Slide_Chapter 3.pdf BALANCE SHEET UFM GOOD

Chapter 3
Balance Sheet
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duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 3, Slide #2
• “Statement of Financial Position”
• Dated as of a specific date
• Format
– Account (side by side)
– Report (assets at top and liabilities and stockholders’ equity at
bottom of statement) dominate in the U.S.
Stockholders'
Assets = Liabilities +
Equity
The Balance Sheet

Chapter 3, Slide #3
Balance Sheet – Report Form
Current assets $200,826
Plant and equipment 60,995
Goodwill an other assets 123,618
Total assets $385,439
Current liabilities $83,864
Long-term liabilities 171,700
Total liabilities 255,564
Noncontrolling interest 3,952
Total shareholders' equity 125,923
Total liabilities and stockholders' equity $385,439
LIABILITIES and STOCKHOLDERS' EQUITY
Quarker Chemical Corporation
Balance Sheet (In Thousands)
December 31, 20XX
ASSETS

Chapter 3, Slide #4
• Probable future economic benefits obtained
or controlled by an entity as a result of past
transactions or events
– Current Assets -operating cycle or one year which
ever is longer to convert or conserve cash.
– Long-Term (noncurrent) assets – take longer than
one year or operating cycle to convert or conserve
cash.
Assets

Chapter 3, Slide #5
• Cash and assets that will be converted into
cash during the operating cycle or within a
year, whichever is longer
• Presented in order of liquidity
Current Assets

Chapter 3, Slide #6
• Cash
– Negotiable checks, unrestricted balance in
checking accounts, savings accounts
• Marketable Securities
– Debt or equity securities
– Carried at fair value
– Intention to convert into cash during the current
period
Current Assets (cont’d)

Chapter 3, Slide #7
• Accounts Receivable
– Amounts due from sales or services
– Carried at net realizable value (net of allowances)
– All allowances are presented in on allowance
account
• Other receivables due from nontrade sources

Chapter 3, Slide #8
• Inventories
– Carried at lower of cost or market
– Categories
• Merchandise on hand- Retail or wholesale firms
• Raw materials
• Work in process
• Finished goods
Manufacturer

Chapter 3, Slide #9
• Prepaids
– Expenditures made in advance of the use of the
service or goods.
– Examples
• Insurance
• Advertising

Chapter 3, Slide #10
• Land
– Carried at acquisition cost
– Not subject to depreciation
– Natural resources are depleted
• Buildings
– Cost plus permanent improvements
– Depreciated ( expensed ) over the estimated useful
life
Long-Term Assets: Tangible

• Machinery
– Acquisition cost plus costs of delivery, installation,
and permanent improvements
– Depreciated over the useful life
• Construction in Progress
– Assets under construction
– Transferred to permanent asset account upon
completion
Long-Term Assets: Tangible (cont’d)

• Accumulated Depreciation
– Carries the to-date depreciation of plant assets
– Factors used in depreciation calculation
• Asset cost
• Length of the life of the asset
• Estimated salvage (residual) value of asset when retired
– Depreciation methods
– Straight Line – Declining Balance
– Sum-of-the-Years’-Digits – Units of Production
• Balance sheet presentation
Cost of the asset
– Accumulated depreciation
= Net book value
Long-Term Assets: Tangible (cont’d)

Depreciation: Straight-Line Method
Cost - Salvage Value
= Annual Depreciation
Estimated Life
10,000 - 2,000
= $1,600
5 years
Cost............................. $10,000 Estimated salvage.......... $2,000
Estimated life.............. 5 years
Year
Deprec.
for the
Year
Accumulated
Depreciation Asset Cost
Book
Value
1 $1,600 $1,600 $10,000 $8,400
2 1,600 3,200 10,000 6,800
3 1,600 4,800 10,000 5,200
4 1,600 6,400 10,000 3,600
5 1,600 8,000 10,000 2,000
The salvage value is not
depreciated and it equals
book value at end of useful
life.

