A Company Depreciates...
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Assets That A Company Depreciates...
CHUCK CORPORATION Balance Sheet December 31, 2017
PP&E is shown at cost less accumulated depreciation
Assets
Current Assets:
Cash $ 2,000
Accounts receivable 4,000
Total Current Assets $ 6,000
Long-term investments:
Stocks 5,000
Real estate 90, ,000
Property, plant & equipment:
Equipment 24,000
Less: Accumulated Depreciation - 8, ,000
Intangible assets
Patents ,000
Total assets $167,000 24

10. Intangible Assets Like PP&E, usually have long useful life
Have no physical substance
Examples:
patents
copyrights
trademarks or trade names
Franchise
Goodwill
Goodwill
License
Trademark
Franchise
Patent
Copyright

11. Current Liabilities
Obligations that are supposed to be paid within the coming year.
Examples:
notes payable
accounts payable
wages payable
interest payable
taxes payable
current maturities of long-term debt payable
Utilities payable
Unearned revenues

12. Debts expected to be paid after one year Examples…
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Long-term (non-current) Liabilities
Debts expected to be paid after one year
Examples…
bonds payable
mortgages payable
long-term notes payable
obligations under employee pension plans 27

13. Stockholder’s Equity Remember equity is similar to Net worth.
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Stockholder’s Equity
Remember equity is similar to Net worth.
How do people get net worth?
Two primary ways:
Inherit or gift (Not earned by them)
Earn it (work or investing) but live on less (save).
On a corporation’s balance sheet, similar items:
1. Common stock - investments in the business by the stockholders (Not revenues or earnings)
2. Retained earnings - earnings kept for use in the business (Portion of net income not paid out to stockholders) 28

14. Ratio Analysis...
Uses relationships on statements to evaluate a company.
3 groups of ratios are intended to indicate different things.

15. Ratio discussed: Earnings Per Share (EPS)
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Profitability Ratios - Measures the success of a company’s ability to generate a profit.
Ratio discussed: Earnings Per Share (EPS)

16. Earnings Per Share (EPS)
...measures the net income earned on each share of common stock.
Higher value = improved performance
Compare trend for a single company.
Not good for comparing one company to another.

17. Illustration: (EPS) Profitability Ratio
BBY FYE February 1 EPS: 2017 = 3.81, = $2.56, = $3.49,
2012 = ($3.27), = $3.14, = $3.16

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Liquidity Ratios - Measures short-term ability of company to pay its debts.
Ratios discussed: Working capital Current Ratio

19. Working capital equals: current assets – current liabilities
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Working capital equals:
current assets – current liabilities
Current ratio formula
current assets
current liabilities
Express as x:1
The more working capital and higher current ratio, the more likely current liabilities will be paid when due.
Lenders often require that the company maintain a 2:1 ratio at all times. 32

20. Illustration: Working Capital 2014 = Classified Balance Sheet of
$10,485 million
– 7,436 million
$ 3,049 million

21. Illustration: Current Ratio
Liquidity Ratio
Illustration: Current Ratio
For every dollar of current liabilities, Best Buy has $1.41 of current assets.

22. 9/16/2018
Solvency Ratios - measures of the ability of a company to survive over a long period of time
Ratios discussed:
Debt to Asset percentage
Free cash flow

23. Debt to Total Assets Ratio formula
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Debt to Total Assets Ratio formula
Total liabilities
Total assets
Multiply by 100 to create %
...measures % of assets financed by creditors.
Often used in risk analysis. The greater the debt to asset ratio, the greater the risk. 32

24. Illustration: Debt to Assets
Solvency Ratio
Illustration: Debt to Assets
See Best Buy balance sheet on slide 20 for amounts.
The 2014 ratio means that every dollar of assets was financed by 72 cents of debt. 24

25. Cash Provided By Operations – Capital Expenditures
Free Cash Flow Ratio
Cash Provided By Operations
– Capital Expenditures
– Dividends Paid
Free Cash Flow
Considered as excess cash available after spending to maintain operations and satisfy shareholders. 25