The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value.
Resources such as employee skills and reputation are not recorded in the balance sheet.
The balance sheet describes many of the resources a company has for generating future cash flows .
It provides liquidity information useful in assessing a company’s ability to pay its current obligations.
It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.
Reports a company’s financial position on a particular date.
Classifications Resources (Assets) Claims against resources (Liabilities) Remaining claims accruing to owners (Shareholders’ Equity)
Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Current Assets (pages 116-118)
Will be converted to cash or consumed within one year or the operating cycle, whichever is longer . Current Assets Cash equivalents include certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills.
Operating Cycle of a Typical Manufacturing Company (page 117) Use cash to acquire raw materials Convert raw materials to finished product Deliver product to customer Collect cash from customer 1 2 3 4
Noncurrent Assets (page 119)
Include long-term prepaid expenses and any noncurrent assets not falling in one of the other classifications .
Not used in business operations
debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes.
Property, Plant, and Equipment
Are tangible, long-lived, and used in the business operations
Include land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells.
Reported at original cost less accumulated depreciation (or depletion for natural resources).
Used in the business operations - have no physical substance (rights to …)
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events.
Current Liabilities (page 120)
Current Maturities of Long-Term Debt
Obligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle, whichever is longer. Current Liabilities
Long-term Liabilities (page 121)
Obligations that will not be satisfied within one year or operating cycle, whichever is longer. Long-Term Liabilities
Shareholders’ equity is the residual interest in the assets of an entity that remains after deducting liabilities.
U. S. GAAP vs. IFRS (page 122)
Does not specify a minimum list of items to be presented in the balance sheet.
Some U.S. companies use the title :Statement of financial position”
Presents current assets and liabilities before noncurrent assets and liabilities.
Specifies a minimum list of items to be presented in the balance sheet.
Statement title = Statement of financial position.
Does not prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first.
There are more similarities than differences in balance sheets prepared according to U.S. GAAP and those prepared applying IFRS.
British Airways Balance Sheet At March 31, 2009
British Airways Balance Sheet At March 31, 2009
U. S. GAAP vs. IFRS The FASB and IASB are working together on the Financial Statement Presentation project to establish a common standard for presenting information in the financial statements. Each of the financial statements will include classifications by operating, investing, and financing activities, as well as income taxes, discontinued operations, and equity (if needed).
Disclosure Notes (pages 125-127) Summary of Significant Accounting Policies Conveys valuable information about the company’s choices from among various alternative accounting methods. Subsequent Events A significant development that occurs after the company’s fiscal year-end but before the financial statements are issued or available to be issued. Noteworthy Events and Transactions Transactions or events that are potentially important to evaluating a company’s financial statements, e.g., related parties, errors and irregularities, and illegal acts.
Management’s Responsibilities (pages 128-129)
Preparing the financial statements and other information in the annual report.
Maintaining and assessing the company’s internal control procedures.
Auditors’ Report (pages 129-130) Expresses the auditors’ opinion as to the fairness of presentation of the financial statements in conformity with generally accepted accounting principles. Auditors’ reports must comply with specifications of the Public Companies Accounting Oversight Board (PCAOB).
Auditors’ Opinions Unqualified Issued when the financial statements present fairly the financial position, results of operations, and cash flows are in conformity with GAAP. Qualified Issued when there is an exception that is not of sufficient seriousness to invalidate the financial statements as a whole. Adverse Issued when the exceptions are so serious that a qualified opinion is not justified . Disclaimer Issued when insufficient information has been gathered to express an opinion .
Liquidity Ratios (pages 133-134) = Current ratio Current assets Current liabilities Measures a company’s ability to satisfy its short-term liabilities = Acid-test ratio Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities
Financing Ratios (page 135) = Debt to equity ratio Total liabilities Shareholders’ equity Indicates the extent of reliance on creditors, rather than owners, in providing resources = Times interest earned ratio Net income + Interest expense + Income taxes Interest expense Indicates the margin of safety provided to creditors
Appendix 3: Reporting by Operating Segment Reportable Operating Segment Characteristics Engages in business activities from which it may earn revenues and incur expenses. Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance. Discrete financial information is available.
Segment Reporting (pages 140-142) Reporting by Geographic Area GAAP requires an enterprise to report certain geographic information unless it is impracticable to do so. Information About Major Customers Revenues from customers generating 10% or more of the revenue of an enterprise must be disclosed.