This document discusses the key components of a balance sheet including assets, liabilities, and owner's equity. Assets are defined as economic resources owned by a business and include items like cash, inventory, and property. Liabilities represent obligations the business owes, such as accounts payable or bonds. Owner's equity is the residual claim on assets by shareholders. The balance sheet equation shows that assets must equal liabilities plus owner's equity. Various types of each component are also described.

1. The Balance Sheet
~ Fundamentals and arguments~
S2142016 Tomohiro Furukawa

2. Contents
 Introduction
 Assets
 Liabilities
 Owner’s Equity
 Financial Instruments
 Classification
 Conclusion

3. Introduction
Question
A balance sheet is a of a
business’s financial .

4. Introduction
Answer
“A Balance Sheet” is a snapshot of a
business’s financial position.

5. Introduction
Assets = Liabilities + Owner’s Equity

6. Introduction

7. Assets
Definition of Assets
“Economic resources of an enterprise that are
recognized and measured in conformity of GAAP”

8. Recognition of Assets
 Historical Acquisition Cost
 Book Value
 Replacement Cost
 Selling Prices
 Net Realizable Value
 Net Realizable Value less Normal Markups
Major attributes to measure assets

9. Recognition of Assets
Historical
Acquisition
Costs
Market
Value
Adjustment

10. Types of Assets
 Receivables
 Investment not subject to equity accounting
 Inventories
 Depreciation / Depletion
 Nonmonetary exchanges of similar assets
 Intangible Assets
 Deferred Charges

11. Arguments of Assets
 Executory Contracts
 FIFO, LIFO, Weight Average
 Depreciation / Depletion / Amortization
 Deferred Charges

12. Liabilities
Definition of Liabilities
“Economic obligations of an enterprise that are
recognized and measured in conformity with GAAP”

13. Economic Obligations
 Contractual Liabilities
 Constructive Obligations
 Equitable Obligations
 Contingent Liabilities
 Deferred Credits

14. Types of Liabilities
 Notes Payable
 Bonds Payable
 Convertible Bonds
 Debt with stock warrants
 Deferred Credits

15. Types of Liabilities

16. Recognition of Liabilities
 Amounts established in the transaction
 Amount of future payments
 Face value
 Present value calculation
Major attributes to measure liabilities

17. Measurement of Liabilities
Current Liabilities Non-current Liabilities
• Measured at face value
• No present value adjustments
< e.g. >
- Accounts Payable
• Measured at the present value
• Discounted by rate of interest
< e.g. >
- Bonds Payable

18. Arguments of Liabilities
 Convertible Bonds

19. Convertible Bonds
Two approaches for convertible bonds
1. Treat as debt until conversion
2. Segregate into amount of bond and the price paid
for conversion privilege

20. Owner’s Equity
Definition of Owner’s Equity
“The stockholders’ residual interest in the net assets of
the firm”

21. Components of Equity
1. Residual interest of the net asset of the firm
2. Contributed capital or retained earnings
3. Unrealized gain or losses

22. Equity Transactions
Capital transactions
The direct contributions or withdrawals of
assets by owners
Income-related transactions
Income statement transactions and prior
period adjustments

23. Arguments of Owner’s Equity
 Retained Earnings
 Stock Options (ESOPs)
 Treasury Stock
 Stock Dividends

24. Financial Instruments
 ‘’Contracts involving a financial asset of one entity
and a financial liability (or equity) of another entity”
 Other instruments are highly complex
 Earning management
 Hedge the risks
 Favorable-looking balance sheet

25. Classification
 Based on liquidity
 Current / Non-current
 Monetary / Non-monetary
Assets Liabilities
• Future benefits
• Uncertainty
• Detailed reporting
• 5 concepts of liabilities

26. Conclusion
 Classification and understanding of economic
events are fundamental for the accounting area.
 Accounting policy and practice are pragmatic
 The lower-of-cost-or-market rule

27. References
 AccountingCoach. (n.d.). Lower of Cost or Market (LCM) |
Explanation |. Retrieved September 12, 2015, from
http://www.accountingcoach.com/lower-of-cost-or-
market/explanation
 Investpedia. (n.d.). Treasury Stock Definition.
Retrieved September 12, 2015, from
http://www.investopedia.com/terms/t/treasurystock.asp
 Lawrence, G. J. (2011). Interest rates and bond valuation. In
Principles of Managerial Finance (6th ed., p. 269). Australia:
Pearson Australia.
 Leung, P., Coram, P., Cooper, J, B., & Richardson, P. (2015).
Glossary. In Modern Auditing & Assurance Service (6th ed.,
p.804). Milton, Qld: John Wiley & Sons Australia, Ltd.