Chapter 10,11 and 12

Balance Sheet Basics – chapter 10

 Balance – a statement of what a business owns and what it owes at a

particular point in time. The difference between what it owns and owes
represents equity. Pg 90

 Goals of a company – increase profitability and increase equity

 The equity section of the balance sheet shows the accumulation of profits and
losses left in the business [retained earnings] NOTE: if the company has
built up net losses over time, then the balance sheet will show a negative
number called accumulated deficit.
Continuation – Chapter 10

 PG 92
Accounting equation: assests-liabilities = Owner’s equity
or what the company owns (assets) – what the company owes (liabilities) =
what the company is worth
Chapter 11
 Assets:
 Cash and cash equivalents
 Accounts receivable
 Allowance for bad debt – provides a more accurate reflect of A/R collectable. This is an
estimate thus it can be used to “smooth” earnings (see page 97)

 Inventory – manufacturers (who make their own products), wholesalers (who sell
other’s products) or retailers (who also sell other’s products but in shops).
Valuation of inventory can alter the asset side of the balance sheet (see bottom
of page 97)
General rule: carry as little inventory as possible for inventory ties up cash.
Pg 98
Chapter 11 continued
 GoodwillI – it is the difference between what a company paid for another
company and what the physical assets of the acquired company are worth.
 Note on page 101-102 the change in rules on amortization of goodwill (it is no
longer required to be amortized) now leads to the purchase of companies with
little in assets and high valued goodwill.

 Other intangible assets – these would be valued by lawyer fees or research &
development costs. Like goodwill they can be used to manipulate the income
statement (amortization expense) as the company might decided to either
capitalize costs to an intangible asset or write-if off as an expense as soon as
it is incurs. It depends on the “smoothing” of the earnings (see page 102)
Chapter 11 continued

 Accruals and Prepaids (page 103) – note the conservative approach of keeping
track of all known expenses (accrual) and tracking what we paid for in
advance (pre-paid).
 The last pages of Chapter 11 are about the mark-to-market rule. This only
has to do with investments (stock of someone else’s company held by the
company).
An example being Disney investing in Apple stock. Disney would put that stock as
an investment on the balance sheet. Originally it is at the balance of what they
purchased the shares, but then at the end of each fiscal year they would adjust
the balance to reflect the market price (per the stock exchange on that date).
Chapter 12
 Chapter 12 talks about the liability section of the balance sheet.

 Long term vs. short term debt. Means that the short term is due within 12
months of the balance sheet date. The remaining balance of the debt is
considered long term (due in over 12 months).
 Accounts payable is used strictly for operations (for the Cheesecake Factory
these are amounts due to vendors who provide food or beverages or liquor).
For Disney it would be for services associated with the theme parks or for
their production companies or possibly costs of materials for their products.
Chapter 12 (continued)
 Accrued expenses are those items that are re-occurring like insurance, the
electric bills, the rent, etc. Not directly related to the products or services
like Accounts Payable is.
 Deferred revenue we have covered in a previous chapter.
 Owner’s Equity – it is what is left after subtracting liabilities from assets. It
includes the capital provided by investors (stockholders purchasing shares in
the company) and also the profits retained in the company (retained
earnings).
 Book page 110: “So owner’s equity is what the shareholders waould receive
if the company were sold?” NO, NO, NO. The actual market value of a
company is what a willing buyer would pay for it. This could be much more
than the assets minus liabilities due to goodwill (see chapter 11).