The document discusses balance sheets and their components. It begins by explaining that a balance sheet provides a snapshot of everything a company owns (assets) and owes (liabilities and equity), where assets must equal liabilities plus equity. It then discusses the key components of a balance sheet - current and non-current assets, like cash, inventory, and property/equipment; current and non-current liabilities, like accounts payable and debt; and equity, including retained earnings. It also covers how companies allocate capital between investing in their business, acquisitions, debt repayment, and returning value to shareholders. Effective capital allocation is positioned as the CEO's most important job.

1. Accounting: Balance Sheet
By Cameron Fen and Jeffery Cherkin

2. Balance Sheet
• Snapshot of everything the company owns
and owes
Assets = Liabilities + Equity

3. • Assets are the total amount a firm owns
• Liabilities are the total debts and obligations
owed
• Equity is the net assets the owners of the
company have a claim to (ie the amount that
doesn’t belong to the liabilities holders)

4. AAPL Balance Sheet

5. Assets
• Assets are divided into
Current Assets and
Non-Current Assets
• Current Assets can be
turned into cash in less
than a year. Non-current
cannot.

6. Current Assets
• Cash is self-explanatory
• Trading Assets are short term investments that
the company is actively trading in and out of
• Accounts receivables are short term IOU’s
where the company already provides the
service or product and is yet to be paid

7. Inventories
• If a company is selling things, like phones, the
company needs to keep a stock of them so
customers can buy
• LIFO, FIFO, or Weighted Average inventory
accounting methods

8. Goodwill
• When a company buys another company, often
they will pay more for the company than the
value of the company’s equity (remember they
pay for the assets but have to assume
responsibility for the liabilities)
• The amount paid above and beyond net asset
value (equity) is capitalized as goodwill
• If the value of the acquired company goes down,
(i.e. the company does worse than anticipated)
goodwill has to be written off
• Goodwill is an intangible asset

9. Property Plant and Equipment
• When you own stuff often time when you use
it a lot or over a long period of time it wears
out and is worth less
– Remember: PPE is initially valued at the cost to
acquire these assets
• We try to estimate the reduction in value of
these assets due to getting older or wear and
tear by depreciating the assets

10. Capital Expenditures
• Funds used by a company to acquire or upgrade physical
assets
- property, industrial buildings or equipment.
This type of outlay is made by companies to maintain or increase
the scope of their operations. These expenditures can include
everything from repairing a roof to building a brand new factory.

11. Liabilities
• Liabilities are separated into current liabilities and
non-current liabilities
– Same as current and non-current assets
• Important liabilities accounts include debt, accounts
payable, accrued expenses, unearned revenue, and
deferred taxes

12. Accounts Payable & Accrued expenses
• Like accounts receivable except these are the
IOU’s that the company owes to others
– Perhaps the company got a shipment of iPhones and
pays for the shipment monthly
• Accrued expenses are expenses for services the
company has already used but has yet to pay for
– For example using electricity and then paying for it
later after the month is over
• Accounts payable and Accrued expenses are very
similar

13. Unearned Revenue
• Unearned Revenue is revenue that has been
collected but the services have not been provided
– Example: Subscriptions
– Since the company hasn’t provided the services which
will lead to expenses the revenue cannot be
recognized yet
– Thus since the company has already collected the
revenue in the form of cash or accounts receivable,
the company has to balance the increase in assets
with an increase in liabilities (because the company
still owes the service)

14. Debt
• This is loans that the company gets from the
bank or from selling bonds
• Separated into short and long term debt
• The interest the company pays is treated as an
expense (*pre-tax)
• Principle on the debt is treated as a liability

15. Equity
• This is the amount of assets that belong to the
owners of the company
• Also known as the net asset value

16. Retained Earnings
• Retained earnings measure the earnings the
company reinvests in itself
– If a company makes one dollar in profit, equity
holder should theoretically be one dollar richer
and if the company does not pay the money out
to stockholders, retained earnings and therefore
equity goes up by one
• Dividends and stock buybacks make retained
earnings go down

17. Capital Allocation
Uses of Cash/Earnings
• R&D
– Invest in current business
• Acquisitions
• Pay down debt
• Return to Shareholders
– Pay Dividend
– Stock Buyback

18. Buybacks
• When a share of a stock is bought back it is no longer on
the market and the total number of shares outstanding
goes down
– Current stockholders own a slightly larger percentage of the
company
• Suppose the stock is overvalued
– The intrinsic value of a share of the company is $1 and the stock
costs two dollars
– If the company buys back shares it is distributing $1 of intrinsic
value to the rest of the shareholders for $2 in cash, destroying
value for shareholders
• Undervalued the opposite is the case
– It costs the company less to distribute more

19. Management is the Difference Maker

21. The Outsider CEOs Produced returns over 20x S&P 500 and 7x peers

22. The Outsiders’ Principles
 “Capital Allocation is CEO’s most important job”
 “What counts in the long run is increase per-share value, not
overall growth or size”
 “Cash flow, not reported earnings, determines long-term
value”
 “Sometimes, the best investment opportunity is your own
stock”
 “With acquisitions, patience is a virtue”
 “Independent thinking is essential to long-term success, and
interactions with outside advisers (Wall Street, press, etc.) can
be distracting”