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The Balance Sheet

Chapter 5
(Ignore Section 2 Cash Flow Statement)

Usefulness
o

Evaluating the capital structure.

Assess risk and future cash flows.

Analyze the companys:


o

Liquidity-Liquidity ratios and turnover ratios

Solvency-Can the firm pay its debts?

Financial flexibility-ability to respond to


unexpected needs and opportunities.

Limitations

Assets/Liabilities at historical cost instead of


current fair value (which ones?)

-reliability vs. relevance

Use of judgments and estimates (where?)


Omits many items of financial value (what?)

Classification

Items grouped based on similar characteristics

Different functions Inventory vs. PP&E


Different implications for financial flexibility

Different liquidity characteristics Cash vs. A/R


Differing amounts of estimation Monetary vs.
non-monetary

Long term vs. short term


Liabilities vs. Equity

Cash, A/P, long-term debt vs. Inventory, PP&E, and


intangibles
Financial instruments

These classifications allow for calculation of ratios

Working Capital

The 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.

Current/Long-Term Assets

Realized within one year or within the normal operating


cycle if the cycle is longer than a year.

Cash
Receivables
A/R
Inventories
Prepaid Expenses
Investments

Realization is expected to occur longer than a year or


normal operating cycle

Noncurrent Investments
Property, Plant, and Equipment
Intangibles
Other Assets

Current/Long-Term Liabilities
AFM 391
Current Liabilities
Accounts Payable
Accrued Liabilities (Wages Payable, Interest Payable,
etc)
Short-term Debt
Taxes Payable
Current Maturity of LT-debt
Long-Term Liabilities
Bonds & Notes Payable
Lease Obligations
Pension Obligations

Owners Equity

Remaining 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
repurchases
Other paid-in Capital/Contributed Surplusamount over par value
Retained Earnings

Additional Information/Disclosure

Contingencies-possibility of gain/loss if future event


occurs
Accounting Policies-Inventory, depreciation method
Contractual Situations-details of contracts
Subsequent Events-events that occur between the
date of the financial statement and when b/s is
actually prepared
Parenthetical Explanations-line items on b/s with
additional info. (reference to notes)
Notes-additional detail of line items in the b/s
Cross-References and Contra Items
Supporting Schedules