Understanding the Balance

Sheet
Elements of an
Annual Report
• Chairman’s Speech
• Financial Statements
– Income Statement
– Balance Sheet
– Statement of Cash Flows
• Management Discussion and Analysis
• Notes to Financial Statements
• Auditor's Report
Financial Accounting Statements
• Income Statement - reports the results
of operations for a specific period of
time
• Balance Sheet - reports the assets,
liabilities, and stockholders’ equity at a
specific date
• Statement of Cash Flows - reports the
cash receipts and payments for a
specific period of time
Types of Financial Statements - IFRS
 Management Discussion
and Analysis
Covers three aspects of a company:
– liquidity - ability to pay near-term
obligations
– capital resources - ability to fund
operations and expansions
– results of operation
Notes to Financial Statements
• Provide additional information not
included in body of statements
• Does not have to be numeric
• Examples:
– Description of accounting policies or
explanation of uncertainties and
contingencies
– Statistics and voluminous details
 Auditor's Report
• Auditor, a professional accountant who
conducts an independent examination of the
financial accounting data presented by a
company.
• Auditor gives an unqualified opinion if the
financial statements present the financial
position, results of operations, and cash
flows in accordance with GAAP.
 The Balance Sheet
• What are the different sections of the
Balance Sheet?
 The Balance Sheet
Sections of the balance sheet:
• Assets - resources of the firm that are expected to
increase or cause future cash flows (everything the
firm owns)
• Liabilities - obligations of the firm to outsiders or
claims against its assets by outsiders (debts of the
firm)
• Owners’ Equity - the residual interest in, or
remaining claims against, the firm’s assets after
deducting liabilities (rights of the owners)
 Balance Sheet Structure
Assets Equity & Liabilities
Non-Current Assets Equity
Real Assets Reserves and Surplus
Land, Buildings, Vehicles,
Equipment, Non-Current Liabilities
Financial Assets Term Loans, Debentures,
Investments Bonds
Intangible Assets
Patents, Goodwill
Current Assets Current Liabilities
Cash, Accounts Receivable, Accounts Payable,
Inventory, Prepaid Expenses Short Term Loans
 The Balance Sheet
The balance sheet equation:

Assets = Liabilities + Owners’ Equity

or
Owners’ Equity = Assets - Liabilities
 Balance Sheet Transactions
• The balance sheet is affected by every
transaction that an entity encounters.
• Each transaction has counterbalancing
entries that keep total assets equal to total
liabilities and owners’ equity, i.e., the balance
sheet equation must always be balanced.
 Balance Sheet Transactions
• Just as the balance sheet equation must
always balance, the balance sheet must
also always balance.

• A balance sheet could be prepared after

every transaction, but this practice would be
awkward and unnecessary.
– Therefore, balance sheets are usually prepared
monthly or on some other periodic schedule.
A Classified Balance Sheet...
Generally contains the following standard
classifications:
– Current Assets
– Long-Term Investments
– Property, Plant, and Equipment
– Intangible Assets
– Current Liabilities
– Long-Term Liabilities
– Stockholders' Equity
 Current Assets
• Assets that are expected to be converted to cash or used
in the business within a short period of time, usually one
year.
• Current assets are listed in order of liquidity.
• Examples:
– Cash
– Short-term investments
– Receivables
– Inventories
– Prepaid expenses
 Long-Term Investments
• Assets that can be converted into cash, but
whose conversion is not expected within one
year.
• Assets not intended for use within the business.
• Example:
– investments of stocks and bonds of other
corporations.
Property, Plant, and
Equipment
• Assets with relatively long
useful lives.
• Assets used in operating
the business.
• Examples:
– land
– buildings
– machinery
– delivery equipment
– furniture and fixtures
 Depreciation is...
• Practice of allocating an asset’s full
purchase price to a number of years
instead of expensing full cost in year of
purchase.
 Accumulated Depreciation
account ...
• Shows the total amount of depreciation
taken over the life of the asset.
 Assets
CSUThat A
CORPORATION
Balance Sheet
Company
Depreciates...
December 31, 2001

