Part of a set of financial statements:



From PLI’s Course Handbook

Basics of Accounting & Finance: What Every Practicing Lawyer Needs to Know – Summer 2006

#8650

Get 40% off this title right now by clicking here.

3

what is a balance sheet?

Karen Kincaid Balmer, CPA, CrFA

Kincaid Consulting LLC

Submitted by:

Albert Lilienfeld

Deloitte Financial Advisory Services LLP

What is a Balance Sheet?

Karen Kincaid Balmer

Presented by Albert Lilienfeld

Balance Sheet

There are five parts of a set of financial statements. The first three are the most recognized parts; i.e.

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Shareholders’ Equity

Notes

Why are there various parts to a set of financial statements?

Each part of the set of financial statements provide different, but necessary information.

The Balance Sheet is a snapshot of an Entity’s Financial Condition at a Single Point in time. It is best illustrated by the following equation.

Balance Sheet Equation:

Assets = Liabilities + Stockholders’ Equity

Why does this equation work? Think of it in terms of your home. The cost basis of your house is the Asset, your mortgage is the Liability, and the difference between the two is your Equity.

Another way of thinking about this equation is to think again of the house as the Asset, the mortgage as the Liability, and the remainder as a liability to you for the portion of the house that is not owed to the bank; i.e. Stockholders’ Equity is a business’ liability to the shareholder.

GAAP and the Balance Sheet

Generally Accepted Accounting Principles (GAAP) determine how and when each component is recorded and valued. Various components are valued differently in accordance with current U.S. GAAP.

Examples of Valuation Methods and Assets

Historic Buildings and Equipment

Fair Market Marketable Securities

First In First Out Inventory

Last In First Out Inventory

Weighted Average Inventory

Other Various

Understanding

Understanding the rules and valuation methods is the key to effectively using financial information. For example: If you were going to sell a business, you would not want to sell buildings and equipment at their historic cost basis if material capital appreciation had occurred over the holding period of the assets.

Financial information can vary significantly between companies in like businesses. For example: If one chemical company built its plant in 1930 and another built its plant during 1980, both would have recorded the cost in 1930 and 1980 dollars, respectively. Land purchased during various times would have the same issues of comparability in companies financial statements.

Basic Balance Sheet

Current Assets

Non-Current Assets

=

Current Liabilities

Long-Term Liabilities

Stockholders’ Equity

The Balance Sheet provides a picture of the economic resources of the entity, both tangible and intangible, both current and non-current.

Current Assets

Cash and Cash Equivalents

Marketable Securities

Accounts Receivable

Inventory

Prepaid Expense

Cash and Cash Equivalents

Cash

Short term, highly liquid investments that are both:

Readily convertible to cash

So near maturity that there is insignificant risk of change in value

Marketable Securities

Trading - gains (losses) to the Income Statement

Held-to-Maturity - gains (losses) to Stockholders’ Equity ‘Comprehensive Gains and Losses’

Available-for-Sale - gains (losses) to the Income Statement

Accounts Receivable

Amounts due from customers (clients) for the sale of goods or services

Due in less than one year generally

Net of amounts likely to be uncollectible

Reserve for uncollectible amounts disclosed on the balance sheet itself in parenthesis

Inventory Methods Effect on Reported Net Income

FIFO - Results in lower cost of goods sold (expense) during periods of rising prices, thus resulting in higher reported net income.

LIFO - Results in higher cost of goods sold during periods of rising prices, thus resulting in lower reported net income.

Inventory valuation methods are required to be discussed in the notes to the financial statements.

Lower of Cost or Market

Regardless of the inventory valuation method chosen … All inventory valuation methods must reflect the lower of cost or market on reported financial statements.

Prepaid Expenses

Expenses paid in advance, such as insurance and rent

Held as an asset until the asset has been ‘used’

Usually expensed equally over a period of time

Property, Plant and Equipment

Land

Buildings

Equipment

All valued at historic acquisition cost

All except land are subject to depreciation

Liabilities

Probable Future Sacrifices of Economic Benefits

Current v. Non-Current

Current - generally due in less than one year

Differentiation between short and long term used for various financial ratios

Current Liabilities

Accounts Payable

Accrued Expenses

Short-term Debt

Current Portion of Long-term Debt

Long-Term Liabilities

Long-Term Debt

Obligations Under Capital Leases

Pension and Post-Retirement Obligations

Commitments and Contingencies

Other

Pension and Post-Retirement Obligations

Recognition of future pension and post retirement obligations (such as retiree health care) for past employee services rendered.

Valuation rules are actuarially based and generally quite complex.

Essentially present value of future obligations

Commitments and Contingencies

Contingencies:

An existing condition or circumstance involving uncertainty as to possible gain or loss that will be resolved when some future event occurs or fails to occur.

Categories of Contingencies

Probable - likely to occur

Reasonably Possible - more than remote, but less than likely to occur

Remote - chance of occurring is slight

Record a Contingency

Only if:

The future event if probable

AND

The amount can be reasonably estimated

Disclose a Contingency

If it is reasonably possible that the event will occur, disclose:

The nature of the contingency

The estimated loss or range of possible loss

Or disclose that such an estimate cannot be made

Gain Contingencies

Generally are not recognized so as not to record revenue prior to its realization.

Stockholders’ Equity

Capital Stock

Additional Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive Income

Accumulated Other Comprehensive Income

(Non-realized gains and losses)

Changes to marketable securities

Changes due to translation gains and losses

Other

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download