The Balance Sheet and Financial Disclosures Chapter 3.

The Balance Sheet and Financial Disclosures

Chapter 3

Learning ObjectivesPART A: BALANCE SHEET (Statement of Financial Position)1. Describe the purpose of the balance sheet and understand its usefulness and limitations. 2. Distinguish among current and noncurrent assets and liabilities.3. Identify and describe the various balance sheet asset classifications.4. Identify and describe the two balance sheet liability classifications.

PART B: Financial Disclosures (SELF-STUDY)5. Explain the purpose of financial statement disclosures.6. Explain the purpose of the management discussion and analysis disclosure.7. Explain the purpose of an audit and describe the content of the audit report.10. Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet and financial disclosures.

PART C: NOT COVERED8. Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis.9. Identify and calculate the common liquidity and financing ratios used to assess risk.

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AssetsAssets

LiabilitiesLiabilities

Shareholders’ Equity

Shareholders’ Equity

Classifications

BALANCE SHEET CLASSIFICATIONS   

Assets:Current assetsInvestmentsProperty, plant, and equipmentIntangible assetsOther assets

Liabilities:Current liabilitiesLong-term liabilities

Shareholders’ equity:Paid-in capitalRetained earnings

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The Balance Sheet

Limitations: The balance sheet does

not portray the market value of the entity as a going concern nor its liquidation value.

Resources such as employee skills and reputation are not recorded in the balance sheet.

Limitations: The balance sheet does

not portray the market value of the entity as a going concern nor its liquidation value.

Resources such as employee skills and reputation are not recorded in the balance sheet.

Usefulness: The balance sheet

describes many of the resources a company has for generating future cash flows.

It provides liquidity information useful in assessing a company’s ability to pay its current obligations.

It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Usefulness: The balance sheet

describes many of the resources a company has for generating future cash flows.

It provides liquidity information useful in assessing a company’s ability to pay its current obligations.

It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Reports a company’s financial position on a particular date.

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Operating Cycle of a Typical Manufacturing Company

Use cash to acquire raw materials

Convert raw materials to finished product

Deliver product to customer

Collect cash from customer

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1.1. CashCash2.2. Cash EquivalentsCash Equivalents3.3. Short-term InvestmentsShort-term Investments4.4. ReceivablesReceivables5.5. InventoriesInventories6.6. Prepaid ExpensesPrepaid Expenses

1.1. CashCash2.2. Cash EquivalentsCash Equivalents3.3. Short-term InvestmentsShort-term Investments4.4. ReceivablesReceivables5.5. InventoriesInventories6.6. Prepaid ExpensesPrepaid Expenses

Current Assets

Will be converted Will be converted to cash or to cash or

consumed within consumed within one year or the one year or the operating cycle, operating cycle,

whichever is whichever is longerlonger..

Will be converted Will be converted to cash or to cash or

consumed within consumed within one year or the one year or the operating cycle, operating cycle,

whichever is whichever is longerlonger..

Current Current AssetsAssets

Current Current AssetsAssets

3-8Cash and Cash EquivalentsCash

Currency, coins and amounts on deposit in bank accounts: checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.

Cash Currency, coins and amounts on deposit in bank

accounts: checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.

Cash Equivalents

Short-term, highly liquid investments that are:

1. Readily convertible to a known cash amount.

2. Close to maturity date and not sensitive to interest rate changes

3. US Treasury Bills & Notes: 3-month maturity.

4. 3-month CDs and Money Market Funds

Cash Equivalents

Short-term, highly liquid investments that are:

1. Readily convertible to a known cash amount.

2. Close to maturity date and not sensitive to interest rate changes

3. US Treasury Bills & Notes: 3-month maturity.

4. 3-month CDs and Money Market Funds6-8

Cash & Cash Equivalents

On Dec. 31, 2010, ABC Co's total CASH COUNT =$1,000,000

The following items are included in the CASH COUNT: Petty cash funds=$12,000, Customers Checks =$3,000, Coins =$1,000 and Stamps =$100.

The following items are not included in cash count: -Three-month CD: $10,000 -Two-month Treasury Note (Bill): $7,000

Required:Prepare the Current Assets Section of the Balance

Sheet

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Noncurrent Assets

1. Investments2. Property, Plant, &

Equipment3. Intangible Assets4. Other Assets

1. Investments2. Property, Plant, &

Equipment3. Intangible Assets4. Other Assets

Not expected to be converted to

cash or consumed within one year or the operating cycle,

whichever is longer.

Not expected to be converted to

cash or consumed within one year or the operating cycle,

whichever is longer.

Noncurrent Assets

Noncurrent Assets

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Noncurrent Assets

Other Assets

1. Include long-term prepaid expenses and any noncurrent assets not falling in to one of the other classifications.

Investments

1. Not used in the operations of the business.

2. Include both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes.

Property, Plant, and Equipment

1. Are tangible, long-lived, and used in the operations of the business.

2. Include land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells.

3. Reported at original cost less accumulated depreciation (or depletion for natural resources), except for land which is not depreciated.

