The Balance Sheet and Financial Disclosures

Sid Glandon, DBA, CPA

Associate Professor of Accounting

Balance Sheet Usefulness

– Evaluating capital structure– Computing rates of return– Analyzing liquidity– Analyzing solvency– Analyzing financial flexibility

Balance Sheet Limitations

– Historical cost– Estimates are used– Items must be objectively determined– Does not report off-balance sheet

financing

Balance Sheet Elements Assets

– Probable future economic benefits as a result of past transactions or events

Liabilities– Probable future sacrifices of economic benefits

as a result of past transactions or events Equity

– Residual interest in the net assets

Accounting EquationASSETS = LIABILITIES + EQUITY

Classification of Assets Current assets

– Cash and cash equivalents– Short-term investments– Receivables– Inventories– Prepaid expenses

Investments (long-term) Property, plant, and equipment Intangible assets Other assets

Classification of Liabilities and Equity

Current liabilities– Accounts payables– Notes payable– Unearned revenue– Accrued liabilities– Current portion of long-term debt

Long-term liabilities Owners’ equity

– Capital stock– Additional paid-in capital– Retained earnings

Notes to the Financial Statements

– Summary of significant accounting policies

Cash equivalents Inventories Depreciation Revenue recognition

– Subsequent events– Related party transactions– Contingent liabilities

Auditors’ Report Unqualified opinion (3 paragraphs)

– fourth paragraph lack of consistency uncertainty emphasis of a matter

Qualified opinion– exceptions

Adverse opinion– not fairly presented

Disclaimer of opinion– scope limitations

Risk Analysis Balance sheet ratios

– Liquidity ratios Current ratio Acid-test ratio

– Financing ratios Debt to equity ratio Times interest earned ratio

Liquidity Ratios

Quick assets: Cash Investments (short-term) Accounts receivable

Current assetsCurrent liabilities

Quick assetsCurrent liabilities

Current ratio =

Acid-test ratio =

Financing Ratios

Total liabilitiesStockholders' equity

Net income + Interest expense + TaxesInterest expense

Debt to equity ratio =

Times interest earned ratio =

Current assets: Cash XXX Accounts receivable XXX Inventory XXX Prepaid costs XXX Total current assets XXXProperty, plant and equipment (net) XXXIntangible assets (net) XXX Total Assets XXX

Current liabilities: Accounts payable XXX Accrued liabilities XXX Current portion of long-term debt XXX Total current liabilities XXXLong-term debt XXX Total debt XXXShareholders' equity: Common stock XXX Additional paid in capital XXX Retained earnings XXX Total shareholders' equity XXX Total liabilities and shareholders' equity XXX

LIABILITIES AND SHAREHOLDER' EQUITY

ASSETS

Balance SheetCompany Name

Date