The balance sheet and financial disclosures

1
The balance sheet and financial disclosures

• Chapter 3

2
The Balance Sheet
The purpose of the balance sheet is to report a
companys financial position on a particular date.

• Limitations
• The balance sheet does not portray the market
  value of the entity as a going concern nor its
  liquidation value.
• Resources such as employee skills and reputation
  are not recorded in the balance sheet.

• Usefulness
• The balance sheet describes many of the resources
  a company has available for generating future
  cash flows.
• It provides liquidity information useful in
  assessing a companys ability to pay its current
  obligations.
• It provides long-term solvency information
  relating to the riskiness of a company with
  regard to the amount of liabilities in its
  capital structure.

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Balance Sheet
Claims against resources (Liabilities)
Remaining claims accruing to owners (Owners
Equity)
Resources (Assets)
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Assets are probable future economic benefits
obtained or controlled by a particular entity as
a result of past transactions or events.
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Current Assets
Cash Cash Equivalents Short-term
Investments Receivables Inventories Prepayments
Current Assets
Will be converted to cash or consumed within one
year or the operating cycle, whichever is longer.
Cash equivalents include certain negotiable items
such as commercial paper, money market funds, and
U.S. treasury bills.
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Current Assets
Cash Cash Equivalents Short-term
Investments Receivables Inventories Prepayments
Current Assets
Will be converted to cash or consumed within one
year or the operating cycle, whichever is longer.
Cash that is restricted for a special purpose and
not available for current operations should not
be classified as a current asset.
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Operating Cycle of a Typical Manufacturing Company
Use cash to acquire raw materials
1
Convert raw materials to finished product
2
Deliver product to customer
3
Collect cash from customer
4
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Noncurrent Assets
Investments and Funds Property, Plant,
Equipment Intangibles Other
Noncurrent Assets
Not expected to be converted to cash or consumed
within one year or the operating cycle, whichever
is longer
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Noncurrent Assets

• Other Assets
• Includes long-term prepaid expenses and any
  noncurrent assets not falling in one of the other
  classifications

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Liabilities are probable future sacrifices of
economic benefits arising from present
obligations of a particular entity to transfer
assets or provide services to other entities as a
result of past transactions or events.
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Current Liabilities
Accounts Payable Notes Payable Accrued
Liabilities Current Maturities of Long-Term Debt
Current Liabilities
Obligations expected to be satisfied through
current assets or creation of other current
liabilities within one year or the operating
cycle, whichever is longer
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Long-term Liabilities
Notes Payable Mortgages Bonds Payable Pension
Obligations Lease Obligations
Long-Term Liabilities
Obligations that will not be satisfied within one
year or operating cycle, whichever is longer
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Shareholders Equity is the residual interest in
the assets of an entity that remains after
deducting liabilities.
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Shareholders Equity
Capital Stock
Deferred Compensation
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income
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Disclosure Notes
Summary of Significant Accounting Policies
Conveys valuable information about the companys
choices from among various alternative accounting
methods.
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Management Discussion and Analysis
Provides a biased but informed perspective of a
companys operations, liquidity, and capital
resources.
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Managements Responsibilities

• Preparing the financial statements and other
  information in the annual report.
• Maintaining and assessing the companys internal
  control procedures.

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Auditors Report
Expresses the auditors opinion as to the
fairness of presentation of the financial
statements in conformity with generally accepted
accounting principles
Must comply with specifications of the AICPA and
the PCAOB
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Auditors Opinions
Unqualified
Issued when the financial statements present
fairly the financial position, results of
operations, and cash flows in conformity with GAAP
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Compensation of Directors Top Executives

• Proxy Statement Information
• Summary compensation table
• Table of options granted
• Table of options holdings

A proxy statement is sent each year to all
shareholders, usually in the same mailing with
the annual report.
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Using Financial Statement Information
Comparative Financial Statements
Allow financial statement users to compare
year-to-year financial position, results of
operations, and cash flows
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Liquidity Ratios
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Liquidity RatiosFederal Express
Current ratio
Acid-test ratio
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Financing Ratios
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Financing RatiosFederal Express
Debt to equity ratio
Times interest earned ratio
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End of Chapter 3