Depreciation: Declining-Balance Method
1
2 = double the straight-line rate
Estimated Life
1
2 Book Value at Beginning of Year = Annual Depreciation
5

 
Year
Asset
Cost
Beginning
Accum.
Dep.
Beginning
Book Value
Deprec. for
the Year
Ending
Book
Value
1 $10,000 $0 $10,000 $4,000 $6,000
2 10,000 4,000 6,000 2,400 3,600
3 10,000 6,400 3,600 1,440 2,160
4 10,000 7,840 2,160 160 2,000
5 10,000 8,000 2,000 - 2,000
Salvage value is not
used in the
depreciation formula
but depreciation
ends when the book
value is equal to the
salvage value.
Double the straight-line
rate is the maximum rate

Depreciation:
Sum-of-the-Years’-Digits Method
( )
( )
( )
Number of Remaining Years
Cost - Salvage = Annual Depreciation
Sum of Digits of Estimated Life
5
10,000 - 2,000 = $2,666.67
1+2+3+4+5


Year
Cost
Minus
Salvage Fraction
Deprec. for
the Year
Ending
Accum.
Dep.
Ending
Book
Value
1 $8,000 5/15 $2,666.67 2,666.67
$ 7,333.33
$
2 8,000 4/15 2,133.33 4,800.00 5,200.00
3 8,000 3/15 1,600.00 6,400.00 3,600.00
4 8,000 2/15 1,066.67 7,466.67 2,533.33
5 8,000 1/15 533.33 8,000.00 2,000.00

Depreciation:
Units-of-Production Method
Cost - Salvage Value
= Per Unit Depreciation
Estimated Life in Capacity
10,000 - 2,000
= $0.50
16,000 hours
Estimated total hours..... 16,000
• Actual Hours of Operation × Rate = Depreciation
• Asset is depreciated until book value equals
salvage value

Long-Term Assets: Leases
• Capital lease
– In-substance ownership
– Recorded as an long term asset net of amortization
– Operating lease if not a Capital lease
Not recorded as asset and lease payments are
expensed.

• Debt or equity securities
– Held to maintain business relationship or to
exercise control
• Debt classification
– Held-to-maturity carried at amortized cost
– Available-for-sale carried at fair value
Long-Term Assets: Investments

Long-Term Assets: Investments (cont’d)
• Equity securities
– Carried at fair value which have 3 levels for input:
1. Level 1: Quoted price for identical item in
active market.
2. Adjusted quoted price of similar asset.
3. Present value of expected cash flows
– Exception: with the ability to exercise significant
influence the equity method is used: cost is
adjusted for the proportionate share of the rise/fall
in the retained profits of the subsidiary (investee)

• Goodwill
– Purchase of a business where price paid exceeds
the fair value of net assets
– U.S. GAAP: not amortized; test annually for
impairment
• Patents
– 20 years
– Amortized over shorter of legal or useful life
• Trademarks
– Indefinite legal life
– Not amortized; test annually for impairment
Long-Term Assets: Intangibles (nonphysical
assets)

Long-Term Assets: Intangibles (cont’d)
• Franchises
– Life based on contract
– Amortize over shorter of legal or useful life
• Copyrights
– Life of the creator plus 70 years
– Amortize over shorter of legal or useful life

• Probable future sacrifices of economic
benefits arising from present obligations of a
particular entity to transfer assets or provide
services to other entities in the futures as a
result of past transactions or events
– Current Liabilities
– Long-Term Liabilities
Liabilities

Current Liabilities
• Obligations whose liquidation is reasonably
expected to
• Require the use of
– Existing current assets
– Creation of other current liabilities
• Within one year or the operating cycle,
whichever is longer

Current Liabilities (cont’d)
• Payables
– Short-term obligations created by the acquisition of
goods or services
• Unearned Income
– Payments collected in advance of the performance
of services or delivery of goods
• Other current liabilities
– As circumstances warrant

Long-Term Liabilities
• Due in a period beyond one year or operating
cycle
• Related to
– Financing arrangements
– Operational obligations

Long-Term Liabilities:
Financing Arrangements
• Notes Payable
– Secured by property: Mortgage notes
• Credit Agreements
– Ready lines of credit that may require a
compensating balance
– Not a liability until funds are drawn

Financing Arrangements (cont’d)
• Bonds Payable
– Sold at par, premium, or discount
– Premium or discount is amortized into interest
expense
– Bond carrying value is amortized to par value
– Convertible bonds can be converted into common
stock
– Conversion feature enhances bond selling price

