The Balance Sheet and Notes to the Financial Statements.ppt

1、,The Balance Sheet and Notes to Financial Statements,Intermediate Accounting,17E,Stice | Stice | Skousen,PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University, 2010 Cengage Learning,Describe the specific elements of the balance sheet (assets, liabilities, and

2、 owners equity), and prepare a balance sheet with assets and liabilities properly classified into current and noncurrent categories.,Identify the different formats used to present balance sheet data.,Analyze a companys performance and financial position through the computation of financial ratios.,(

3、continues),Learning Objectives,Learning Objectives,Recognize the importance of the notes to the financial statements, and outline the types of disclosures made in the notes.,5.Understand the major limitations of the balance sheet.,(continues),Describe the specific elements of the balance sheet (asse

4、ts, liabilities, and owners equity), and prepare a balance sheet with assets and liabilities properly classified into current and noncurrent categories.,OBJECTIVE 1,The Balance Sheet,A balance sheet presents a listing of an organizations assets and liabilities at a certain point in time. The differe

5、nce between assets and liabilities is called equity. The balance sheet is designed using the basic accounting equation: Assets = Liabilities + Owners Equity,Accounting is not a science.,The primary purpose of the balance sheet is to help forecast the future.,If a company economically controls the fu

6、ture economic benefits association with an item, that item qualifies as an asset whether it is legally owned or not.,This term includes legal commitments as well as moral, social, and implied obligations.,Most liabilities involve an obligation to transfer assets in the future. However, an obligation

7、 to provide a service is also a liability.,Assets and liabilities arise from transactions or events that have already happened.,(continues),(continues),(concluded),Current Assets,Cash and resources expected to be converted to cash during the entitys normal operating cycle or one year, whichever is l

8、onger, are current assets.,Cash Receivables Inventories,The normal operating cycle involves the use of cash to purchase inventories, the sale of inventories resulting in receivables, and ultimately the cash collection of those receivables.,Current Assets,In addition to cash, receivables, and invento

9、ries, current assets typically include prepaid expenses and investments in certain securities.,Debt and equity securities that are purchased mainly with the intent of reselling these securities in the short term are called trading securities.,Current Assets,Current assets are normally listed on the

10、balance sheet before the noncurrent assets and in the order of their liquidity, with the most liquid items first.,Current Assets,Noncurrent Assets,Investments Property, plant, and equipment Intangible assets Deferred income taxes,Investments,Investments held for such long-term purposes as regular in

11、come, appreciation, or ownership control are reported under the heading Investments.,Property, plant, and equipment are properties of a tangible and relatively permanent nature that are used in the normal business operations.,Plant, Property, and Equipment,Land Buildings Machinery Tools,Intangible a

12、ssets are long-term rights and privileges of a nonphysical nature acquired for use in business operations.,Intangible Assets,Goodwill Patents Trademarks Franchises,Current liabilities are obligations expected to be paid using current assets or by creating other current liabilities.,Accounts and note

13、s payable Accrued expenses Current portion of long-term obligations Unearned revenues,Current Liabilities,Sinking Fund,A sinking fund is comprised of cash and investment securities that have been accumulated for the stated purpose of repaying a specific loan.,Current Liabilities,Short-Term Obligatio

14、ns,If a short-term loan is expected to be refinanced or paid back with the proceeds of a replacement loan, the existing short-term loan will not require the use of current assets even though it is scheduled to mature within a year.,Current Liabilities,The existing loan is not classified as current a

15、s long as:,The intent of the company is to refinance the loan on a long-term basis.,The companys intent is evidenced by an actual refinancing after the balance sheet date but before the financial statements are finalized or by the existence of an explicit refinancing agreement.,Current Liabilities,A

16、 callable obligation is one that is payable on demand and thus has no specified due date. If an agreement calls for an obligation to be due on demand or to become due on demand within one year from the balance sheet date, the obligation should be classified as current.,Callable Obligations,Noncurren

17、t Liabilities,Current liabilities do not usually include:,Debts to be liquidated from a noncurrent sinking fund. Short-term obligations to be refinanced.,Long-term debt Long-term lease obligations Deferred income tax liability Pension obligations,Obligations not reasonably expected to be paid or oth

18、erwise satisfied within 12 months are classified as noncurrent liabilities.,Noncurrent Liabilities,Long-term debt is reported at its discounted present value. When a note, bond issue, or a mortgage becomes payable within a year, it should be reclassified as a current liability. For a capital lease,

19、the present value of the future minimum payments is recorded as a long-term liability. Most large companies include deferred income tax liabilities on the balance sheet.,Noncurrent Liabilities,Contingent Liabilities,Past activities or circumstances may give rise to possible future liabilities, altho

