The Balance Sheet
The Balance SheetChapter 5(Ignore Section 2 Cash Flow
Statement)UsefulnessEvaluating the capital structure.Assess risk
and future cash flows.Analyze the companys: Liquidity-Liquidity
ratios and turnover ratiosSolvency-Can the firm pay its
debts?Financial flexibility-ability to respond to unexpected needs
and opportunities.
LimitationsAssets/Liabilities at historical cost instead of
current fair value (which ones?)-reliability vs. relevanceUse of
judgments and estimates (where?)Omits many items of financial value
(what?)ClassificationItems grouped based on similar
characteristicsDifferent functions Inventory vs. PP&EDifferent
implications for financial flexibility Long term vs. short
termLiabilities vs. EquityDifferent liquidity characteristics Cash
vs. A/RDiffering amounts of estimation Monetary vs.
non-monetaryCash, A/P, long-term debt vs. Inventory, PP&E, and
intangiblesFinancial instrumentsThese classifications allow for
calculation of ratios
Working CapitalThe excess of total current assets over total
current liabilities is referred to as working capital. The net
amount of a companys relatively liquid resources.That is, working
capital is the liquidity buffer available to meet the financial
demands of the operating cycle.5Current/Long-Term AssetsRealized
within one year or within the normal operating cycle if the cycle
is longer than a year.CashReceivablesA/RInventoriesPrepaid
ExpensesInvestmentsRealization is expected to occur longer than a
year or normal operating cycleNoncurrent InvestmentsProperty,
Plant, and EquipmentIntangiblesOther Assets
Current/Long-Term LiabilitiesAFM 391Current LiabilitiesAccounts
PayableAccrued Liabilities (Wages Payable, Interest Payable,
etc)Short-term DebtTaxes PayableCurrent Maturity of
LT-debtLong-Term LiabilitiesBonds & Notes PayableLease
ObligationsPension ObligationsOwners EquityRemaining interest in
assets spread among individual shareholders of common or preferred
stock.Share Capital/Capital shares-includes both common and
preferred stock. May be net of repurchasesOther paid-in
Capital/Contributed Surplus-amount over par valueRetained
EarningsAdditional Information/DisclosureContingencies-possibility
of gain/loss if future event occursAccounting Policies-Inventory,
depreciation methodContractual Situations-details of
contractsSubsequent Events-events that occur between the date of
the financial statement and when b/s is actually
preparedParenthetical Explanations-line items on b/s with
additional info. (reference to notes)Notes-additional detail of
line items in the b/sCross-References and Contra ItemsSupporting
Schedules
