Ch. 7: The Balance Sheet

For: Dr. LandrumBy: James Esch

MNA 4325

What is a Balance Sheet?

A balance sheet is a snapshot of one point in time.

A balance sheet includes:• Assets• Liabilities• Equity

Assets = Liabilities + Equity

The Balance SheetCurrent Assets:Cash $ 30,000Accounts Receivable 90,000Inventory 100,000Total Current Assets 220,000

Property 80,000Total Assets $300,000

Current Liabilities:Payroll Taxes: $10,000Accounts Payable: 70,000Total Current Liabilities $80,000

Long-Term Liabilities:Loan payable to bank 20,000Total Long-Term Debt 20,000Total Liabilities $100,000

Equity = Total Assets – Total Liabilities

Total Assets $300,000- Total Liabilities 100,000 Equity: $200,000

An asset is anything that you own.

This includes:• Cash – whether it be in the bank or in your safe• Accounts Receivable – what others owe you• Inventory – vehicles, expensive machinery, computers• Prepaid Expenses – prepaid insurance, anything paid in advance• Property and Equipment – land & equipment less depreciation costs• Intangible Assets – cost of patent, net of accumulated amortization,

goodwill (special intangible asset)• Other Assets – for miscellaneous assets

Current Assets – composed of those assets that are cash, or will be converted into cash within the next 12 months.

What Are Assets?

Liabilities are anything that you owe.

This includes:• Financing by Suppliers (Accounts Payable) – when suppliers allow x

number of days before payment is expected• Accrued Expenses – Money owed, but not invoiced yet

• accrued wages – employee makes $400 per week and is paid on a monthly basis.

• Deferred Income – income that has been received but not yet earned (also called customer deposits and deferred credits)

• Income Taxes Payable and Deferred• Income Taxes Payable – states the amount of the checks that the

company soon will have to write to the IRS and state tax authorities (just a special type of account payable)• Deferred Income Taxes – the difference between GAAP income tax

and IRS income tax if it comes out as a liability

What Are Liabilities?

Working capital is the current assets less the current liabilities.

Finding the working capital:

Current assets $207,000Subtract current liabilities $156,788Excess of current assets over current liabilities $ 50,212

What is Working Capital?

Notes have different meanings...

On financial statements, notes consist of explanations the management of the company wants to put in them.

Notes payable are known as bonds… here is the difference between some commonly used terms:

• Loan – a transfer of an asset to some person with the expectation that it will be repaid

• Note (promissory note) – the written document that describes a loan and its terms (interest, repayment, etc…)

• Bond – one of a series of notes that are sold to investors

Notes to the Financial Statements

Why balance sheets are important to both the company and investors: •It is the fundamental report of a company’s possessions, debts, and capital invested.• Investors often use a company’s balance sheet to examine these key elements:

• If the firm meet its financial obligations• How much money has already been invested in the company• If the company is overly indebted• What kind of assets has the company purchased with its financing

• Balance sheets are harder to make misleading (legally)

http://www.ameritrade.com/educationv2/fhtml/learning/ubalsheets.fhtml

The Importance of the Balance Sheet

1. A balance sheet provides information to a reader that is not available from an income statement or operating report.True

2. Part of a balance sheet lists current assets, which are items that are cash or will turn into cash within 12 months.True

3. The balance sheet of a company provides an estimate of what its real estate and equipment would sell for at an auction.False, property and equipment are listed at their cost less depreciation

4. The interest that will be paid in the future on loans from banks is listed on the balance sheet as a liabilityFalse, future interest is not a liability until the future is present

Review Questions

5. A prepaid expense is an expense that will arise in the future and is therefore a liability.False, it ignores interest. It is suitable for comparing cash flows from various pieces of equipment, not to compare investment in equipment to interest-bearing investments like bonds, deposits, and certificates.

6. Goodwill is the value of steady, satisfied customers. It can be included on the balance sheet whenever management of a company wants to list it there.True

7. Accounts payable are actually loans made to a company by its suppliers.True

Review Questions cont…

1. Classify the following by making a check under the proper heading…

Case Study Questions

Current asset Noncurrent asset Current liability Long-term liability

Accounts payable X

Inventory X

Intangible assets X

Deferred income X

Loan due in 90 days X

Cash X

Accounts receivable X

Property & equipment X

2. When George, who built golf courses, bought his Automatic Sand-Trap Machine for $100,000, he paid $20,000 of his own money and borrowed $80,000 from the Easymoney Bank. He borrowed the money on January 1 of year 1 and was to repay it in annual payments of $16,000 principal plus interest (10%), due on December 31. He made all payments before the due date. Determine how this liability should be divided between current and long-term liability on George’s balance sheet at the end of the second year.

Case Study Questions cont…

Beginning balance of loan $80,000Subtract payments made 32,000

Balance 48,000Subtract current portion 16,000Long-term liability $32,000