Slide_Chapter 3.pdf BALANCE SHEET UFM GOOD

PT TCDN CHAPTER 3

1. Chapter 3
Balance Sheet
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2. Chapter 3, Slide #2
•“Statement of Financial Position”
•Dated as of a specific date
•Format
–Account (side by side)
–Report (assets at top and liabilities and stockholders’ equity at
bottom of statement) dominate in the U.S.Stockholders'
Assets = Liabilities +
Equity
The Balance Sheet
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3. Chapter 3, Slide #3
Balance Sheet – Report Form Current assets $200,826
Plant and equipment 60,995
Goodwill an other assets 123,618
Total assets $385,439
Current liabilities $83,864
Long-term liabilities 171,700
Total liabilities 255,564
Noncontrolling interest 3,952
Total shareholders' equity 125,923
Total liabilities and stockholders' equity$385,439
LIABILITIES and STOCKHOLDERS' EQUITY
Quarker Chemical Corporation
Balance Sheet (In Thousands)
December 31, 20XX
ASSETS
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4. Chapter 3, Slide #4
•Probable future economic benefits obtained
or controlled by an entity as a result of past
transactions or events
–Current Assets -operating cycle or one year which
ever is longer to convert or conserve cash.
–Long-Term (noncurrent) assets – take longer than
one year or operating cycle to convert or conserve
cash.
Assets
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5. Chapter 3, Slide #5
•Cash and assets that will be converted into
cash during the operating cycle or within a
year, whichever is longer
•Presented in order of liquidity
Current Assets
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6. Chapter 3, Slide #6
•Cash
–Negotiable checks, unrestricted balance in
checking accounts, savings accounts
•Marketable Securities
–Debt or equity securities
–Carried at fair value
–Intention to convert into cash during the current
period
Current Assets (cont’d)
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7. Chapter 3, Slide #7
•Accounts Receivable
–Amounts due from sales or services
–Carried at net realizable value (net of allowances)
–All allowances are presented in on allowance
account
•Other receivables due from nontrade sources
Current Assets (cont’d)
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8. Chapter 3, Slide #8
•Inventories
–Carried at lower of cost or market
–Categories
•Merchandise on hand- Retail or wholesale firms
•Raw materials
•Work in process
•Finished goods
Manufacturer
Current Assets (cont’d)
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9. Chapter 3, Slide #9
•Prepaids
–Expenditures made in advance of the use of the
service or goods.
–Examples
•Insurance
•Advertising
Current Assets (cont’d)
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10. Chapter 3, Slide #10
•Land
–Carried at acquisition cost
–Not subject to depreciation
–Natural resources are depleted
•Buildings
–Cost plus permanent improvements
–Depreciated ( expensed ) over the estimated useful
life
Long-Term Assets: Tangible
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11. Chapter 3, Slide #11
•Machinery
–Acquisition cost plus costs of delivery, installation,
and permanent improvements
–Depreciated over the useful life
•Construction in Progress
–Assets under construction
–Transferred to permanent asset account upon
completion
Long-Term Assets: Tangible (cont’d)
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12. Chapter 3, Slide #12
•Accumulated Depreciation
–Carries the to-date depreciation of plant assets
–Factors used in depreciation calculation
•Asset cost
•Length of the life of the asset
•Estimated salvage (residual) value of asset when retired
–Depreciation methods
–Straight Line – Declining Balance
–Sum-of-the-Years’-Digits – Units of Production
•Balance sheet presentation
Cost of the asset
– Accumulated depreciation
= Net book value
Long-Term Assets: Tangible (cont’d)
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13. Chapter 3, Slide #13
Depreciation: Straight-Line Method Cost - Salvage Value
= Annual Depreciation
Estimated Life
10,000 - 2,000
= $1,600
5 years
Cost............................. $10,000 Estimated salvage.......... $2,000
Estimated life.............. 5 years Year
Deprec.
for the
Year
Accumulated
DepreciationAsset Cost
Book
Value
1 $1,600 $1,600 $10,000 $8,400
2 1,600 3,200 10,000 6,800
3 1,600 4,800 10,000 5,200
4 1,600 6,400 10,000 3,600
5 1,600 8,000 10,000 2,000
The salvage value is not
depreciated and it equals
book value at end of useful
life.
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14. Chapter 3, Slide #14
Depreciation: Declining-Balance Method1
2 = double the straight-line rate
Estimated Life
1
2 Book Value at Beginning of Year = Annual Depreciation
5

