CHAPTER 5 BALANCE SHEET

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CHAPTER 5 BALANCE SHEET Powered By Docstoc
					  CHAPTER 5
BALANCE SHEET




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                       Balance Sheet

• Basic definitions:
    – F/S reporting Assets, Liabilities & Stockholders’ Equity at a
      point in time
    – Predicts amounts, timing & uncertainty of future C/F
• Uses of B/S information
    – Compute rates of return
    – Evaluate capital structure
    – Assess Liquidity
    – Assess financial flexibility




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                     Balance Sheet
• Limits on B/S information:
    – Historical..
    – Market values not used (not inflation adjusted either).
    – ―Off-B/S‖ assets not reflected:
        • Human assets
        • Customer base
        • Research abilities




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        Balance Sheet Accounts

• Classification on the B/S
  –See definitions in text--Elements of B/S.
  –Presentation can be:
     • Account form
     • Report form




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       Balance Sheet Accounts
– Definition of current assets
  • Current if consumed, converted to cash or sold within
    one year or within the operating cycle, whichever is
    longer

– Current assets:
  • Cash: Disclose any restrictions on availability.
  • Short-term investments: Debt and equity securities
    grouped together in three portfolios (FASB #115):
     – Held-to-Maturity. Reported at cost.
     – Trading. Reported at FV; change to I/S
     – Available for Sale. Report at FV; change to R/E.

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    Balance Sheet Accounts

• Receivables
  – Disclose amount of anticipated loss due to
    uncollectibles.
  – Disclose restrictions on receivables.
• Inventories
  – Disclose valuation basis (LCM)
  – Disclose method of pricing (FIFO, LIFO, etc.)
• Prepaids
  – Benefits paid for; future value (one year)
  – P/P insurance, rent, advertising, etc.


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       Balance Sheet Accounts

– Long-term Investments. To be held for > one year
 (management intention)
   • Securities Bonds receivable, stock, notes.
   • Tangible assets Not used in operations.
   • Funds Set asides to finance a future purpose such as
     pension payments, asset acquisition, debt retirement.
   • Investments in non-consolidated subsidiaries or
     affiliates.




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        Balance Sheet Accounts

–Property, Plant & Equipment (PP&E)
  • Durable assets that are operational assets
    Depreciable over estimated useful life (except land).
  • Use contra accounts-- accumulated depreciation
  • Result: NBV = Cost - accumulated depreciation




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        Balance Sheet Accounts
– Intangible Assets--Assets without physical existence that
  possess value to future operational periods:
        – Organization costs
        – Patents
        – Goodwill
        – Franchises
        – Trademarks, tradenames, etc.
    • New rules for amortization per FASB 142—effective
      December 15, 2001
        – Intangible assets subject to amortization—amortize over
          estimated economic life—writedown any assets impaired during
          period
        – Intangible Assets Not Subject to Amortization—‖indefinite useful
          life‖—writedown any assets impaired during the period to FV
        – Goodwill shall not be amortized, but evaluated annually to FV
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       Balance Sheet Accounts

– Other Assets-- Items will vary widely in
 practice.
   • Deferred charges (long-term prepaids).
   • Noncurrent receivables
   • Deferred income taxes recble
   • Advances to subsidiaries & affiliates`




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      Balance Sheet Accounts

–Current liabilities:
Obligations expected to be paid use of within one
 year or the operating cycle, if longer.
  • Examples
      – Accounts payable
      – Deferred revenues
      – Current portion long-term debt
      – Accrued expenses




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       Balance sheet Accounts

– Long-term Liabilities (Long-term debt)
   • Not paid off or maturing within one year or the operating
     cycle, whichever is longer.
   • Examples:
       – Pension liabilities
       – Bonds
       – Notes
       – Deferred taxes
   • Contingencies--FASB # 5
       – Probable that an assets has been impaired and can
         be reasonably estimated, then record liabliity

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       Balance Sheet Accounts

– Owners’(Stockholders’) Equity Legal and
 corporate concerns, disclosure.
   • Fundamental division between amounts invested
     (stock) and amounts earned (RE).
   • Stock--disclose classes, amounts authorized, issued
     and outstanding, par value, preferred return, treasury
     stock
   • RE--disclose appropriated, unappropriated, prior period
     adjustments, dividends and any restrictions
   • Other capital transactions--Unrealized gains and losses
     from available for sale securities


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Additional Information Reported

– Supplemental information
Cannot contradict the body of the F/S.
  • Footnote #1--Statement of significant acctg policies.
  • Contractual obligations--Restrictions, covenants.
  • Contingencies- Within the body of the F/S or
    footnotes-losses not gains (normally). Gain
    contingencies would normally violate conservatism.
      – FASB #5




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Additional Information Reported

– Subsequent events—
Events that occur between the B/S date and
 issuance date of the F/S.
  • Type 1. If material, adjust the F/S. Example: a major
    accounts receivable suddenly proves uncollectible.
  • Type 2. Do not adjust the F/S but disclose in the
    footnotes




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