balance sheet free pdf

The Balance Sheet Statement

Learning Objectives

1.How balance sheet accounts are measured, classified and presented.

2.How balance sheet information is used.

3.Balance sheet terminology and format outside the U.S.

4.How footnotes aid to the understanding of the firm’s accounting policies, contingent liabilities, subsequent events, and related-party transactions

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The Accounting Equation

Assets = Liabilities + Equity

Shareholders’ Equity:

What’s left of the company’s assets

after paying off liabilities.

It also referred to as net assets.

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Balance sheet classification:Overview

• Current assets

• Property, plant and

equipment

• Investments

• Other assets

• Current liabilities

• Long-term debt

• Other liabilities• Preferred and

common stock

• Additional paid-in

capital

• Retained earnings

ASSETS LIABILITIES EQUITY= +

Contributed

Capital

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Elements of the balance sheet

• Probable future economic benefits

• Obtained from past transactions or events

• Probable future sacrifices of economic benefits

• Arising from present obligations

• To transfer assets or provide services in the future

• As a result of past transactions or events

• The residual interest in net assets

ASSETS LIABILITIES EQUITY= +

How the money is

invested Where the money came from

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Balance sheet Classification and Account

Measurement - Current assets

Amortized cost

or current

market valueNet

realizable

value

Lower of cost or

current market

value

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Assets – classification and measurement

n Resources with future economic benefit to a

business entity as a result of a past transaction.

n Current Assets: cash and other assets that are

reasonably expected to be realized in cash or

sold, or consumed during a normal operating

cycle or one year, whichever is longer

Examples: Cash and cash equivalents, short-

term investments (reported at the fair value),

receivables (estimated amount collectible),

inventory (LCM), prepaid expenses, etc.

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Balance Sheet Classification and Account

Measurement -PPE, Investments and Intangibles

Historical cost minus

accumulated

depreciation except that

fair market value is used

when “impaired”

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Assets (contd.)

Long-term Investments: Comprise of the

following

Securities (i.e., bonds, stock, long-term notes)

Fixed assets (i.e., land, building)

Special funds (i.e., pension fund, bond sinking

fund)

Nonconsolidated subsidiaries or affiliated

companies

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Assets (contd.)

Property, Plant, Equipment (i.e., building, Land, Machinery and equipment, capital leases): assets used in firms’ operations and meet the following criteria:

1. Economic life > 1 year;

2. Acquired for use in operation;

3. Not for resale to customers;

4. $ is material. (materiality)

Depreciation will be applied except for land.

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Assets (contd.)

Intangible Assets: assets with no

physical substance but have value

based on rights or privileges that

belong to the owner (i.e., goodwill,

patents, franchises, trademarks,…).

Amortization for limited life

intangibles (i.e., patents, franchises)

and impairment test for indefinite-life

intangibles (i.e., goodwill).SYED Saeed Ul Hassan

Balance Sheet Classification and

Measurement - Liabilities

Amount due

at maturity

Historical

cost

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Discounted

present

value

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Liabilities

n Legal obligations required future payments of assets or services as a result of a business entity’s past transactions or events.

A. Current Liabilities

B. Long-term Liabilities

C. Other Liabilities

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A. Current Liabilities

n Obligations must be fulfilled in one

year or one operating cycle,

whichever is longer. (will require the

use of current assets or the creation

of current liability) (i.e., A/P, N/P,

accrual payable, unearned revenue,

income tax payable, current portion of

L-T debt)

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Contingent Liabilities

n Obligations may arise because of the

occurrence or not occurrence of

future event(s). (i.e., warranty

obligations)

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B. Long-Term Liabilities

n Obligations are not due in next year

or next operating cycle, whichever is

longer. (i.e., bonds payable, pension

liability)

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C. Other Liabilities

n Long-term advances from customers,

deferred income taxes.

