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THE BALANCE SHEET AND FINANCIAL DISCLOSURES

Chapter 3

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The Balance Sheet

Limitations:• The balance sheet does not

portray the market value of the entity as a going concern nor its liquidation value.

• Resources such as employee skills and reputation are not recorded in the balance sheet.

Usefulness:• The balance sheet describes

many of the resources a company has for generating future cash flows.

• It provides liquidity information useful in assessing a company’s ability to pay its current obligations.

• It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Reports a company’s financial position on a particular date.

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Resources (Assets)

Claims against resources (Liabilities)

Remaining claims accruing to owners

(Shareholders’ Equity)

Classifications

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1.1. CashCash2.2. Cash EquivalentsCash Equivalents3.3. Short-term InvestmentsShort-term Investments4.4. ReceivablesReceivables5.5. InventoriesInventories6.6. Prepaid ExpensesPrepaid Expenses

Current Assets

Will be converted Will be converted to cash or to cash or

consumed within consumed within one year or the one year or the operating cycle, operating cycle,

whichever is whichever is longerlonger..

Current Current AssetsAssets

Cash equivalents include certain

negotiable items such as commercial paper, money market

funds, and U.S. treasury bills.

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Noncurrent Assets1.1. InvestmentsInvestments2.2. Property, Plant, & Property, Plant, &

EquipmentEquipment3.3. Intangible AssetsIntangible Assets4.4. Other AssetsOther Assets

Not expected to Not expected to be converted to be converted to

cash or cash or consumed within consumed within one year or the one year or the operating cycle, operating cycle,

whichever is whichever is longer.longer.

Noncurrent Noncurrent AssetsAssets

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Noncurrent Assets

Other Assets

1. Include long-term prepaid expenses and any noncurrent assets not falling in one of the other classifications.

Investments

1. Not used in the operations of the business.

2. Include both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes.

Property, Plant, and Equipment

1. Are tangible, long-lived, and used in the operations of the business.

2. Include land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells.

3. Reported at original cost less accumulated depreciation (or depletion for natural resources).

Intangible Assets

1. Used in the operations of the business but have no physical substance.

2. Include patents, copyrights, and franchises.

3. Reported net of accumulated amortization.

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Current Liabilities

1. Accounts Payable2. Notes Payable3. Accrued Liabilities4. Unearned Revenues5. Current Maturities

of Long-Term Debt

Obligations expected to be satisfied through current

assets or creation of other current liabilities within one year or the operating cycle,

whichever is longer.

Current Liabilities

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Long-term Liabilities

1. Long-term Notes 2. Mortgages3. Long-term Bonds4. Pension Obligations5. Lease Obligations

Obligations that will not be

satisfied within one year or

operating cycle, whichever is

longer.

Long-Term Liabilities

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(In millions) January 30, 2009 February 1, 2008Stockholders' equityPreferred stock and capital in excess of $.01 par value; shares issued and outstanding: none -$ -$ Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,338 and 3,320, respectively; shares outstanding: 1,944 and 2,060, respectively 11,189 10,589 Treasury stock, at cost: 919 and 785 shares, respectively (27,904) (25,037) Retained earnings 20,677 18,199 Accumulated other comprehensive income (loss) 309 (16) Total stockholders' equity 4,271$ 3,735$

Dell Inc.Balance Sheet

Shareholders’ equity is the residual interest in the assets of an entity that remains after deducting

liabilities.

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U. S. GAAP vs. IFRS

• Does not specify a minimum list of items to be presented in the balance sheet.

• Some U.S. companies use the statement of financial position title as well.

• Presents current assets and liabilities before noncurrent assets and liabilities.

There are more similarities than differences in balance sheets prepared per U.S. GAAP vs. IFRS.

Some differences:

• Specifies a minimum list of items to be presented in the balance sheet.

• Statement title changed to statement of financial position.

• Does not prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first.

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British Airways Balance Sheet

At March 31, 2009

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Disclosure NotesSummary of Significant

Accounting Policies

Conveys valuable information about the company’s choices from

among various alternative accounting methods.

Subsequent EventsA significant development that

occurs after the company’s fiscal year-end but before the financial

statements are issued or available to be issued.

Noteworthy Events and Transactions

Transactions or events that are potentially important to evaluating a company’s financial statements,

e.g., related parties, errors and irregularities, and illegal acts.

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Management Discussion and Analysis

Provides a biased but Provides a biased but informed perspective of informed perspective of

a company’s a company’s operations, liquidity, operations, liquidity,

and capital resources.and capital resources.

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Management’s Responsibilities

• Preparing the financial statements and other information in the annual report.

• Maintaining and assessing the company’s internal control procedures.

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Auditors’ Report

Expresses the auditors’ opinion as to the fairness of

presentation of the financial statements in conformity with

generally accepted accounting principles.

Auditors’ reports must comply with specifications of the Public

Companies Accounting Oversight Board (PCAOB).

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Auditors’ Opinions

UnqualifiedIssued when the financial statements present fairly the financial position,

results of operations, and cash flows are in conformity with GAAP.

QualifiedIssued when there is an exception that

is not of sufficient seriousness to invalidate the financial statements as a

whole.

AdverseIssued when the exceptions are so

serious that a qualified opinion is not justified.

DisclaimerIssued when insufficient information

has been gathered to express an opinion.

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Compensation of Directors andTop Executives

Proxy Statement Information • Summary Compensation Table

– Salary– Bonus– Stock Awards– Option Awards– Other Compensation

A proxy statement is sent each year to all shareholders, usually in the

same mailing with the annual report.

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Using Financial Statement InformationComparative Financial

Statements

Allow financial statement users to compare year-to-year financial

position, results of operations, and cash flows.

Horizontal AnalysisExpresses each item in the financial statements as a

percentage of that same item in the financial statements of another

year (base amount).

Vertical AnalysisInvolves expressing each item in

the financial statements as a percentage of an appropriate corresponding total, or base

amount, within the same year.

Ratio AnalysisAllows analysts to control for size differences over time and among

firms.

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Liquidity Ratios

=Current ratioCurrent assets

Current liabilitiesMeasures a company’s ability to satisfy its

short-term liabilities

=Acid-test ratioQuick assets

Current liabilitiesProvides a more stringent indication of a

company’s ability to pay its current liabilities

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Financing Ratios

=Debt to equity ratio

Total liabilities

Shareholders’ equityIndicates the extent of reliance on

creditors, rather than owners, in providing resources

=Times interest earned ratio

Net income + Interest expense + Income taxes

Interest expenseIndicates the margin of safety provided to

creditors