chapter 3 balance sheet © 2011 cengage learning. all rights reserved. may not be scanned, copied or...

Chapter 3

Balance Sheet

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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


Chapter 3, Slide #3

Balance Sheet – Report Form

Current assets $200,826Plant and equipment 60,995Goodwill an other assets 123,618Total assets $385,439

Current liabilities $83,864Long-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 CorporationBalance Sheet (In Thousands)

December 31, 20XXASSETS


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


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


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)


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



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



Chapter 3, Slide #9

• Prepaids– Expenditures made in advance of the use of the

service or goods.– Examples

• Insurance• Advertising



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



• 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)



• 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 presentationCost of the asset

– Accumulated depreciation= Net book value

Long-Term Assets: Tangible (cont’d)



Depreciation: Straight-Line Method

Cost - Salvage Value = Annual Depreciation

Estimated Life

10,000 - 2,000 = $1,600

5 years

Cost............................. $10,000 Estimated salvage.......... $2,000Estimated life.............. 5 years

Year

Deprec. for the Year

Accumulated Depreciation Asset Cost

Book Value

1 $1,600 $1,600 $10,000 $8,4002 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.



Depreciation: Declining-Balance Method

1 2 = double the straight-line rate

Estimated Life

1 2 Book Value at Beginning of Year = Annual Depreciation

5

YearAsset Cost

Beginning Accum.

Dep.Beginning

Book ValueDeprec. for

the Year

Ending Book Value

1 $10,000 $0 $10,000 $4,000 $6,0002 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.


Double the straight-line rate is the maximum rate



Depreciation: Sum-of-the-Years’-Digits Method


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

Salvage FractionDeprec. for

the Year

Ending Accum.

Dep.

Ending Book Value

1 $8,000 5/15 $2,666.67 2,666.67$ 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



Depreciation: Units-of-Production Method

Cost - Salvage Value = Per Unit Depreciation

Estimated Life in Capacity

10,000 - 2,000 = $0.50

16,000 hours

Cost............................. $10,000 Estimated salvage.......... $2,000Estimated total hours..... 16,000

• Actual Hours of Operation × Rate = Depreciation

• Asset is depreciated until book value equals salvage value



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.



• 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



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)



• 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)



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



• 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



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



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



Long-Term Liabilities

• Due in a period beyond one year or operating cycle

• Related to– Financing arrangements– Operational obligations



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



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



Bonds at Par, Premium, or Discount

BondContractual

Interest Rate 8%

6%

8%

10%

Premium

Par(Face Value)

Discount

Market Interest Rate

BondsSold at



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



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



• The residual ownership interest in the assets of an entity that remains after deducting its liabilities

– Paid-in Capital

– Retained Earnings

Stockholders’ Equity



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



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




• Common Stock– Shareholder ownership– Voting rights

• Election of board of directors• Major corporate decisions

– Liquidation rights secondary to• Creditors• Preferred stock




• 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



Stockholders’ Equity: Retained Earnings

• Undistributed earnings of the corporation– Net income for all prior periods– Less dividends declared to shareholders for all prior

periods



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.



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



• 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



• 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



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.


chapter 3 balance sheet © 2011 cengage learning. all rights reserved. may not be scanned, copied or...

Documents

cengage learning

accessible website

report assets

longterm noncurrent

conserve cash

cash negotiable checks

unrestricted balance

balance sheet report