Bonds at Par, Premium, or Discount
Bond
Contractual
Interest Rate 8%
6%
8%
10%
Premium
Par
(Face Value)
Discount
Market Interest
Rate
Bonds
Sold at

Operational Obligations
• Deferred Taxes
– Difference between accounting and tax methods
– Difference in the timing of recognizing revenue and
expense for accounting and tax purposes
• Warranty Obligations
– Estimated; arise from offering product warranties
– Estimated to achieve matching of sales revenue
and associated expense of warranty

Long-Term Liabilities: Operational
Obligations (cont’d)
• Noncontrolling Interest (was minority interest)
– Reported on consolidated financial statements as
equity, but separate from parents equity
– Represents the interest in the equity of a partially-
held subsidiary by the nonmajority owners
– Analysis can be twice if material-once as a liability
(conservative) and then as equity.
• Other Noncurrent Liabilities
– As circumstances warrant
• Redeemable Preferred Stock
– Excluded from stockholders’ equity
– For analysis, treat as a liability

• The residual ownership interest in the assets of
an entity that remains after deducting its
liabilities
– Paid-in Capital
– Retained Earnings
Stockholders’ Equity

Stockholders’ Equity: Paid-in Capital
• Par value
– In some states, referred to as “stated value”
– Considered “legal capital” by many states
– Established by the articles of incorporation
– Usually a minimal value
• No-par stock

Stockholders’ Equity:
Paid-in Capital (cont’d)
• Additional paid-in capital
– Issue price in excess of par (stated) value
– Other sources
• Treasury stock transactions
• Stock dividend transactions
• Donated capital

• Common Stock
– Shareholder ownership
– Voting rights
• Election of board of directors
• Major corporate decisions
– Liquidation rights secondary to
• Creditors
• Preferred stock

• Preferred Stock
– Does not normally convey voting rights
– May carry any or all of these features:
• Preference as to dividends
• Accumulation of dividends
• Participation in dividend beyond stated dividend rate
• Convertibility into common stock at holder’s discretion
• Preference in liquidation secondary to creditors
• Callable at issuer discretion
• Redemption at future maturity value
• Donated Capital
– Donated by outside entities
– Shareholder surrender of stock

Retained Earnings
• Undistributed earnings of the corporation
– Net income for all prior periods
– Less dividends declared to shareholders for all prior
periods

Stockholders’ Equity: Other
• Quasi-Reorganization
– Eliminates a deficit balance of retained earnings
– Retained earnings are dated for 5-10 years
• Accumulated Other Comprehensive Income
- Represents retained earnings for other
comprehensive income as a separate component on
the face of the balance sheet.

Stockholders’ Equity: Other (cont’d)
• Employee Stock Ownership Plans (ESOPs)
– A qualified pension plan
– Tax benefits for the employer and employee
– Unearned compensation reduces stockholders’
equity
• Treasury Stock
– Stock purchased and held by the issuing
corporation
– Recording and disclosure
• Record at par value; deduct from paid-in capital
• Record at cost; deduct from total stockholders’ equity

• Reconciles the beginning and ending balances
of all components of stockholders’ equity
• Account changes indicate
– Issuance of stock: paid-in capital increase
– Acquisition of treasury stock: treasury stock
increase
– Net income: retained earnings increase
– Dividends: retained earnings decrease
– Changes in accumulated other comprehensive
income.
Statement of Stockholders’ Equity

• Financial analysis is complicated by
– Many assets recorded at cost rather than fair
(replacement) value
– Varying valuation methods
• Within a firm from item to item
• Within an industry from company to company
– Not all items of value are listed as assets
– Certain contingent liabilities may be excluded
Balance Sheet Presentation Issues

IFRS Balance Sheet Format
• Asset section=Usually noncurrent assets are
presented first, followed by current assets.
• Liabilities and Owner’s Equity section=Capital
and reserves are presented first followed by
noncurrent liabilities and then current
liabilities.
– Reserve section would not be part of U.S. GAAP.

Slide_Chapter 3.pdf BALANCE SHEET UFM GOOD

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