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Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
Acc101 week 3
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Acc101 week 3

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  • 1. Week 3 The Balance SheetReference: Chapter 5pp. 143-172,181-183 1
  • 2. Learning Objectives • Explain the purpose of a Balance Sheet • Explain and apply the definition of assets and liabilities • Explain and apply the definition of equity • Prepare and interpret a Balance Sheet using the T format and narrative format • Explain and apply the measurement of assets and liabilities to the balance sheet • Discuss the limitations of the balance sheet2
  • 3. NATURE AND PURPOSE OF THE BALANCE SHEET• Presents the financial position of an entity at the reporting date• Lists an entity’s assets, liabilities and owner’s equity at reporting date (at a specific point in time)• Reflects – the assets in which the entity has invested (its investing decisions), and – how the entity has financed the assets (its financing decisions)3
  • 4. NATURE AND PURPOSE OF THE BALANCE SHEET continued Balance Mama Dudes Café date Balance sheet as at 30 June 2010 2009 2010 2009Cash at bank 12 000 30 000 Accounts payable 37 000 55 000Accounts receivable 12 000 14 000 Mortgage 10 000 10 000Inventory 30 000 28 000 Loans 45 000 45 000Motor vehicles 40 000 36 000 Total liabilities 92 000 110 000Buildings 80 000 70 000 Owner’s equity 82 000 68 000Total assets 174 000 178 000 Total liabilities & equity 174 000 178 000 Reflects duality system & accounting equation Assets = Liabilities + Equity 4
  • 5. Definition of Assets• Essential characteristics for an asset are: – the resource must be controlled by the entity – the resource must be as a result of a past event – future economic benefits are expected to flow to the entity from the resource5
  • 6. Definition of Liabilities• Essential characteristics for a liability are: – A present obligation to another entity – The present obligation arises as a result of past events – An outflow of resources embodying economic benefits is expected to flow from the entity as a result of settling the present obligation6
  • 7. THE DEFINITION AND NATURE OF EQUITY• Equity is the residual interest in the assets after the liabilities are deducted EQUITY = ASSETS – LIABILITIES• Equity represents the claim of owner/s on the firm’s assets• Equity comprises of various items including – Capital contribution by owners – Profits retained in the entity7
  • 8. Activity 3.1 • An Italian restaurant called Appetito has established an outstanding reputation. Every lunch and dinner service the restaurant is booked to capacity, and there is a 2 month waiting list for a table for non-regular customers. The restaurant is famous for its excellent food. The owner knows that the chef is critical to the restaurant’s fame and success. The owner believes that the chef is his biggest asset, and wants to record the chef as an asset on the business balance sheet. The owner asks for your opinion on this. • Can the chef be recorded as an asset on the balance sheet? Discuss8
  • 9. FORMAT AND PRESENTATION OF THE BALANCE SHEET• Two main formats – T-format • Assets on left-hand side and liabilities on right-hand side • Often used for smaller entities – Narrative format • Assets, liabilities and equity presented down the page, net assets is also shown• Comparative information allows users to see how firm’s financial position has changed between the previous and current periods (shown in example on slide 10) 9
  • 10. FORMAT AND PRESENTATION OF THE BALANCE SHEET (T-format) Mama Dudes Café Balance sheet as at 30 June 2010 2009 2010 2009Cash at bank 12 000 30 000 Accounts payable 37 000 55 000Accounts receivable 12 000 14 000 Mortgage 10 000 10 000Inventory 30 000 28 000 Loans 45 000 45 000Motor vehicles 40 000 36 000 Total liabilities 92 000 110 000Buildings 80 000 70 000 Owner’s equity 82 000 68 000Total assets 174 000 178 000 Total liabilities & equity 174 000 178 000 10
  • 11. FORMAT AND PRESENTATION OF THE BALANCE SHEET (Narrative format)11
  • 12. CLASSIFICATION, PRESENTATION AND DISCLOSURE OF ELEMENTS ON THE BALANCE SHEET• Accounting standards (rules) exist that prescribe the presentation, classification and disclosure requirements for assets, liabilities and equity on the balance sheet• Assets and liabilities are generally classified, which means separated into Current and Non- Current12
  • 13. Current and non-current assets and liabilities• Distinction between current and non-current classification is based on timing• If the economic benefits (of asset) or outflow of resources (for liability) are expected to be realised in the next reporting period (next 12 months), the asset or liability is categorised as current• If economic benefits (of asset) or outflow of resources (of liability) are expected beyond next the reporting period, the classification is non- current13
  • 14. Classification in the Balance SheetCurrent Assets –assets that are cash, we willbe used or converted to cash within 12months e.g. cash accounts receivable,inventory, supplies, prepaymentsNon-current Assets – assets that are notcurrent assets (i.e. more than 12 months). e.g.building, land, equipment, motor vehicles
  • 15. Classification in the Balance SheetCurrent Liabilities – the debt is expected to besettled within 12 months. e.g. Accountspayable (creditors), wages payable, bankoverdraft, unearned revenueNon-current Liability – any liability that is nota current liability. e.g. 3 year bank loanpayable, mortgage payable