 Year
Asset
Cost
Beginning
Accum.
Dep.
Beginning
Book Value
Deprec. for
the Year
Ending
Book
Value
1$10,000 $0 $10,000 $4,000 $6,000
2 10,000 4,000 6,000 2,400 3,600
3 10,000 6,400 3,600 1,440 2,160
4 10,000 7,840 2,160 160 2,000
5 10,000 8,000 2,000 - 2,000
Salvage value is not
used in the
depreciation formula
but depreciation
ends when the book
value is equal to the
salvage value.
Cost............................. $10,000 Estimated salvage.......... $2,000
Estimated life.............. 5 years
Double the straight-line
rate is the maximum rate
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15. Chapter 3, Slide #15
Depreciation:
Sum-of-the-Years’-Digits Method
Cost............................. $10,000 Estimated salvage.......... $2,000
Estimated life.............. 5 years ( )
( )
( )
Number of Remaining Years
Cost - Salvage = Annual Depreciation
Sum of Digits of Estimated Life
5
10,000 - 2,000 = $2,666.67
1+2+3+4+5

 Year
Cost
Minus
SalvageFraction
Deprec. for
the Year
Ending
Accum.
Dep.
Ending
Book
Value
1 $8,000 5/15 $2,666.672,666.67$ 7,333.33$
2 8,000 4/15 2,133.33 4,800.00 5,200.00
3 8,000 3/15 1,600.00 6,400.00 3,600.00
4 8,000 2/15 1,066.67 7,466.67 2,533.33
5 8,000 1/15 533.33 8,000.00 2,000.00
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16. Chapter 3, Slide #16
Depreciation:
Units-of-Production MethodCost - Salvage Value
= Per Unit Depreciation
Estimated Life in Capacity
10,000 - 2,000
= $0.50
16,000 hours
Cost............................. $10,000 Estimated salvage.......... $2,000
Estimated total hours..... 16,000
•Actual Hours of Operation × Rate = Depreciation
•Asset is depreciated until book value equals
salvage value
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17. Chapter 3, Slide #17
Long-Term Assets: Leases
•Capital lease
–In-substance ownership
–Recorded as an long term asset net of amortization
–Operating lease if not a Capital lease
Not recorded as asset and lease payments are
expensed.
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18. Chapter 3, Slide #18
•Debt or equity securities
–Held to maintain business relationship or to
exercise control
•Debt classification
–Held-to-maturity carried at amortized cost
–Available-for-sale carried at fair value
Long-Term Assets: Investments
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19. Chapter 3, Slide #19
Long-Term Assets: Investments (cont’d)
•Equity securities
–Carried at fair value which have 3 levels for input:
1. Level 1: Quoted price for identical item in
active market.
2. Adjusted quoted price of similar asset.
3. Present value of expected cash flows
–Exception: with the ability to exercise significant
influence the equity method is used: cost is
adjusted for the proportionate share of the rise/fall
in the retained profits of the subsidiary (investee)
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20. Chapter 3, Slide #20
•Goodwill
–Purchase of a business where price paid exceeds
the fair value of net assets
–U.S. GAAP: not amortized; test annually for
impairment
•Patents
–20 years
–Amortized over shorter of legal or useful life
•Trademarks
–Indefinite legal life
–Not amortized; test annually for impairment
Long-Term Assets: Intangibles (nonphysical
assets)
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21. Chapter 3, Slide #21
Long-Term Assets: Intangibles (cont’d)
•Franchises
–Life based on contract
–Amortize over shorter of legal or useful life
•Copyrights
–Life of the creator plus 70 years
–Amortize over shorter of legal or useful life
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22. Chapter 3, Slide #22
•Probable future sacrifices of economic
benefits arising from present obligations of a
particular entity to transfer assets or provide
services to other entities in the futures as a
result of past transactions or events
–Current Liabilities
–Long-Term Liabilities
Liabilities
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23. Chapter 3, Slide #23
Current Liabilities
•Obligations whose liquidation is reasonably
expected to
•Require the use of
–Existing current assets
–Creation of other current liabilities
•Within one year or the operating cycle,
whichever is longer
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24. Chapter 3, Slide #24
Current Liabilities (cont’d)
•Payables
–Short-term obligations created by the acquisition of
goods or services
•Unearned Income
–Payments collected in advance of the performance
of services or delivery of goods
•Other current liabilities
–As circumstances warrant
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25. Chapter 3, Slide #25
Long-Term Liabilities
•Due in a period beyond one year or operating
cycle
•Related to
–Financing arrangements
–Operational obligations
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26. Chapter 3, Slide #26
Long-Term Liabilities:
Financing Arrangements
•Notes Payable
–Secured by property: Mortgage notes
•Credit Agreements
–Ready lines of credit that may require a
compensating balance
–Not a liability until funds are drawn
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27. Chapter 3, Slide #27
Long-Term Liabilities:
Financing Arrangements (cont’d)
•Bonds Payable
–Sold at par, premium, or discount
–Premium or discount is amortized into interest
expense
–Bond carrying value is amortized to par value
–Convertible bonds can be converted into common
stock
–Conversion feature enhances bond selling price
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28. Chapter 3, Slide #28
Bonds at Par, Premium, or Discount
Bond
Contractual
Interest Rate 8%
6%
8%
10%
Premium
Par
(Face Value)
Discount
Market Interest
Rate
Bonds
Sold at
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29. Chapter 3, Slide #29
Long-Term Liabilities:
Operational Obligations
•Deferred Taxes
–Difference between accounting and tax methods
–Difference in the timing of recognizing revenue and
expense for accounting and tax purposes
•Warranty Obligations
–Estimated; arise from offering product warranties
–Estimated to achieve matching of sales revenue
and associated expense of warranty
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30. Chapter 3, Slide #30
Long-Term Liabilities: Operational
Obligations (cont’d)
•Noncontrolling Interest (was minority interest)
–Reported on consolidated financial statements as
equity, but separate from parents equity
–Represents the interest in the equity of a partially-
held subsidiary by the nonmajority owners
–Analysis can be twice if material-once as a liability
(conservative) and then as equity.
•Other Noncurrent Liabilities
–As circumstances warrant
•Redeemable Preferred Stock
–Excluded from stockholders’ equity
–For analysis, treat as a liability
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31. Chapter 3, Slide #31
•The residual ownership interest in the assets of
an entity that remains after deducting its
liabilities
–Paid-in Capital
–Retained Earnings
Stockholders’ Equity
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32. Chapter 3, Slide #32
Stockholders’ Equity: Paid-in Capital
•Par value
–In some states, referred to as “stated value”
–Considered “legal capital” by many states
–Established by the articles of incorporation
–Usually a minimal value
•No-par stock
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33. Chapter 3, Slide #33
Stockholders’ Equity:
Paid-in Capital (cont’d)
•Additional paid-in capital
–Issue price in excess of par (stated) value
–Other sources
•Treasury stock transactions
•Stock dividend transactions
•Donated capital
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34. Chapter 3, Slide #34
Stockholders’ Equity:
Paid-in Capital (cont’d)
•Common Stock
–Shareholder ownership
–Voting rights
•Election of board of directors
•Major corporate decisions
–Liquidation rights secondary to
•Creditors
•Preferred stock
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35. Chapter 3, Slide #35
Stockholders’ Equity:
Paid-in Capital (cont’d)
•Preferred Stock
–Does not normally convey voting rights
–May carry any or all of these features:
•Preference as to dividends
•Accumulation of dividends
•Participation in dividend beyond stated dividend rate
•Convertibility into common stock at holder’s discretion
•Preference in liquidation secondary to creditors
•Callable at issuer discretion
•Redemption at future maturity value
•Donated Capital
–Donated by outside entities
–Shareholder surrender of stock
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36. Chapter 3, Slide #36
Stockholders’ Equity:
Retained Earnings
•Undistributed earnings of the corporation
–Net income for all prior periods
–Less dividends declared to shareholders for all prior
periods
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37. Chapter 3, Slide #37
Stockholders’ Equity: Other
•Quasi-Reorganization
–Eliminates a deficit balance of retained earnings
–Retained earnings are dated for 5-10 years
•Accumulated Other Comprehensive Income
- Represents retained earnings for other
comprehensive income as a separate component on
the face of the balance sheet.

