Balance Sheet COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein

Balance Sheet

COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Chapter 3

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 3, Slide #2

• “Statement of Financial Position”

• Dated as of a specific date• Format

– Account– Report

The Balance Sheet

Owners'Assets = Liabilities + Equity


•Balance Sheet – Report Form

Current assets 281,157$ Plant and equipment 142,258 Goodwill 55,254

Total assets 478,669$

Current liabilities 159,926$ Long-term liabilities 32,495

Total liabilities 192,421 Stockholders' equity 286,248

Total liabilities and stockholders' equity 478,669$

LIABILITIES and STOCKHOLDERS' EQUITY

ABC CorporationBalance Sheet

December 31, 20X6

ASSETS


Balance Sheet – Account Form

Current assets 281,157$ Current liabilities 159,926$ Plant and equipment 142,258 Long-term liabilities 32,495

Goodwill 55,254 Total liabilities 192,421 Stockholders' equity 286,248

Total assets 478,669$

Total liabilities and stockholders' equity 478,669$

ABC CorporationBalance Sheet

December 31, 20X6


Assets

• Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events– Current Assets

• Cash and assets that will be converted into cash during the operating cycle or within a year, whichever is longer

• Presented in order of liquidity

– Long-term Assets


Current Assets (cont’d)

• Cash– Negotiable checks, unrestricted balance in checking

accounts, savings accounts

• Marketable Securities– Debt or equity securities– Carried at fair value– Intention to convert into cash during the current

period



• Accounts Receivable– Amounts due from sales or services– Carried at net realizable value (net of allowances)

• Other receivables due from nontrade sources



• Inventories– Carried at lower of cost or market– Categories

• Goods on hand• Raw materials• Work in process• Finished goods

Manufacturer



• Prepaids– Expenditures made in advance of the use of the

service or goods.– Examples

• Insurance• Rent


Long-Term Assets: Tangible

• Land– Carried at acquisition cost– Not subject to depreciation– Natural resources are depleted as mined

• Buildings– Cost plus permanent improvements– Depreciated over the useful life


Long-Term Assets: Tangible (cont’d)

• Machinery– Acquisition cost plus costs of delivery, installation,

and permanent improvements– Depreciated over the useful life

• Construction in Progress– Assets under construction– Transferred to permanent asset account upon

completion


Long-Term Assets: Tangible (cont’d)

• Accumulated Depreciation– Carries the to-date depreciation of plant assets– Factors used in depreciation calculation

• Asset cost• Length of the life of the asset• Estimated salvage (residual) value of asset when retired

– Depreciation methods– Straight Line – Declining Balance– Sum-of-the-Years’-Digits – Units of Production

• Balance sheet presentationCost of the asset

– Accumulated depreciation= Net book value


Depreciation: Straight-Line Method

Cost - Salvage Value = Annual Depreciation

Estimated Life

10,000 - 2,000 = $1,600

5 years

Cost............................. $10,000 Estimated salvage.......... $2,000Estimated life.............. 5 years

Year

Deprec. for the Year

Accumulated Depreciation Asset Cost

Book Value

1 $1,600 $1,600 $10,000 $8,4002 1,600 3,200 10,000 6,800 3 1,600 4,800 10,000 5,200 4 1,600 6,400 10,000 3,600 5 1,600 8,000 10,000 2,000

The salvage value is not depreciated.


Depreciation: Declining-Balance Method

1 2 = double the straight-line rate

Estimated Life

1 2 Book Value at Beginning of Year = Annual Depreciation

5

YearAsset Cost

Beginning Accum.

Dep.Beginning

Book ValueDeprec. for

the Year

Ending Book Value

1 $10,000 $0 $10,000 $4,000 $6,0002 10,000 4,000 6,000 2,400 3,600 3 10,000 6,400 3,600 1,440 2,160 4 10,000 7,840 2,160 160 2,000 5 10,000 8,000 2,000 - 2,000

Scrap value is not used in the depreciation formula but depreciation ends when the book value is equal to the salvage value.


Double the straight-line rate is the maximum rate


Depreciation: Sum-of-the-Years’-Digits Method


Number of Remaining Years Cost - Salvage = Annual Depreciation

Sum of Digits of Estimated Life

5 10,000 - 2,000 = $2,666.67

1+2+3+4+5

Year

Cost Minus

Salvage FractionDeprec. for

the Year

Ending Accum.

Dep.

Ending Book Value

1 $8,000 5/15 $2,666.67 2,666.67$ 7,333.33$ 2 8,000 4/15 2,133.33 4,800.00 5,200.00 3 8,000 3/15 1,600.00 6,400.00 3,600.00 4 8,000 2/15 1,066.67 7,466.67 2,533.33 5 8,000 1/15 533.33 8,000.00 2,000.00


Depreciation: Units-of-Production Method

Cost - Salvage Value = Per Unit Depreciation

Estimated Life in Capacity

10,000 - 2,000 = $0.50

16,000 hours

Cost............................. $10,000 Estimated salvage.......... $2,000Estimated total hours..... 16,000

• Hours of Operation × Rate = Depreciation

• Asset is depreciated until salvage value is reached


Long-Term Assets: Leases

• Capital lease– In-substance ownership– Recorded as an asset net of amortization


