Elements of the Balance SheetElements of the Balance Sheet

• AssetsAssets are probable future economic benefits obtained are probable future economic benefits obtained or controlled by a particular entity as a result of past or controlled by a particular entity as a result of past transactions or events.transactions or events.

• LiabilitiesLiabilities are probable future sacrifices of economic benefits are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result assets or provide services to other entities in the future as a result of past transactions or events.of past transactions or events.

• EquityEquity is the residual interest in the assets of an entity is the residual interest in the assets of an entity that remains after deducting its liabilities. In a business that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.enterprise, the equity is the ownership interest.

CON #6

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications

1) Current Assets– Cash– Short-Term Investments– Receivables– Inventories– Prepaid Expenses

2) Long-Term Investments

3) Property, Plant & Equipment

4) Intangible Assets5) Other Assets

6) Current Liabilities7) Long-Term Liabilities8) Owners’ Equity

– Capital Stock– Additional Paid-in Capital– Retained Earnings

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications

(1) (1) Current AssetsCurrent Assets - - are cash and other assets are cash and other assets expected to be converted into cash, sold, or expected to be converted into cash, sold, or consumed either in one year or in the consumed either in one year or in the operating cycle, whichever is longer.operating cycle, whichever is longer.

Examples:Examples:CashCashCash EquivalentsCash EquivalentsShort-term InvestmentsShort-term InvestmentsAccounts ReceivableAccounts ReceivableInventoriesInventoriesPrepaid ExpensesPrepaid Expenses

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications

(2) Long-Term Investments - (2) Long-Term Investments - 4 types: 4 types:

(1) investments in securities, (such as bonds, common stock, (1) investments in securities, (such as bonds, common stock, or long-term notes)or long-term notes)

(2) investments in tangible fixed assets (2) investments in tangible fixed assets not not currently used in currently used in operations (such as land held for speculationoperations (such as land held for speculation

(3) Investments set aside in special funds such as a sinking (3) Investments set aside in special funds such as a sinking fund, pension fund, or plant expansion fund. (The cash fund, pension fund, or plant expansion fund. (The cash surrender value of life insurance is included here.)surrender value of life insurance is included here.)

(4) Investments in nonconsolidated subsidiaries or affiliated (4) Investments in nonconsolidated subsidiaries or affiliated companiescompanies

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications

(3) (3) Property, Plant, & EquipmentProperty, Plant, & Equipment are properties of a are properties of a durable nature used in the regular operations of durable nature used in the regular operations of the business. Examples:the business. Examples:

– landland– buildingsbuildings– machinerymachinery– furniturefurniture– toolstools– wasting resources (timber, minerals)wasting resources (timber, minerals)

• only land is not depreciableonly land is not depreciable• natural resources are depletednatural resources are depleted

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications(4) (4) Intangible AssetsIntangible Assets lack physical substance & lack physical substance &

usually have a high degree of uncertainty usually have a high degree of uncertainty concerning their future benefitsconcerning their future benefits– patentspatents– copyrightscopyrights– franchisesfranchises– goodwillgoodwill– trademarkstrademarks– trade namestrade names– secret processessecret processes– organization costs ….. Amortize (expense over organization costs ….. Amortize (expense over

5-40 years)5-40 years)

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications

(5) (5) Other AssetsOther Assets could includecould include– long-term prepaid expenses (deferred charges)long-term prepaid expenses (deferred charges)– noncurrent receivablesnoncurrent receivables– intangible assetsintangible assets– assets in special fundsassets in special funds– deferred income taxesdeferred income taxes– property held for saleproperty held for sale– advances to subsidiaries advances to subsidiaries

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications(6) (6) Current LiabilitiesCurrent Liabilities - are the obligations that - are the obligations that

are reasonably expected to be liquidated are reasonably expected to be liquidated either through the use of current assets or the either through the use of current assets or the creation of other current liabilities.creation of other current liabilities.

Includes:Includes:• payables resulting from the acquisitions of goods payables resulting from the acquisitions of goods

& services (A/P, Wages Payable, etc.)& services (A/P, Wages Payable, etc.)• collections of receivables in advance (unearned collections of receivables in advance (unearned

revenue)revenue)• other liabilities (current portion of long-term debt)other liabilities (current portion of long-term debt)

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications(7) Long-Term Liabilities (7) Long-Term Liabilities - obligations that are not - obligations that are not

reasonably expected to be liquidated within the reasonably expected to be liquidated within the normal operating cycle (or 1 year)normal operating cycle (or 1 year)

3 types:3 types:• obligation arising from obligation arising from specific financing situationsspecific financing situations, such , such

as the issuance of bonds, long-term lease obligations, and as the issuance of bonds, long-term lease obligations, and long-term notes payablelong-term notes payable

• obligations arising from the obligations arising from the ordinary operating activitiesordinary operating activities of the organization, such as pension obligations & of the organization, such as pension obligations & deferred income tax liabilitiesdeferred income tax liabilities

• obligations that are obligations that are dependent upon future contingencies:dependent upon future contingencies: the occurrence or non-occurrence of one or more future the occurrence or non-occurrence of one or more future events to confirm the amount payable, or the payee, or the events to confirm the amount payable, or the payee, or the date payable, such as service or product warranties or date payable, such as service or product warranties or other contingencies other contingencies

Balance Sheet: 8 Major ClassificationsBalance Sheet: 8 Major Classifications(8) Owners’ Equity(8) Owners’ Equity

Usually includes:Usually includes:(1) Capital Stock - the par or stated value of the (1) Capital Stock - the par or stated value of the

shares issuedshares issued(2) Additional Paid-in capital - representing the (2) Additional Paid-in capital - representing the

amounts initially paid for stock in excess of the amounts initially paid for stock in excess of the par or stated valuepar or stated value

(3) Retained Earnings - the undistributed earnings(3) Retained Earnings - the undistributed earnings(*) also includes other information relating to (*) also includes other information relating to

comprehensive incomecomprehensive income

Supplemental Balance Sheet InformationSupplemental Balance Sheet Information

Contingencies ... material events that have an uncertain outcome

Accounting Policies ... explain the valuation methods used or the basic assumptions made concerning inventory valuation, depreciation methods, investments in subsidiaries, etc.

Contractual Situations ... explain certain restrictions or covenants attached to specific assets or, more likely, to liabilities

SFAS #6

Post Balance Sheet Disclosures ... disclose certain events that have occurred after the balance sheet date but before the financial statements have been issued

Techniques of DisclosureTechniques of Disclosure

• Parenthetical ExplanationsParenthetical Explanations

• NotesNotes

• Cross Reference & Contra ItemsCross Reference & Contra Items

• Supporting SchedulesSupporting Schedules