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38. Chapter 3, Slide #38
Stockholders’ Equity: Other (cont’d)
•Employee Stock Ownership Plans (ESOPs)
–A qualified pension plan
–Tax benefits for the employer and employee
–Unearned compensation reduces stockholders’
equity
•Treasury Stock
–Stock purchased and held by the issuing
corporation
–Recording and disclosure
•Record at par value; deduct from paid-in capital
•Record at cost; deduct from total stockholders’ equity
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39. Chapter 3, Slide #39
•Reconciles the beginning and ending balances
of all components of stockholders’ equity
•Account changes indicate
–Issuance of stock: paid-in capital increase
–Acquisition of treasury stock: treasury stock
increase
–Net income: retained earnings increase
–Dividends: retained earnings decrease
–Changes in accumulated other comprehensive
income.
Statement of Stockholders’ Equity
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40. Chapter 3, Slide #40
•Financial analysis is complicated by
–Many assets recorded at cost rather than fair
(replacement) value
–Varying valuation methods
•Within a firm from item to item
•Within an industry from company to company
–Not all items of value are listed as assets
–Certain contingent liabilities may be excluded
Balance Sheet Presentation Issues
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41. Chapter 3, Slide #41
IFRS Balance Sheet Format
•Asset section=Usually noncurrent assets are
presented first, followed by current assets.
•Liabilities and Owner’s Equity section=Capital
and reserves are presented first followed by
noncurrent liabilities and then current
liabilities.
–Reserve section would not be part of U.S. GAAP.
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