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Balance Sheet Classification and Account

Measurement -Stockholders’ equity

Historical

par value

Historical

cost

Combination of

different

measurement

bases

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Stockholders’ Equity

n Residual claims (assets-liabilities) to the business entity from stockholders including:

a. contributed capital

b. (+ or -)Accumulated Other Comprehensive Income

c. retained earnings (or - deficit)

d. (-)treasury stock

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a. Contributed Capital

n Par value of common stock

n Par value of prefer stock

n Paid-in capital in excess of par value

of common stock or preferred stock

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b. Accumulated Other Comprehensive

Income

n Increase of assets without outflows of

assets, increase of liabilities, increase

of income or issuance of common stock

(i.e.,(+) increase in market value of

securities-available-for-sale (+ or -),

gains or losses of foreign currency

adjustments, etc.)

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c. Retained Earnings

n Net income not distributed to

stockholders

u appropriated

u unappropriated

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Balance sheet information

LIABILITIES

+

EQUITY

ASSETS

1. Rates of return

2. Capital structure

3. Liquidity

4. Solvency

5. Flexibility

ROA and ROCE

Debt vs. Equity

Cash conversion

Ability to pay debt

Operating and financial

Helps

assess

Balance Sheet

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1. Rate of Return Ratios

ROA (return on assets) and ROCE (return on

common equity) ratios:

Evaluate operating efficiency and profitability.

ROA =

Net operating profit after taxes (NOPAT) /

Average assets

ROCE =

(Net income – Preferred dividends) / Average

common shareholders’ equity

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2. Capital Structure

The balance sheet provides critical

information for understanding an

entity’s capital structure.

Capital structure refers to how much

of an entity’s assets are financed from

debt versus equity sources.

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3. Liquidity Ratios

Liquidity measures how readily assets can be converted to cash relative to how soon liabilities will have to be paid in cash.

Current ratio: Indicate the level of current resources available to pay current debts.

Current Ratio = Current Assets / Current Liabilities

Question:

Does higher ratio always indicate better financial status?

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4. Solvency

Solvency defines the ability of a company

to generate sufficient cash flows to

maintain its productive capacity and still

able to pay off the long-term debt.

Debt ratios provide information about the

amount of long-term debt in a company’s

financial structure.

Long-term debt to assets =

Long term debt/Total assets

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Solvency (contd.)

A company that can not make timely

payments in the amount required

becomes insolvent and may be

compelled to reorganize or liquidate.

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5. Flexibility

Flexibility refers to the ability to adapt or

revise to a new strategy for different

circumstances.

The ability to adjust to unexpected

downturn in the economic environment

in which it operates or to take

advantage of profitable investment

opportunities when they arise.

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Analytical insights:Understanding the business

Which company is:

Deere

E-Trade

Potomac Electric Power

Wal-Mart

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Balance sheet presentation:International differences

Current Assets

Long-lived Assets

Current Liabilities

Non-current Liabilities

Stockholders’ Equity

Fixed Assets

Current Assets

Current Liabilities

Non-current Liabilities

Capital Employed

U.S. Format: U.K. Format:

+

=

+

+

+

-

-

=

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Financial statement footnotes Footnotes are an integral part of

companies’ financial reports.

These “notes” help users better understand and interpret the numbers presented in the body of the financial statements.

Three important notes:1. Summary of significant accounting

policies.

2.Subsequent event disclosures.

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Limitations of the Balance Sheet

n 1. Historical costs reporting for most of assets and liabilities.

n 2. Estimations involved in the value of some assets and liabilities (i.e., the net realizable value of accounts receivable and the cost of warranty).

n 3. the omission of some valuable items such as goodwill of the company.

n 4. Off-balance sheet liabilities.SYED Saeed Ul Hassan

Summary

1. The balance sheet shows the assets owned by a company at a given point in time, and how those assets are financed (debt vs. equity).

2. Be alert for differences in balance sheet measurement bases, account titles, and statement format.

3. Financial statement footnotes provide important information..

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