1. Dollars and Decisions
Chapter 3
Balance Sheet

2. What is a balance sheet?
Shows the financial condition of a business at a specific time.
Usually done on December 31 or January 1.
For standardization purposes the Income statement and Statement of Cash Flow should also be completed on this dates.

3. The purpose of a balance sheet
Should be done on the same day each year.
1. Show solvency
(Do assets exceed liabilities?)
2. Measure liquidity
(Will firm meet financial obligations?)
3. Evaluate risk-bearing capacity
(How much loss could business sustain?)
4. Identify collateral
(availability to support loan requests)
5. Compare business records over time to determine trends.
(Trend are we better off this year than last year?)

4. Components of Balance Sheet
Assets
1. Current (used or sold and converted into cash within a twelve month period)
2. Non-current (used in producing a product or are not sold and not converted into cash within one year)
B. Liabilities
1. Current (payable within one year)
2. Non-current (due in more than one year)
C. Owner equity
1. Total assets - total liabilities

5. Does a Balance Sheet stand alone?No
It is an integral part of:
Income Statements.
Credit applications
Insurance Policies
Estate Plans
Tax management Strategies

6. Completing a balance sheet
Current asset
Cash on hand, checking and savings.
Cash value: bonds, stocks, life insurance.
Notes and receivables
Non-depreciable inventory.
Non-current asset
Depreciable inventory
Real estate and improvements
Other.

7. Liabilities Current Liabilities Non-Current liabilities
Accounts and notes payable
Current portion of non-current liability
Accrued interest of current liability.
Accrued interest on non-current liabilities
Non-Current liabilities
Notes and chattels, (Moveable asset) mortgages (Total debt – current portion)
Real estate mortgages/contracts (total – current portion)

8. Liquid measurements Working capital
Current asset minus current liability
Current ratio - Current asset divided by current liability

9. Solvency measurements
Debt to asset ratio
Total Liabilities divided by total assets
Debt to equity – Total liabilities divide Owner equity.

10. Debt to equity ratio Total liabilities divided by Owner equity
Equity to Asset ratio
Owner equity divided by total assets

11. Cost valuation Cost valuation (Advantage)
Easier to estimate accurately
Reduced fluctuations in net worth
Better evaluation of performance
Disadvantages
Original cost is difficult to determine
Annual record keeping is needed
Maintain two depreciation schedules
(accounting vs taxes)

12. Market valuation Advantage Disadvantage Easier to calculate
Truer representation of asset values
Better representation of financial position
Disadvantage
Difficult to determine for land buildings
Difficult to determine for assets with thin markets
Adjustments must be made for deferred taxes and retained earnings vs valuation equity.