1. Chapter 3 Balance Sheet © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Chapter 3, Slide #2 “Statement of Financial Position” Dated as of a specific date Format –Account (side by side) –Report (assets at top and liabilities and stockholders’ equity at bottom of statement) dominate in the U.S. The Balance Sheet © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3. Chapter 3, Slide #3 Balance Sheet – Report Form © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4. Chapter 3, Slide #4 Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events –Current Assets -operating cycle or one year which ever is longer to convert or conserve cash. –Long-Term (noncurrent) assets – take longer than one year or operating cycle to convert or conserve cash. Assets © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

5. Chapter 3, Slide #5 Cash and assets that will be converted into cash during the operating cycle or within a year, whichever is longer Presented in order of liquidity Current Assets © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6. Chapter 3, Slide #6 Cash –Negotiable checks, unrestricted balance in checking accounts, savings accounts Marketable Securities –Debt or equity securities –Carried at fair value –Intention to convert into cash during the current period Current Assets (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7. Chapter 3, Slide #7 Accounts Receivable –Amounts due from sales or services –Carried at net realizable value (net of allowances) –All allowances are presented in on allowance account Other receivables due from nontrade sources Current Assets (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

8. Chapter 3, Slide #8 Inventories –Carried at lower of cost or market –Categories Merchandise on hand- Retail or wholesale firms Raw materials Work in process Finished goods Manufacturer Current Assets (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

9. Chapter 3, Slide #9 Prepaids –Expenditures made in advance of the use of the service or goods. –Examples Insurance Advertising Current Assets (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

10. Chapter 3, Slide #10 Land –Carried at acquisition cost –Not subject to depreciation –Natural resources are depleted Buildings –Cost plus permanent improvements –Depreciated ( expensed ) over the estimated useful life Long-Term Assets: Tangible © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

11. Chapter 3, Slide #11 Machinery –Acquisition cost plus costs of delivery, installation, and permanent improvements –Depreciated over the useful life Construction in Progress –Assets under construction –Transferred to permanent asset account upon completion Long-Term Assets: Tangible (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12. Chapter 3, Slide #12 Accumulated Depreciation –Carries the to-date depreciation of plant assets –Factors used in depreciation calculation Asset cost Length of the life of the asset Estimated salvage (residual) value of asset when retired –Depreciation methods –Straight Line–Declining Balance –Sum-of-the-Years’-Digits– Units of Production Balance sheet presentation Cost of the asset –Accumulated depreciation =Net book value Long-Term Assets: Tangible (cont’d) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

13. Chapter 3, Slide #13 Depreciation: Straight-Line Method Cost.............................$10,000Estimated salvage..........$2,000 Estimated life..............5 years The salvage value is not depreciated and it equals book value at end of useful life. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

14. Chapter 3, Slide #14 Depreciation: Declining-Balance Method Salvage value is not used in the depreciation formula but depreciation ends when the book value is equal to the salvage value. Cost.............................$10,000Estimated salvage..........$2,000 Estimated life..............5 years Double the straight-line rate is the maximum rate © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

15. Chapter 3, Slide #15 Depreciation: Sum-of-the-Years’-Digits Method Cost.............................$10,000Estimated salvage..........$2,000 Estimated life..............5 years © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

16. Chapter 3, Slide #16 Depreciation: Units-of-Production Method Cost.............................$10,000Estimated salvage..........$2,000 Estimated total hours.....16,000 Actual Hours of Operation × Rate = Depreciation Asset is depreciated until book value equals salvage value © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

17. Chapter 3, Slide #17 Long-Term Assets: Leases Capital lease –In-substance ownership –Recorded as an long term asset net of amortization –Operating lease if not a Capital lease Not recorded as asset and lease payments are expensed. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

18. Chapter 3, Slide #18 Debt or equity securities –Held to maintain business relationship or to exercise control Debt classification –Held-to-maturity carried at amortized cost –Available-for-sale carried at fair value Long-Term Assets: Investments © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

19. Chapter 3, Slide #19 Long-Term Assets: Investments (cont’d) Equity securities –Carried at fair value which have 3 levels for input: 1. Level 1: Quoted price for identical item in active market. 2. Adjusted quoted price of similar asset. 3. Present value of expected cash flows –Exception: with the ability to exercise significant influence the equity method is used: cost is adjusted for the proportionate share of the rise/fall in the retained profits of the subsidiary (investee) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

20. Chapter 3, Slide #20 Goodwill –Purchase of a business where price paid exceeds the fair value of net assets –U.S. GAAP: not amortized; test annually for impairment Patents –20 years –Amortized over shorter of legal or useful life Trademarks –Indefinite legal life –Not amortized; test annually for impairment Long-Term Assets: Intangibles (nonphysical assets) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

21. Chapter 3, Slide #21 Long-Term Assets: Intangibles (cont’d) Franchises –Life based on contract –Amortize over shorter of legal or useful life Copyrights –Life of the creator plus 70 years –Amortize over shorter of legal or useful life © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

22. Chapter 3, Slide #22 Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the futures as a result of past transactions or events –Current Liabilities –Long-Term Liabilities Liabilities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

23. Chapter 3, Slide #23 Current Liabilities Obligations whose liquidation is reasonably expected to Require the use of –Existing current assets –Creation of other current liabilities Within one year or the operating cycle, whichever is longer © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