20、ugh obligations do not exist on the balance sheet date. These potential claims that involve uncertainty as to possible losses are known as contingent liabilities An estimated liability is a definite obligation with only the amount in question and subject to estimation on the balance sheet date.,Owne

21、rs Equity,Can also be called stockholders or shareholders equity. Generally divided into two parts: Contributed capital (also known as paid-in-capital) Retained earnings,Contributed Capital,Two parts of contributed capital: Capital stockthe number of shares the par value Preferred stockusually pays

22、a fixed annual cash dividend and provides rights to recover investment in case of bankruptcy Common stockprovides real ownership of the corporation and grants voting power, but holders are last in line for assets in case of bankruptcy Additional paid-in capitalinvestment by shareholders in excess of

23、 par value of capital stock,Retained Earnings,Retained earnings (RE)the amount of undistributed earnings of past periods RE deficitan excess of dividends and losses over earnings results in a negative retained earnings balance Sometimes, retained earnings is restricted and unavailable for cash divid

24、ends.,Treasury Stock,When a company buys back its own shares, accountants call the repurchased shares treasury stock.,Treasury shares can be retired, or they can be retained and reissued later.,Available-for-Sale Securities,Available-for-sale securities are those that were not purchased with the imm

25、ediate intention to resell, but are not meant to be held permanently.,These securities are reported in the balance sheet at their current market value.,Foreign Currency Transaction Adjustments,Foreign currency transaction adjustments arise from the change in the equity of foreign subsidiaries that o

26、ccurs during the year as a result of changes in foreign currency exchange rates.,Unrealized Gains and Losses on Derivatives,A derivative is a financial instrument, such as an option or a future, that derives its value from the movement of a price, an exchange rate, or an interest rate associated wit

27、h some other item.,Minority Interest,In the consolidated balance sheet, minority interest is the amount of equity investment made by outside shareholders to consolidated subsidiaries that are not 100% owned by the parent company.,International Reserves,International reserves are merely different equ

28、ity categories similar in nature, depending on the reserve, to additional paid-in capital or to restricted retained earnings.,Identify the different formats used to present balance sheet data.,OBJECTIVE 2,Format of the Balance Sheet,Generally, assets and liabilities are presented in their order of l

29、iquidity. Some industries with significant investments in land and buildings will list these items first on the balance sheet. Generally, a balance sheet is presented in comparative form, including data from both the current year and the previous year. Foreign balance sheets frequently list the curr

30、ent assets and current liabilities together.,(continues),(continues),(continues),(continues),Format of ForeignBalance Sheets,Foreign balance sheets are frequently presented with property, plant, and equipment and intangibles listed first. They frequently list the current assets and current liabiliti

31、es together and label the difference between the two as net current assets or net working capital.,(continues),Analyze a companys performance and financial position through the computation of financial ratios.,OBJECTIVE 3,Liquidity,Liquidity is the ability of a firm to satisfy its short-term obligat

32、ions.,A common indicator of the overall liquidity of a company is the current ratio.,(continues),(concluded),Liquidity,The WITH CLASSIFICATION section of Exhibit 3-8 will serve as the source of information for all ratios in Slides 3-61 through 3-70.,Current assets Current liabilities,Current Ratio,$

33、812,600,$499,500,= 1.63,Historically, the rule of thumb is that a current ratio below 2.0 suggests liquidity problems.,Liquidity,Another ratio used to measure a firms liquidity is the quick ratio, also known as the acid-test ratio. It indicates how well a firm can satisfy existing short-term obligat

34、ions with assets that can be converted into cash without difficulty.,(Cash + Sec. + Rec.) Current liabilities,$483,700,$499,500,= 0.97,Quick Ratio,Overall Leverage,Comparing the amount of liabilities to the amount of assets held by a business indicates the extent to which borrowed funds have been us

35、ed to leverage the owners investments and increase the size of the firm.,Total liabilities Total assets,$1,098,700,$1,952,600,= 0.56,Techtronics borrowed 50% of the money it needed to buy its assets.,Debt Ratio,Relationships Between Balance Sheet and Income Statement Amounts,Efficiency,A financial r

36、atio that gives an overall measure of company efficiency is called asset turnover. Assuming sales of $4,000,000, the turnover is:,Techtronics generates $2.05 in sales for each dollar of assets.,Overall Profitability,To appropriately measure profitability, net income must be compared to some measure

37、of the size of the investment. Two financial ratios used to assess a firms overall profitability are return on assets and return on equity.,Relationships Between Balance Sheet and Income Statement Amounts,Return on Assets,= 7.7%,This means that one dollar of Techronics assets generated 7.7 cents in net income.,Relationships Between Balance Sheet and Income Statement Amounts,Return on Equity,Techronics stockholders earned 17.6 cents p