Balance Sheet Fundamentals

• Balance Sheet describes liquidity and solvency

• Limitations:

- Historical Cost—may be reliable but not relevant

- Judgment for some accounts—management can

influence account balances through judgment

- Omits some “assets” (like value of employee

knowledge)

- Omits some “liabilities” (like operating leases)

 Balance Sheet Fundamentals

Balance Sheet elements:

Assets Liabilities
• Current • Current
• Long-Term Investments • Long-Term
• Property, Plant, & Equip.
• Intangible
Owner’s Equity
• Other
• Capital Stock
• Retained Earnings
• Additional Paid-In
Capital
 Current Assets

Assets that are:

• Cash or
• Other assets expected to be converted to cash within
one year or one operating cycle

• Cash: recorded at its stated value

• Short-term investments: recorded at fair market value
• Accounts Receivable: recorded at collectible value
• Inventories: recorded at lower of cost or fair market value
• Prepaid Items: recorded at cost
Any restrictions must be disclosed (e.g. minimum deposits).
 Long-Term Investments

Investments in:
• Bonds, common stock, long-term notes
• Tangible assets not used for operations
• Special funds (e.g. pension funds)
• Non-consolidated subsidiaries or affiliated companies
 Property, Plant, and Equipment (PP&E)

Tangible property used for operations:

• Land
• Buildings
• Machinery
• Furniture
• Tools

Most assets are depreciable (except land).

 Intangible Assets

Lack physical substance, but still hold value:

• Patents
• Copyrights
• Franchises
• Trademarks
• Goodwill
• Secret Processes
 Current Liabilities

Obligations to be paid off using current assets.

• Covered later in Ch. 13

Current Assets – Current Liabilities = Working Capital

Represents relatively liquid available resources
 Long-Term Liabilities

Obligations to be paid off past current operating cycle.

• Covered primarily in Accounting 472
• Bonds Payable
• Notes Payable
• Pension Obligations
 Owner’s Equity

Owners’ residual claim to the firm.

• Net Assets – Net Liabilities

• Capital Stock—usually valued at par value

• Additional Paid-In-Capital—excess of amounts paid

above par

• Retained Earnings—undistributed earnings kept

within the firm
 Extra Required Balance Sheet Disclosures

• Contingencies: material, uncertain events (e.g.

potential lawsuit liability)

• Accounting Policies: types of depreciation and

inventory methods used, for example

• Contractual Issues: covenants, restrictions, liens