Accounting: Balance Sheet

By Cameron Fen and Jeffery Cherkin

Balance Sheet

• Snapshot of everything the company owns and owes

Assets = Liabilities + Equity

• Assets are the total amount a firm owns• Liabilities are the total debts and obligations

owed• Equity is the net assets the owners of the

company have a claim to (ie the amount that doesn’t belong to the liabilities holders)

AAPL Balance Sheet

Assets

• Assets are divided into Current Assets and Non-Current Assets

• Current Assets can be turned into cash in less than a year. Non-current cannot.

Current Assets

• Cash is self-explanatory• Trading Assets are short term investments that

the company is actively trading in and out of• Accounts receivables are short term IOU’s

where the company already provides the service or product and is yet to be paid

Inventories

• If a company is selling things, like phones, the company needs to keep a stock of them so customers can buy

• LIFO, FIFO, or Weighted Average inventory accounting methods

Goodwill

• When a company buys another company, often they will pay more for the company than the value of the company’s equity (remember they pay for the assets but have to assume responsibility for the liabilities)

• The amount paid above and beyond net asset value (equity) is capitalized as goodwill

• If the value of the acquired company goes down, (i.e. the company does worse than anticipated) goodwill has to be written off

• Goodwill is an intangible asset

Property Plant and Equipment

• When you own stuff often time when you use it a lot or over a long period of time it wears out and is worth less– Remember: PPE is initially valued at the cost to

acquire these assets• We try to estimate the reduction in value of

these assets due to getting older or wear and tear by depreciating the assets

Capital Expenditures

• Funds used by a company to acquire or upgrade physical assets

- property, industrial buildings or equipment.

This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.

Liabilities

• Liabilities are separated into current liabilities and non-current liabilities– Same as current and non-current assets

• Important liabilities accounts include debt, accounts payable, accrued expenses, unearned revenue, and deferred taxes

Accounts Payable & Accrued expenses

• Like accounts receivable except these are the IOU’s that the company owes to others– Perhaps the company got a shipment of iPhones and

pays for the shipment monthly• Accrued expenses are expenses for services the

company has already used but has yet to pay for– For example using electricity and then paying for it later

after the month is over• Accounts payable and Accrued expenses are very

similar

Unearned Revenue

• Unearned Revenue is revenue that has been collected but the services have not been provided– Example: Subscriptions– Since the company hasn’t provided the services which

will lead to expenses the revenue cannot be recognized yet

– Thus since the company has already collected the revenue in the form of cash or accounts receivable, the company has to balance the increase in assets with an increase in liabilities (because the company still owes the service)

Debt

• This is loans that the company gets from the bank or from selling bonds

• Separated into short and long term debt• The interest the company pays is treated as an

expense (*pre-tax)• Principle on the debt is treated as a liability

Equity

• This is the amount of assets that belong to the owners of the company

• Also known as the net asset value

Retained Earnings

• Retained earnings measure the earnings the company reinvests in itself– If a company makes one dollar in profit, equity

holder should theoretically be one dollar richer and if the company does not pay the money out to stockholders, retained earnings and therefore equity goes up by one

• Dividends and stock buybacks make retained earnings go down

Capital AllocationUses of Cash/Earnings

• R&D– Invest in current business

• Acquisitions • Pay down debt• Return to Shareholders– Pay Dividend– Stock Buyback

Buybacks

• When a share of a stock is bought back it is no longer on the market and the total number of shares outstanding goes down– Current stockholders own a slightly larger percentage of the

company• Suppose the stock is overvalued

– The intrinsic value of a share of the company is $1 and the stock costs two dollars

– If the company buys back shares it is distributing $1 of intrinsic value to the rest of the shareholders for $2 in cash, destroying value for shareholders

• Undervalued the opposite is the case– It costs the company less to distribute more

Management is the Difference Maker

The Outsider CEOs Produced returns over 20x S&P 500 and 7x peers

The Outsiders’ Principles “Capital Allocation is CEO’s most important job” “What counts in the long run is increase per-share value, not

overall growth or size” “Cash flow, not reported earnings, determines long-term

value” “Sometimes, the best investment opportunity is your own

stock” “With acquisitions, patience is a virtue” “Independent thinking is essential to long-term success, and

interactions with outside advisers (Wall Street, press, etc.) can be distracting”