Long-Term Assets: Investments

• Debt or equity securities– Held to maintain business relationship or to exercise control

• Debt classification– Held-to-maturity carried at amortized cost– Available-for-sale carried at fair value

• Equity securities– Carried at fair value– Exception: with the ability to exercise significant influence the

equity method is used: cost is adjusted for the proportionate share of the rise/fall in the retained profits of the subsidiary (investee)


Long-Term Assets: Intangibles

• Goodwill– Purchase of a business where price paid exceeds the fair

value of net assets– U.S. GAAP: not amortized; test annually for impairment

• Patents– 20 years– Amortized over shorter of legal or useful life

• Trademarks– Indefinite legal life– Not amortized; test annually for impairment


Long-Term Assets: Intangibles (cont’d)

• Franchises– Life based on contract– Amortize over shorter of legal or useful life

• Copyrights– Life of the creator plus 70 years– Amortize over shorter of legal or useful life


Liabilities

• Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events– Current Liabilities

• Obligations whose liquidation is reasonably expected within one year or the operating cycle, whichever is longer

– Long-term Assets


Current Liabilities

• Payables– Short-term obligations created by the acquisition of

goods or services

• Unearned Income– Payments collected in advance of the performance

of services or delivery of goods (airline tickets)

• Other current liabilities– As circumstances warrant


Long-Term Liabilities

• Due in a period beyond one year or operating cycle

• Related to– Financing arrangements– Operational obligations


Long-Term Liabilities: Financing Arrangements

• Notes Payable– Secured by property: Mortgage notes

• Credit Agreements– Ready lines of credit that may require a

compensating balance– Not a liability until funds are drawn


Long-Term Liabilities: Financing Arrangements (cont’d)

• Bonds Payable– Sold at par, premium, or discount– Premium or discount is amortized into interest

expense– Bond carrying value is amortized to par value– Convertible bonds can be converted into common

stock– Conversion feature enhances bond selling price


Bonds at Par, Premium, or Discount

BondContractual

Interest Rate 8%

6%

8%

10%

Premium

Par(Face Value)

Discount

Market Interest Rate

BondsSold at


Long-Term Liabilities: Operational Obligations

• Deferred Taxes– Difference between accounting and tax methods– Difference in the timing of recognizing revenue and

expense for accounting and tax purposes

• Warranty Obligations– Estimated; arise from offering product warranties– Estimated to achieve matching of sales revenue

and associated expense of warranty


Long-Term Liabilities: Operational Obligations (cont’d)

• Minority Interest– Reported on consolidated financial statements

– Represents the interest in the equity of a partially-held subsidiary by the nonmajority owners

– Not a liability per se but for purposes of analysis treat as a liability

• Other Noncurrent Liabilities– As circumstances warrant

• Redeemable Preferred Stock– Excluded from owners' equity

– For analysis, treat as a liability


• The residual ownership interest in the assets of an entity that remains after deducting its liabilities

– Paid-in Capital

– Retained Earnings

Owners’ Equity


Owners’ Equity: Paid-in Capital

• Par value– In some states, referred to as “stated value”– Considered “legal capital” by many states– Established by the articles of incorporation– Usually a minimal value

• No-par stock


Owners’ Equity: Paid-in Capital (cont’d)

• Additional paid-in capital– Issue price in excess of par (stated) value– Other sources

• Treasury stock transactions• Stock dividend transactions• Donated capital



• Common Stock– Shareholder ownership– Voting rights

• Election of board of directors• Major corporate decisions

– Liquidation rights secondary to• Creditors• Preferred stock



• Preferred Stock– Does not normally convey voting rights– May carry any or all of these features:

• Preference as to dividends• Accumulation of dividends• Participation in dividend beyond stated dividend rate• Convertibility into common stock at holder’s discretion• Preference in liquidation secondary to creditors• Callable at issuer discretion• Redemption at future maturity value

• Donated Capital– Donated by outside entities– Shareholder surrender of stock


Owners’ Equity: Retained Earnings

• Undistributed earnings of the corporation– Net income for all prior periods– Less dividends declared to shareholders


Owners’ Equity: Other

• Quasi-Reorganization– Eliminates a deficit balance of retained earnings– Retained earnings are dated for 5-10 years

• Equity-Oriented Deferred Compensation– A reduction to owners' equity that is amortized

(expensed) to future periods of employee service


Owners’ Equity: Other (cont’d)

• Employee Stock Ownership Plans (ESOPs)– A qualified pension plan– Tax benefits for the employer and employee– Unearned compensation reduces owners' equity

• Treasury Stock– Stock purchased and held by the issuing corporation– Recording and disclosure

• Record at par value; deduct from paid-in capital

• Record at cost; deduct from total owners' equity


Statement of Owners’ Equity

• Reconciles the beginning and ending balances of all components of owners' equity

• Account changes indicate– Issuance of stock: paid-in capital increase– Acquisition of treasury stock: treasury stock

increase– Net income: retained earnings increase– Dividends: retained earnings decrease


Balance Sheet Presentation Issues

• Financial analysis is complicated by– Many assets recorded at cost rather than fair

(replacement) value– Varying valuation methods

• Within a firm from item to item• Within an industry from company to company

– Not all items of value are listed as assets– Certain contingent liabilities may be excluded

Documents

Balance Sheet COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein