BALANCE SHEET

1
BALANCE SHEET

• Accounting ASW
• Summer 2004

2
Assets Liabilities Owners Equity

• Net Worth
• Explains the components of net worth
• On the economic balance sheet, owners equity
  market capitalization

3
Reason for mis-valuation

• Accounting omits many assets
• Accounting mis-values many assets
• FASB/IASB know and do it intentionally

4
Asset Definition

• Probable net future cash inflow
• Currently right to it (often title)
• Past transaction provided right
• Future benefits reasonably quantifiable

5
Are these recognized as assets?

• Cash, accounts receivable and PPE?
• Yes, recognized as assets
• Intangibles
• - patents/R D,
• - trademarks/advertising
• - goodwill?
• Recognized only if purchased
  externally

6

• Executory contracts
• - situations in which contracts have been
  signed but neither party has acted
• - e.g., purchase contracts, rental
  agreements, etc.
• Generally not
• Employees
• Never

7
Asset Valuation

• Most assets are value based on historical cost
  (e.g., inventory, PPE, land)
• - Initially at acquisition cost
• - Inclusive of the cost of putting in
  place-- e.g., labor, taxes, transportation, etc.
• PPE is reduced by
• - depreciation of normal use
• - impairment if value falls below book

8

• Inventory reduced to lower of cost or market
• Accounts receivable are reduced for estimated bad
  debts
• A few assets are valued at fair market value
• - e.g., some debt and equity securities
  and financial instruments
• - increasingly common, especially with
  financial instruments
• - remains controversial

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Asset Classification (US)

• Current assetsone year (or operating cycle)
  until cash
• Noncurrent assetslonger term
• E.g., Strategic investments in other companies
  property, plant and equipment intangible assets
• Problem 2.11

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Liability Definition

• Probable net future cash (or service/goods
  outflow)
• Unavoidable obligation to pay it
• Created by past transaction or exchange
• Amount (and time) can be reasonably estimated

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Are these recognized as liabilities?

• Accounts payable, long-term debt?
• Yes, recognized as liabilities
• Contingencies and litigation?
• Rarely if probable and reasonably
  estimable
• Executory contracts?
• No?
• Employees?

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Liability Classification

• Current liabilities
• - due within a year (or operating cycle)
• - includes the current portion of long-
  term debt
• Noncurrent liabilitieslonger term
• - E.g., non-current long term debt weird
• liabilities like deferred taxes, pension
• liabilities, etc.

13
Liability Valuation

• Expected cash outflow for most current
  liabilities
• - e.g., accounts. payable, salaries
  payable, etc.
• - not worth the effort of discounting
• Discounted present value of future cash outflow
  for long-term debt (including current portion)
• - typically clear from amount received
• at issuance
• Problem 2.13

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Owners Equity

• Residual (assets - liabilities)

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Owners Equity Classification

• Contributed Capital
• Par value (shares outstanding times
  par value per share)--arbitrary
• Capital in excess of par (proceeds
  minus par value)
• Retained earnings (cumulative earnings net of
  dividends)
• Other--foreign currency translation etc.
• Problem 2.17

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Basic Journal Entries

• Debits on the left
• Credits on the right
• Assets increase with debits
• Liabilities increase with credits
• DebitsCredits implies
• AssetsLiabilities Owners Equity

17

• Buy inventory for cash
• Buy inventory on credit
• Issue stock for cash
• Pay off accounts payable
• Sell inventory at cost
• Problem 2.19

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Contra Accounts

• Accumulate reductions in accounts
• Often used to separate historical cost from book
  value
• Accumulated Depreciation
• - Contra-asset offsetting PPE at cost
• - Credit balance
• Allowed for Doubtful Accounts
• - Contra to accounts receivable