Chapter 4

UNDERSTANDING BALANCE SHEETS

Presented by: John Iwan Kusno

CONTENTS
1. Introduction
2. Components and Format of the Balance Sheet
3. Current Assets and Current Liabilities
4. Non-current Assets
5. Non-current Liabilities
6. Equity
7. Analysis of the Balance Sheet
8. Summary

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 OVERVIEW

• Balance sheet elements and format

• Accounting issues
- Current and non-current assets and liabilities
- Measurement bases of different assets and liabilities
• Components of shareholders’ equity
• Balance sheet analysis
• Liquidity and solvency

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 BALANCE SHEET CONTENTS

The balance sheet is also known as the statement of

financial position or statement of financial condition.
The balance sheet discloses, at a specific point in time:
- what an entity owns (or controls),
- what it owes, and
- what the owners’ claims are.

Assets = Liabilities + Owners’ Equity

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 BALANCE SHEET ELEMENTS

• Assets (A): resources controlled by the company as a

result of past events and from which future economic
benefits are expected to flow to the entity.
• Liabilities (L): obligations of a company arising from
past events, the settlement of which is expected to result in
a future outflow of economic benefits from the entity.
• Equity (E): represents the owners’ residual interest in
the company’s assets after deducting its liabilities.

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 EQUITY

• The balance sheet provides important information about a company’s

financial condition.
• However, balance sheet amounts of equity (assets, net of liabilities)
should not be viewed as a measure of either the market or
intrinsic value of a company’s equity.
• Why?
- The balance sheet is a mixed model with respect to measurement
(some items at historical cost, some items at current value).
- Even fair value reflects a value that was current at the end of the
reporting period.
- Future cash flows, which affect value, are driven by items excluded
from the balance sheet (e.g., reputation, management skills).

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 BALANCE SHEET: EXAMPLE
SAP GROUP
(€ millions) 31 December 2017 31 December 2016
Assets
Total current assets 11,930 11,564
Total non-current assets 30,567 32,713
Total assets 42,497 44,277
Equity and liabilities
Total current liabilities 10,210 9,675
Total non-current liabilities 6,747 8,205
Total liabilities 16,957 17,880
Total equity 25,540 26,397
Equity and liabilities 42,497 44,277

SAP’s 2017 Annual Report

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 BALANCE SHEET: EXAMPLE
APPLE
($ millions) 30 September 2017 24 September 2016
Assets
Total current assets 128,645 106,869
Total assets 375,319 321,686
Liabilities and Shareholders’ Equity
Current liabilities 100,814 79,006
Total liabilities 241,272 193,437
Total shareholders’ equity 134,047 128,249
Total liabilities and shareholders’ 375,319 321,686
equity

Apple’s 2017 Annual Report

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 BALANCE SHEET FORMAT

Liquidity
- For a company overall, its ability to pay for short-term
obligations
- For a particular asset or liability, its “nearness to cash”
Balance sheet ordering according to liquidity:
- Companies using U.S. GAAP (e.g., Apple, Hershey)
order items on the balance sheet from most liquid to
least liquid.
- Companies using IFRS order balance sheet information
from least liquid to most liquid.

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BALANCE SHEET: EXAMPLE, HENKEL AG (ASSETS)

Henkel’s 2018 Annual Report

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 BALANCE SHEET: EXAMPLE
L’ORÉAL (ASSETS)

L’Oreal’s 2018 Annual Report

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 CURRENT AND NON-CURRENT
ASSETS AND LIABILITIES
• Balance sheet must distinguish between and present separately
- current and non-current assets
- current and non-current liabilities
• Exception to the current and non-current classifications
requirement, under IFRS:
- Current and non-current classifications are not required if a
liquidity-based presentation provides reliable and more
relevant information.
- In a liquidity-based presentation, all assets and liabilities
presented in order of liquidity.
- Liquidity-based presentation are often used by banks.
• Classified balance sheet: Balance sheet with separately
classified current and non-current assets and liabilities.

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 BALANCE SHEET: EXAMPLE
BARCLAYS PLC (ASSETS)

Barclays' Annual Report

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 CURRENT AND NON-CURRENT
ASSETS AND LIABILITIES
• Current assets: Assets expected to be sold, used up, or
otherwise realized in cash within one year or one operating
cycle of the business, whichever is greater, after the
reporting period.
• Non-current assets: Assets not classified as current. Also
known as long-term or long-lived assets.
• Current liabilities: Liabilities expected to be settled within
one year or within one operating cycle of the business.
• Non-current liabilities: All liabilities not classified as
current.
• Working capital: The excess of current assets over
current liabilities.

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