  • 16. Current and non-current assets and liabilities continued• On the balance sheet, an entity will usually show total amounts for – Current asset – Non-current assets – Current liabilities – Non-current liabilities16
  • 17. Classification, presentation and disclosure of assets, liabilities and equity• Assets are classified according to their nature or function• Classifications can reflect – Liquidity – Marketability – Physical characteristics – Expected timing of future economic benefits – Purpose17
  • 18. Classification, presentation and disclosure of assets, liabilities and equity continued Assets – Classes include:• Cash and cash equivalents • Financial assets• Trade receivables • Property, plant and• Inventories equipment• Non-current assets held for • Deferred tax assets sale • Agricultural assets• Investments accounted for • Intangible assets using equity method • Goodwill18
  • 19. JB Hi-Fi Ltd19
  • 20. Classification, presentation and disclosure of assets, liabilities and equity continued• Liabilities and equity are classified according to their nature• Classifications may be based on: – Liquidity – Level of security of guarantee – Expected timing of the future sacrifice – Source – Conditions attached to the liabilities20
  • 21. Classification, presentation and disclosure of assets, liabilities and equity continued Liabilities – Classes include: • Trade and other payables • Borrowings • Tax liabilities • Provisions • Financial liabilities • Secured debts21
  • 22. JB Hi-Fi Ltd22
  • 23. Classification, presentation and disclosure of assets, liabilities and equity continued Equity – Classes include (for a company):• Share capital – Paid-up share capital, contributed capital• Retained earnings• Reserves (e.g. Asset Revaluation Reserve)23
  • 24. JB Hi-Fi Ltd24
  • 25. Activity 3.2 • Classify the following items as current or non-current assets, current or non-current liabilities or equity – Cash at Bank, Loan Payable (due in 5 years), Share Capital, Accounts Receivable, Tax Payable, Inventory, Retained Earnings, Land, Equipment25
  • 26. MEASUREMENT OF ASSETS AND LIABILITIES Different methods of valuation are used for different assets and liabilities on the balance sheet. Following are some examples of different values that are shown for items on the balance sheet. The dollar value assigned to assets and liabilities is called their “carrying amounts” or “book values”.26
  • 27. MEASUREMENT OF ASSETS AND LIABILITIES continued• Assets and liabilities initially recorded at their historical cost (original cost).• Non-current assets can continue to be recorded at historical cost, or can be revalued to fair value (market value).• Inventory must be valued at the lower of its cost price and estimated selling price.• Accounts receivable must be shown at the amount that is estimated to be collectable.27
  • 28. Measuring non-current assets continued• All non-current assets with limited useful lives must be depreciated• Land is not depreciated• Depreciation is the allocation of the cost of the asset to expense over its useful life• On balance sheet, depreciable assets are carried at their cost (or fair value) less accumulated depreciation (accumulated depreciation is the sum of all depreciation expense for the asset)28
  • 29. Activity 3.3 • The following is an extract from the balance sheet: Balance Sheet (extract) $000 $000 Land at independent valuation 5,860 Buildings at fair valuation 3,790 Less Accumulated Depreciation 1,270 2,520 Plant and Equipment at cost 9,460 Less Accumulated Depreciation 5,510 3,950 Total Property, Plant and Equipment 12,330 • As a user of the balance sheet, what does the $12,330 total property, plant and equipment asset value mean to you?29
  • 30. Activity 3.4 • From the following account balances of Daisy Pty Ltd as at 30 September 2011, prepare a balance sheet in both the T- format and the narrative format: Accounts receivable (net) 25,000 Cash at Bank $50,000 Equipment 6,000 Inventory 20,000 Land 25,000 Loan Payable (due in 2020) 5,000 Retained Earnings 96,000 Share Capital 20,000 Tax Payable 5,00030
  • 31. POTENTIAL LIMITATIONS OF THE BALANCE SHEET1. Shows asset, liability and equity values at a particular point in time and may not be representative of other points in time2. The entity’s value is not reflected due to: – Items that generate future benefits or involve future sacrifices and cannot be measured reliably in dollars are not shown – The historical nature (or combinations of cost and fair values) of the balance sheet31
  • 32. POTENTIAL LIMITATIONS OF THE BALANCE SHEET continued3. Preparing a balance sheet involves: – management choices – judgements – estimations32
  • 33. Summary• The balance sheet reports an entity’s financial position at a point in time• A balance sheet may be presented in a narrative or T-format• Asset and liabilities are classified into current and non-current to provide for useful information for decision-making• Different ways are used to measure different assets and liabilities on the balance sheet33
  • 34. Homework Questions• The following homework questions should be completed from the textbook before class in week 4: Chapter 5 Comprehension Questions 5.2, 5.3, 5.7 page 187 Exercises 5.17, 5.18, 5.24 parts a to d, 5.11 pages 192-193 Problem 5.34 page 19534

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