Should be shown at cost less accumulated

depreciation

Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 24,000
Less: Accumulated Depreciation 8,000 16,000
Total assets $23,800
 Intangible Assets
• Noncurrent assets
• Have no physical substance
• Examples:
– patents
– copyrights
– trademarks or trade names
– franchise
Intangible Assets have value
because of the exclusive
rights or privileges they possess.
 Current Liabilities
Obligations that are supposed to be paid within
the coming year...
• accounts payable
• wages payable
• bank loans payable
• interest payable
• taxes payable
 Long-Term Liabilities
Debts expected to be paid after one
year
Examples…
– bonds payable
– mortgages payable
– long-term notes payable
– lease liabilities and
– obligations under employee pension plans
 Stockholders' Equity
• Capital stock - investments in the
business by the stockholders
• Retained earnings - earnings kept for
use in the business
 Accounting for Owners’ Equity
Proprietorships and Partnerships vs.
Corporations
• Owners’ equities for proprietorships and
partnerships are called capital.
• Owners’ equity for a corporation
is called stockholders’ equity or
shareholders’ equity.
 The Meaning of Par Value
• Par value (stated value) - a nominal dollar
amount printed on each stock certificate -
required by most states
– Stock is usually issued and sold at more than par
value.

• Paid-in capital in excess of par - difference

between the total amount received for the
stock (issue price or sales price) and par value
 A Typical Manufacturing Company
Starts Operation
Two promoters deposit Rs 5 lakhs in the company account as
equity

ABC Limited
Balance Sheet at April 1, 2001

Assets Liabilities
Cash 5,00,000 Equity 5,00,000
Total 5,00,000 Total 5,00,000
 A lathe is bought on cash basis

Owner pays Rs 3 lakhs from the bank acount

Assets Liabilities
Cash 2,00,000 Equity 5,00,000
Plant 3,00,000
Total 5,00,000 Total 5,00,000
 Raw material worth Rs 80,000
bought on a 60 day credit basis
No payment is done so cash position does not change

Assets Liabilities
Cash 2,00,000 Equity 5,00,000
Plant 3,00,000 Account 80,000
Payable
Inventory 80,000
Total 5,80,000 Total 5,80,000
 Raw material worth Rs 40,000 processed and
sold for Rs 50,000 with a 30 day credit
No payment is done so cash position does not change, but
inventory is reduced

Assets Liabilities
Cash 2,00,000 Equity 5,00,000
Plant 3,00,000 Accounts Payable 80,000
Inventory 40,000 Retained 10,000
Earnings
Accounts 50,000
Receivable
Total 5,90,000 Total 5,90,000
 Customer pays up after 20 days

Payment deposited in bank so cash position changes

Assets Liabilities
Cash 2,50,000 Equity 5,00,000
Plant 3,00,000 Accounts 80,000
Payable
Inventory 40,000 Retained 10,000
Earnings
Accounts 00,000
Receivable
Total 5,90,000 Total 5,90,000
 Supplier credit period is over and raw material
is paid for after 60 days
Payment done from bank so cash balance reduces

Assets Liabilities
Cash 1,70,000 Equity 5,00,000
Plant 3,00,000 Accounts 00,000
Payable
Inventory 40,000 Retained 10,000
Earnings
Accounts 00,000
Receivable
Total 5,10,000 Total 5,10,000
Prepare a Balance Sheet from the following information
And provide the missing figures
Particulars Amount in Rs.
Outstanding salaries 43,754
Cash 76,413
Total liabilities ?
Long-term liabilities 9,117
Receivables 17,753
General Reserve 402
Inventory ?
Accounts payable 74,510
Property, plant & 165,822
equipment
Stockholders’ equity 295,805
Other assets 34,015
Bank Borrowing 32,608
Total assets 456,196