Summary Notes: A2--Balance Sheet 1 The Balance Sheet (The Statement of Financial Position) records information on: Assets—the value of things that are owned Liabilities—the value of things that are owed The balance sheet tells us what the company is worth on a particular date (assuming we do a good job valuing assets and liabilities). The Accounting Equation always holds: Liabilities + Owners’ Equity = Assets Balance sheet example (thousands): J&M, Inc. BALANCE SHEET December 31 2015 2014 Changes Assets Current assets: Cash and cash equivalents Short-term marketable sec. Accounts receivable Inventory Prepaid expenses Deferred charges Total current assets $ 8,500 3,000 23,700 37,700 2,000 2,500 77,400 $ 6,100 5,000 19,500 39,800 1,500 3,000 74,900 + $2,400 – 2,000 + 4,200 – 2,100 500 – 500 + 2,500 Long-term Assets: Plant and equipment Less accumulated depreciation Total assets 154,000 (70,000) $161,400 145,000 (50,000) $169,900 + 9,000 + 20,000 – 8,500 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable Wages payable Accrued taxes Total current liabilities 10,000 16,000 2,000 28,000 26,000 15,000 3,500 44,500 – 16,000 + 1,000 – 1,500 – 16,500 Other liabilities Long-term debt Total liabilities 30,000 $58,000 32,000 $76,500 – 2,000 – 18,500 Shareholders’ equity Preferred stock, 6%, $100 par value Common stock, $4 par value (10,000 shares) Additional paid-in capital Retained earnings Total owners’ equity Total liabilities and equity 10,000 40,000 11,000 42,400 103,400 $161,400 10,000 40,000 11,000 32,400 93,400 $169,900 0 0 0 + 10,000 + 10,000 – 8,500 Notes about Assets: • Assets are arranged in order of liquidity--cash is listed first Summary Notes: A2--Balance Sheet 2 o Liquidity = easy to convert to cash ($) • Current assets = convertible to cash within a year o Firms with good LT assets but lack of cash have a “cash-flow” problem • Short-term marketable securities--bonds that can be easily sold-like US govt. debt. • Accounts receivable—owed to the firm by customers (30- or 45-day accounts receivable) • Inventory--$ value invested in raw materials, work in process and finished goods o Sometimes tricky to value--Last year’s unsold holiday sweaters? Gold stock of a jeweler? • Prepaid expenses (e.g.: insurance policy or rent) • Deferred charges (prepaid expenses for intangible asset like goodwill or startup costs in the pre- operating period). • Long-term Assets = harder to convert to cash o Purchase price of plant and equipment • Depreciation—With exception of land, an allowance is made for the “using up” of assets • Total Assets = Current + LT Assets Notes about Liabilities: • Current liabilities must be paid in the next year o Pay suppliers for raw.

1. Summary Notes: A2--Balance Sheet
1
The Balance Sheet (The Statement of Financial Position)
records information on:
Assets—the value of things that are owned
Liabilities—the value of things that are owed
The balance sheet tells us what the company is worth on a
particular date (assuming we do a good job
valuing assets and liabilities).
The Accounting Equation always holds:
Liabilities + Owners’ Equity = Assets
Balance sheet example (thousands):
J&M, Inc. BALANCE SHEET December 31
2015 2014 Changes
Assets
Current assets:
Cash and cash equivalents
Short-term marketable sec.
Accounts receivable
Inventory
Prepaid expenses
Deferred charges
Total current assets

2. $ 8,500
3,000
23,700
37,700
2,000
2,500
77,400
$ 6,100
5,000
19,500
39,800
1,500
3,000
74,900
+ $2,400
– 2,000
+ 4,200
– 2,100
500
– 500
+ 2,500
Long-term Assets:
Plant and equipment
Less accumulated depreciation
Total assets
154,000
(70,000)

3. $161,400
145,000
(50,000)
$169,900
+ 9,000
+ 20,000
– 8,500
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Wages payable
Accrued taxes
Total current liabilities
10,000
16,000
2,000
28,000
26,000
15,000
3,500
44,500
– 16,000
+ 1,000
– 1,500
– 16,500

4. Other liabilities
Long-term debt
Total liabilities
30,000
$58,000
32,000
$76,500
– 2,000
– 18,500
Shareholders’ equity
Preferred stock, 6%, $100 par value
Common stock, $4 par value (10,000 shares)
Additional paid-in capital
Retained earnings
Total owners’ equity
Total liabilities and equity
10,000
40,000
11,000
42,400
103,400
$161,400

5. 10,000
40,000
11,000
32,400
93,400
$169,900
0
0
0
+ 10,000
+ 10,000
– 8,500
Notes about Assets:
• Assets are arranged in order of liquidity--cash is listed first
Summary Notes: A2--Balance Sheet
2
o Liquidity = easy to convert to cash ($)
• Current assets = convertible to cash within a year
o Firms with good LT assets but lack of cash have a “cash-flow”
problem
• Short-term marketable securities--bonds that can be easily
sold-like US govt. debt.

6. • Accounts receivable—owed to the firm by customers (30- or
45-day accounts receivable)
• Inventory--$ value invested in raw materials, work in process
and finished goods
o Sometimes tricky to value--Last year’s unsold holiday
sweaters? Gold stock of a jeweler?
• Prepaid expenses (e.g.: insurance policy or rent)
• Deferred charges (prepaid expenses for intangible asset like
goodwill or startup costs in the pre-
operating period).
• Long-term Assets = harder to convert to cash
o Purchase price of plant and equipment
• Depreciation—With exception of land, an allowance is made
for the “using up” of assets
• Total Assets = Current + LT Assets
Notes about Liabilities:
• Current liabilities must be paid in the next year
o Pay suppliers for raw materials, workers their wages, and
government assessed taxes
• Long term liabilities—not payable within a year
o Bonds, mortgages and long-term notes
Working capital = current assets – current liabilities
• In 2015, working capital = $77,400,000 - $28,000,000 =
$49,400,000
• This company has enough short-term assets to cover its short-
term debts

7. Notes about shareholders’ equity:
• Common stock—measured at par value
o Par value--no relation to market value of a stock/set very low
(e.g.: 10c/share)
• Preferred stock—fixed dividend, paid back ahead of common
stock owners if company fails (but
behind bondholders).
• Paid-in capital—money received from sale of shares to public
over and above the par value.
o Example: A company sells 1,000 shares for $50 a share. The
par value is $0.10/share.
Paid in capital = ($50.00 - $0.10) x 1,000 = $49,900.
• Treasury stock—Unsold shares retained by company.
Sometimes corporations also buy back
their own stock, which then becomes treasury stock.
• Retained earnings = Cumulative net income since inception –
total dividends paid to
shareholders (See Summary Notes A3)
Notice: Accounting equation satisfied in the sample balance
sheet for 2015:
• Liabilities + Shareholder Equity = Assets = $161,400,000
Book Value of company = Total equity/# of shareholders (from
balance sheet)
= $103,400,000/10,000,000 = $10.34

8. • Book value doesn’t have to be reflected in share price quoted
on stock exchange today:
o Stock price higher than book value when investors anticipate
future growth
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Provided specific examples of how the benefits of
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A - 4 - Mastery
Submitted a properly formatted formal email; used a
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