FINANCIAL ACCOUNTING – BALANCE SHEET

Basic Elements

In a specific time period the relationship of what a firm owns versus what it owes. What is owns (assets) consist of what is owed to them and what they own. As such, a loan is an asset to a bank because you owe it money where a deposit is a liability because they owe you the money on deposit.

  1. Assets = Liabilities + Equity

a)Assets are on the left side of the balance sheet and Liabilities and Equity are on the right side = they must match apriori.

  1. Liabilities = the debt of the firm with the difference being Equity

Assets in General

  1. Represent future economic benefit obtained or controlled by the company

a)Can be physical such as land

b)Can be obligations to the company

c)Can be intangible such as patents or trademarks – Nike, NBA, Drug Companies

d)Current assets – assets that can be converted within the operating cycle! Or the time period between the acquisition of inventory and the realization of cash or 1 year whichever is greater

e)Long-Term assets take longer than a year OR the operating cycle to be converted into cash

Current Assets

Usually listed in or of liquidity

  1. Cash
  2. Marketable Securities
  3. Accounts Receivable
  4. Inventories – goods “on hand” whether finished or NOT

a)Raw materials

b)Work in Process

c)Finished Goods

d)Supplies – sewing machines needles used to make shirts, pens pencils

e)Prepaids – payment in advance or paid before for a future benefit so no payment in the future.

Long-Term Assets - 4 categories – tangible, investments, intangible and other

  1. Tangible

a)Land

b)Buildings

c)Machinery

d)Construction in Progress

e)Accumulated Depreciation – several ways discuss

  1. Investments

a)Stocks and bonds held for the long-term “held until maturity”

b)Carried at market value as a whole

  1. Intangibles

a)Goodwill

b)Patents

c)Trademarks

d)Organizational Costs –legal costs to start a business

e)Franchises – BK

f)Copyrights

  1. Other

a)Capital Leases – substance is an ownership basis like equipment – an ownership agreement in practical purposes.

Liabilities – obligations/what you owe resulting in “future economic sacrifice” - either Current or Long-Term.

Current Liabilities – likely to result in using current assets or creating new liabilities within one year or the operating cycle

  1. Payables
  2. Unearned Income = payments in advance which you have obligations to provide stuff. Do NOT get money because already got it.
  3. Other

Long-Term Liabilities – Periodexceeding 1 year OR operating cycle

  1. Financing over one year
  2. Notes/Bonds Payable – callable, putable
  3. Credit Agreements – loans
  4. Operational obligations – retirement plans – Defined Benefit Plans
  5. Deferred Taxes – taxes owed
  6. Warranty Obligations – car recalls Toyota

Stockholders Equity – ownership in assets after liabilities

  1. Paid in Capital
  2. Common Stock - votes
  3. Preferred Stock – no voting

A)Accumulated Dividends

B)Participation in Excess of Stated Dividend Rate

C)Convertibility into Common Stock

D)Callabillity by the Corporation

  1. Donated Capital goes to paid –in-capital
  2. Retained Earnings – earnings not spent
  3. Treasury Stock – bought back by company and no voting
  4. ESOP