24. Chapter 3, Slide #24 Current Liabilities (cont’d) Payables –Short-term obligations created by the acquisition of goods or services Unearned Income –Payments collected in advance of the performance of services or delivery of goods Other current liabilities –As circumstances warrant © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

25. Chapter 3, Slide #25 Long-Term Liabilities Due in a period beyond one year or operating cycle Related to –Financing arrangements –Operational obligations © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

26. Chapter 3, Slide #26 Long-Term Liabilities: Financing Arrangements Notes Payable –Secured by property: Mortgage notes Credit Agreements –Ready lines of credit that may require a compensating balance –Not a liability until funds are drawn © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

27. Chapter 3, Slide #27 Long-Term Liabilities: Financing Arrangements (cont’d) Bonds Payable –Sold at par, premium, or discount –Premium or discount is amortized into interest expense –Bond carrying value is amortized to par value –Convertible bonds can be converted into common stock –Conversion feature enhances bond selling price © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

28. Chapter 3, Slide #28 Bonds at Par, Premium, or Discount Bond Contractual Interest Rate 8% 6% 8% 10% Premium Par (Face Value) Discount Market Interest Rate Bonds Sold at © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

29. Chapter 3, Slide #29 Long-Term Liabilities: Operational Obligations Deferred Taxes –Difference between accounting and tax methods –Difference in the timing of recognizing revenue and expense for accounting and tax purposes Warranty Obligations –Estimated; arise from offering product warranties –Estimated to achieve matching of sales revenue and associated expense of warranty © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

30. Chapter 3, Slide #30 Long-Term Liabilities: Operational Obligations (cont’d) Noncontrolling Interest (was minority interest) –Reported on consolidated financial statements as equity, but separate from parents equity –Represents the interest in the equity of a partially- held subsidiary by the nonmajority owners –Analysis can be twice if material-once as a liability (conservative) and then as equity. Other Noncurrent Liabilities –As circumstances warrant Redeemable Preferred Stock –Excluded from stockholders’ equity –For analysis, treat as a liability © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

31. Chapter 3, Slide #31 The residual ownership interest in the assets of an entity that remains after deducting its liabilities –Paid-in Capital –Retained Earnings Stockholders’ Equity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

32. Chapter 3, Slide #32 Stockholders’ Equity: Paid-in Capital Par value –In some states, referred to as “stated value” –Considered “legal capital” by many states –Established by the articles of incorporation –Usually a minimal value No-par stock © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

33. Chapter 3, Slide #33 Stockholders’ Equity: Paid-in Capital (cont’d) Additional paid-in capital –Issue price in excess of par (stated) value –Other sources Treasury stock transactions Stock dividend transactions Donated capital © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

34. Chapter 3, Slide #34 Stockholders’ Equity: Paid-in Capital (cont’d) Common Stock –Shareholder ownership –Voting rights Election of board of directors Major corporate decisions –Liquidation rights secondary to Creditors Preferred stock © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

35. Chapter 3, Slide #35 Stockholders’ Equity: Paid-in Capital (cont’d) Preferred Stock –Does not normally convey voting rights –May carry any or all of these features: Preference as to dividends Accumulation of dividends Participation in dividend beyond stated dividend rate Convertibility into common stock at holder’s discretion Preference in liquidation secondary to creditors Callable at issuer discretion Redemption at future maturity value Donated Capital –Donated by outside entities –Shareholder surrender of stock © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

36. Chapter 3, Slide #36 Stockholders’ Equity: Retained Earnings Undistributed earnings of the corporation –Net income for all prior periods –Less dividends declared to shareholders for all prior periods © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

37. Chapter 3, Slide #37 Stockholders’ Equity: Other Quasi-Reorganization –Eliminates a deficit balance of retained earnings –Retained earnings are dated for 5-10 years Accumulated Other Comprehensive Income - Represents retained earnings for other comprehensive income as a separate component on the face of the balance sheet. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

38. Chapter 3, Slide #38 Stockholders’ Equity: Other (cont’d) Employee Stock Ownership Plans (ESOPs) –A qualified pension plan –Tax benefits for the employer and employee –Unearned compensation reduces stockholders’ equity Treasury Stock –Stock purchased and held by the issuing corporation –Recording and disclosure Record at par value; deduct from paid-in capital Record at cost; deduct from total stockholders’ equity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

39. Chapter 3, Slide #39 Reconciles the beginning and ending balances of all components of stockholders’ equity Account changes indicate –Issuance of stock: paid-in capital increase –Acquisition of treasury stock: treasury stock increase –Net income: retained earnings increase –Dividends: retained earnings decrease –Changes in accumulated other comprehensive income. Statement of Stockholders’ Equity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

40. Chapter 3, Slide #40 Financial analysis is complicated by –Many assets recorded at cost rather than fair (replacement) value –Varying valuation methods Within a firm from item to item Within an industry from company to company –Not all items of value are listed as assets –Certain contingent liabilities may be excluded Balance Sheet Presentation Issues © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

41. Chapter 3, Slide #41 IFRS Balance Sheet Format Asset section=Usually noncurrent assets are presented first, followed by current assets. Liabilities and Owner’s Equity section=Capital and reserves are presented first followed by noncurrent liabilities and then current liabilities. –Reserve section would not be part of U.S. GAAP. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.