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Chapter 4

Chapter 4. Balance Sheet. Balance Sheet. Three General Classifications Assets, Liabilities, and Stockholders’ Equity Companies further divide these classifications:. Balance Sheet Usefulness. Evaluating the capital structure. Assess risk and future cash flows. Analyze the company’s:

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Chapter 4

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  1. Chapter 4

    Balance Sheet
  2. Balance Sheet Three General Classifications Assets, Liabilities, and Stockholders’ Equity Companies further divide these classifications:
  3. Balance Sheet Usefulness Evaluating the capital structure. Assess risk and future cash flows. Analyze the company’s: Liquidity, Solvency, and Financial flexibility.
  4. Balance Sheet Limitations Use of historical cost or fair value—lack of valuation consistency. Use of judgments and estimates. Many items of financial value are omitted (human resources; internal research & development & other intangibles).
  5. Current Assets Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer.
  6. Cash Generally any monies available “on demand.” Cash equivalents are short-term highly liquid investments that will mature within three months or less. Any restrictions or commitments must be disclosed.
  7. Short-term Investments Debt or equity, usually held less than one year Held-to-Maturity: Amortized cost (current or non-current) Trading: Fair value (current; gains & losses recorded in income statement) Available-for-sale: Fair value (current or non-current; gains & losses recorded as other comprehensive income)
  8. Receivables Claims held against customers and others for money, goods, or services. Accounts Receivable – oral promises, expected quick payment Notes Receivable – written promises, usually longer for payment often including interest Major categories of receivables should be shown in the balance sheet or the related notes, with estimated doubtful accounts recorded.
  9. Accounts Receivable Presentation Current assets: Cash $ 346 Accounts receivable, net of $25 allowance 475 Inventory 812 Total current assets $1,633
  10. Accounts Receivable, Detailed Presentation
  11. Inventory Common for Manufacturing and Retail; less common for service companies. Company discloses: basis of valuation (e.g., lower-of-cost-or-market) and the method of pricing (e.g., FIFO or LIFO).
  12. Inventory: Manufacturing Example
  13. Prepaid Expenses Payment of cash, that is recorded as an asset because service or benefit will be received in the future. Common for: Insurance Rent Supplies Maintenance on Equipment Advertising
  14. Long-term Investment Generally consists of four types: Securities(either held-to-maturity or available-for sale; debt or equity) Tangible fixed assets (held for investment) Special funds (e.g., sinking funds or pension funds) Nonconsolidated subsidiaries or affiliated companies (equity method investments).
  15. Property, Plant & Equipment Assets of a durable nature used in the regular operations of the business.
  16. Intangibles Lack physical substance and are not financial instruments. Limited life intangibles amortized. Indefinite-life intangibles tested for impairment.
  17. Current Liabilities Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.” Accounts & Notes Payable Unearned Revenue Taxes Payable Current Maturity of Long-term Debt
  18. Long-term Liabilities “Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.” All covenants and restrictions must be disclosed. Long-term Debt Capital Lease Obligations Deferred Income Tax Pension Obligations
  19. Stockholders’ Equity Companies usually divide equity into three parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings.
  20. Additional Reporting There are normally five types of information that are supplemental to account titles and amounts presented in the balance sheet: Contingencies Accounting Policies Contractual Situations Post-Balance-Sheet Disclosures Fair Values
  21. Subsequent Events Two Types: Events that provide evidence about conditions that existed at the balance sheet date. Events that provide evidence about conditions that did not exist at the balance sheet date.
  22. Disclosing Additional Information Parenthetical Explanations Notes Cross-Reference and Contra Items Supporting Schedules Terminology
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