Ch' 7: The Balance Sheet

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Ch. 7 The Balance Sheet
For Dr. Landrum By James Esch MNA 4325
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What is a Balance Sheet?

• A balance sheet is a snapshot of one point in
  time.
• A balance sheet includes
• Assets
• Liabilities
• Equity
• Assets Liabilities Equity

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The Balance Sheet
Current Assets Cash 30,000 Accounts
Receivable 90,000 Inventory
100,000 Total Current Assets
220,000 Property 80,000 Total Assets
300,000
Current Liabilities Payroll Taxes
10,000 Accounts Payable 70,000 Total
Current Liabilities 80,000 Long-Term
Liabilities Loan payable to bank 20,000 Total
Long-Term Debt 20,000 Total Liabilities
100,000
Equity Total Assets Total Liabilities

• Total Assets 300,000
• Total Liabilities 100,000
• Equity 200,000

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What Are Assets?

• An asset is anything that you own.
• This includes
• Cash whether it be in the bank or in your safe
• Accounts Receivable what others owe you
• Inventory vehicles, expensive machinery,
  computers
• Prepaid Expenses prepaid insurance, anything
  paid in advance
• Property and Equipment land equipment less
  depreciation costs
• Intangible Assets cost of patent, net of
  accumulated amortization, goodwill (special
  intangible asset)
• Other Assets for miscellaneous assets
• Current Assets composed of those assets that
  are cash, or will be converted into cash
  within the next 12 months.

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What Are Liabilities?

• Liabilities are anything that you owe.
• This includes
• Financing by Suppliers (Accounts Payable) when
  suppliers allow x number of days before payment
  is expected
• Accrued Expenses Money owed, but not invoiced
  yet
• accrued wages employee makes 400 per week and
  is paid on a monthly basis.
• Deferred Income income that has been received
  but not yet earned (also called customer
  deposits and deferred credits)
• Income Taxes Payable and Deferred
• Income Taxes Payable states the amount of the
  checks that the company soon will have to write
  to the IRS and state tax authorities (just a
  special type of account payable)
• Deferred Income Taxes the difference between
  GAAP income tax and IRS income tax if it comes
  out as a liability

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What is Working Capital?
Working capital is the current assets less the
current liabilities. Finding the working
capital Current assets 207,000 Subtract
current liabilities 156,788 Excess of current
assets over current liabilities 50,212
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Notes to the Financial Statements

• Notes have different meanings...
• On financial statements, notes consist of
  explanations the management of the company wants
  to put in them.
• Notes payable are known as bonds
• here is the difference between some commonly used
  terms
• Loan a transfer of an asset to some person
  with the expectation that it will be repaid
• Note (promissory note) the written document
  that describes a loan and its terms (interest,
  repayment, etc)
• Bond one of a series of notes that are sold to
  investors

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The Importance of the Balance Sheet

• Why balance sheets are important to both the
  company and investors
• It is the fundamental report of a companys
  possessions, debts, and capital invested.
• Investors often use a companys balance sheet to
  examine these key elements
• If the firm meet its financial obligations
• How much money has already been invested in the
  company
• If the company is overly indebted
• What kind of assets has the company purchased
  with its financing
• Balance sheets are harder to make misleading
  (legally)
• http//www.ameritrade.com/educationv2/fhtml/learni
  ng/ubalsheets.fhtml

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Review Questions
1. A balance sheet provides information to a
reader that is not available from an income
statement or operating report. True 2. Part of
a balance sheet lists current assets, which are
items that are cash or will turn into cash within
12 months. True 3. The balance sheet of a
company provides an estimate of what its real
estate and equipment would sell for at an
auction. False, property and equipment are
listed at their cost less depreciation 4. The
interest that will be paid in the future on loans
from banks is listed on the balance sheet as a
liability False, future interest is not a
liability until the future is present
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Review Questions cont

• 5. A prepaid expense is an expense that will
  arise in the future and is therefore a liability.
• False, it ignores interest. It is suitable for
  comparing cash flows from various pieces of
  equipment, not to compare investment in equipment
  to interest-bearing investments like bonds,
  deposits, and certificates.
• 6. Goodwill is the value of steady, satisfied
  customers. It can be included on the balance
  sheet whenever management of a company wants to
  list it there.
• True
• Accounts payable are actually loans made to a
  company by its suppliers.
• True

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Case Study Questions
1. Classify the following by making a check under
the proper heading
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Case Study Questions cont
2. When George, who built golf courses, bought
his Automatic Sand-Trap Machine for 100,000, he
paid 20,000 of his own money and borrowed
80,000 from the Easymoney Bank. He borrowed the
money on January 1 of year 1 and was to repay it
in annual payments of 16,000 principal plus
interest (10), due on December 31. He made all
payments before the due date. Determine how this
liability should be divided between current and
long-term liability on Georges balance sheet at
the end of the second year.
Beginning balance of loan 80,000 Subtract
payments made 32,000 Balance
48,000 Subtract current portion
16,000 Long-term liability 32,000