Intangible Assets

1. Used in the operations of the business but have no physical substance.

2. Include patents, copyrights, and franchises.

3. Reported net of accumulated amortization.

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Current Liabilities

1. Accounts Payable2. Notes Payable3. Accrued Liabilities4. Unearned Revenues5. Current Maturities

of Long-Term Debt

1. Accounts Payable2. Notes Payable3. Accrued Liabilities4. Unearned Revenues5. Current Maturities

of Long-Term Debt

Obligations expected to be satisfied through current

assets or creation of other current liabilities within one year or the operating cycle,

whichever is longer.

Obligations expected to be satisfied through current

assets or creation of other current liabilities within one year or the operating cycle,

whichever is longer.

Current Liabilities

Current Liabilities

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Long-Term Liabilities

1. Long-term Notes 2. Mortgages3. Long-term Bonds4. Pension Obligations5. Lease Obligations

1. Long-term Notes 2. Mortgages3. Long-term Bonds4. Pension Obligations5. Lease Obligations

Obligations that will not be

satisfied within one year or the operating cycle,

whichever is longer.

Obligations that will not be

satisfied within one year or the operating cycle,

whichever is longer.

Long-Term Liabilities

Long-Term Liabilities

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(In millions) January 28, 2011 January 29, 2010Stockholders' equityCommon stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,369 and 3,351, respectively; shares outstanding: 1,918 and 1,957, respectively 11,797 11,472 Treasury stock, at cost: 976 and 919 shares, respectively (28,704) (27,904) Retained earnings 24,744 22,110 Accumulated other comprehensive (loss) (71) (37) Total stockholders' equity 7,766$ 5,641$

Dell Inc.Balance Sheet

Shareholders’ equity is the residual interest in the assets of an entity that remains after deducting

liabilities.

Shareholders’ equity is the residual interest in the assets of an entity that remains after deducting

liabilities.

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U.S. GAAP vs. IFRS

Does not specify a minimum list of items to be presented in the balance sheet.

Some U.S. companies use the statement of financial position title as well.

Presents current assets and liabilities before noncurrent assets and liabilities.

Specifies a minimum list of items to be presented in the balance sheet.

Statement title changed to statement of financial position, although title is not required.

Does not prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first.

There are more similarities than differences in balance sheets prepared according to U.S. GAAP and those

prepared applying IFRS. Some differences are highlighted below.

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U. S. GAAP vs. IFRS

A recent survey of large companies that prepare their financial statements according to IFRS reports that in 2009, 73% of the surveyed companies list noncurrent items first.

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U. S. GAAP vs. IFRS

The FASB and IASB are working together on the Financial Statement Presentation project to establish a common

standard for presenting information in the financial statements.

Each of the financial statements will include

classifications by operating, investing, and

financing activities, as well as income taxes,

discontinued operations, and equity (if needed).

BusinessOperating assets and liabilitiesInvesting assets and liabilities

FinancingDebtEquity

Income TaxesDiscontinued Operations

Statement of Financial Position

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Disclosure Notes (Self-Study)

Summary of Significant

Accounting Policies

Conveys valuable information about the company’s choices from

among various alternative accounting methods.

Subsequent Events

A significant development that occurs after the company’s fiscal year-end but before the financial

statements are issued or available to be issued.

Noteworthy Events and Transactions

Transactions or events that are potentially important to evaluating a company’s financial statements, e.g., related-party transactions, errors and

irregularities, and illegal acts.

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Management Discussion and Analysis

Provides a biased but Provides a biased but informed perspective of informed perspective of

a companya company’’s s operations, liquidity, operations, liquidity,

and capital resources.and capital resources.

Provides a biased but Provides a biased but informed perspective of informed perspective of

a companya company’’s s operations, liquidity, operations, liquidity,

and capital resources.and capital resources.

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Management’s Responsibilities

Preparing the financial statements and other information in the annual report.

Maintaining and assessing the company’s internal control procedures.

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Auditors’ Report

Expresses the auditors’ opinion as to the fairness of

presentation of the financial statements in conformity with

generally accepted accounting principles.

The auditors’ report must comply with specifications of the Public

Companies Accounting Oversight Board (PCAOB).

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Auditors’ Opinions

UnqualifiedIssued when the financial statements present fairly the financial position,

results of operations, and cash flows and are in conformity with U.S. GAAP.

QualifiedIssued when there is an exception that

is not of sufficient seriousness to invalidate the financial statements as a

whole.

AdverseIssued when the exceptions are so

serious that a qualified opinion is not justified.

DisclaimerIssued when insufficient information

has been gathered to express an opinion.

3-23Compensation of Directors and

Top Executives

Proxy Statement Information Summary Compensation Table

Salary Bonus Stock Awards Option Awards Other Compensation

A proxy statement is sent each year to all shareholders, usually in the

same mailing with the annual report.

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End of Chapter 3