Chapter 1 Module 2: Balance Sheet and Stockholders’ Equity

Chapter 1 Module 2: Balance Sheet and Stockholders’ Equity

Balance Sheet is

Assets = Liabilities + Equity

Items of the balance sheet include

*Current assets • Long-term assets • Current liabilities • Long-term liabilities • Stockholders’ equity

Measurement of Assets or Liabilities can be in

Historical cost, Net realizable value, Present value of future cash flows, Current cost, Current market cost

Net realizable value

Value of an asset minus all estimated costs like

Example: If you can sell inventory for $500, but it will cost $50 to ship, then:

NRV=500−50=450

Present value of future cash flows

The current value of a future amount of money

Present Value of Future Cash Flows example

So, how much money would you need today to end up with $100 in a year?

• Answer: You’d only need $95.24 today.

• Because if you put $95.24 in the bank at 5%, it’ll grow to $100 in one year.

Step 1 of creating BS- Current Asset in BS

• Cash & Cash Equivalents – Money on hand or in the bank, T-bills, money market funds

• Accounts Receivable (net of allowance) – Amounts customers owe you minus uncollectible estimates

• Trading Securities – Stocks/bonds bought to sell soon

• Prepaid Expenses – Things paid in advance, like insurance or rent

*Anything within next 12 month

Step 2 - Noncurrent assets

• AFS Securities (Available-for-Sale)
  Investments not meant to be sold soon; reported at fair value

• Held-to-Maturity Securities
  Bonds the company plans to hold until they mature

• Intangible Assets
  Non-physical assets like patents, trademarks, goodwill

• Leasehold Improvements
  Changes made to rented property (e.g., painting, installing walls)

• Deferred Tax Asset
  Future tax savings — like overpaying taxes now and getting credit later

• Accumulated Depreciation (contra-asset)
  Total depreciation taken on assets like buildings or equipment; reduces asset value on the balance sheet

  *Anything more than 12 years

Step 3- Current liabilities

• Deferred Revenue
  Money collected before delivering goods/services
  Example: Customer pays $1,000 today for a service next month

• Accrued Liabilities
  Expenses that have been incurred but not yet paid
  Example: Utility bill for July received in August

• Accrued Payroll
  Wages earned by employees but not yet paid
  Example: Employees worked last week, payday is next week

• Income Tax Payable
  Taxes owed to the government but not paid yet

  *Anything less than 12 months

Step 4- Noncurrent liabilties

• Bonds Payable
  Money borrowed from investors through bonds, to be repaid in future years
  Example: Company issues $1 million in 10-year bonds

• Deferred Tax Liability
  Taxes owed in the future due to temporary differences between accounting income and taxable income
  Example: Using faster depreciation for tax purposes now = more taxes owed later

• Capital Lease Obligation (Finance Lease Liability)
  A long-term lease that acts like a loan to buy an asset. The company agrees to make payments over time.

  Example: Company leases equipment for 5 years and agrees to monthly payments. The unpaid portion due after 1 year is a noncurrent liability.

Deferred Tax Liability (DTL)

Let’s say you buy equipment for $10,000.

• For financial reporting (GAAP):
  You spread the cost over 5 years → $2,000 each year

• For taxes (IRS rules):
  You deduct $5,000 in year 1 (faster depreciation)

✅ Result:
You show lower taxable income in year 1 → you pay less tax now

BUT
Later, you’ll have less depreciation left, so you’ll pay more tax later.

That "extra tax you'll owe later" is called a Deferred Tax Liability.

1 Step of making SE statement - Contributed capital

Common Stock
Definition: Basic ownership in a company with voting rights.
Example: An investor buys 100 shares of common stock at $10 each.

Preferred Stock
Definition: Stock with fixed dividends, paid before common stockholders.
Example: A company issues preferred stock that pays $5 dividend per year.

Treasury Stock
Definition: Company’s own stock it bought back from shareholders.
Example: A company repurchases 1,000 of its own shares from the market.

Additional Paid-In Capital (APIC)
Definition: Extra amount investors paid above the stock’s par value.
Example: Par value is $1, and stock is sold for $8 → $7 goes to APIC.

3 Sections of SE statement

Operating Section
Definition: Day-to-day cash flows from the core business (income statement-related).
✅ Example Items:

• Dividends Received: Cash received from investments in other companies.
  Example: Company earns $500 in dividends from stocks it owns.

• Interest Received/Paid: Interest from or on loans (unless capitalized).

• Purchase/Sale of Trading Securities (if current)

Investing Section
Definition: Cash flows from buying or selling long-term assets or investments.
✅ Example Items:

• Lending Money: Giving out loans.
  Example: Company loans $10,000 to another business.

• Purchase/Sale of AFS or HTM Securities: Buying/selling long-term investments.
  Example: Selling long-term bonds.

Financing Section
Definition: Cash flows related to borrowing, repaying debt, and transactions with owners.
✅ Example Items:

• Borrowing Money: Taking out loans.
  Example: Company takes a $50,000 loan from the bank.

• Dividends Paid: Cash paid to shareholders.
  Example: Company pays $2,000 to its investors.

• Repayment of Principal: Paying back the original loan amount (not interest).

2 of making SE statement - Retained earnings

Net income goes to RE

Step 3 of making SE statement

Accumulated other comprehensive income (FUPIE)

Step 4 of making SE statement

Noncontrolling Interest
Part of a subsidiary owned by outside investors, not the parent company.

Example:
Parent owns 80% of a company. The other 20% is the noncontrolling interest.

Periodic payment of interest, Secured by collateral are a sign of

Loans

Current Cost

So if you have a truck on your books and a brand-new one like it costs $60,000 today, then current cost = $60,000.

How much would it cost to buy or replace the asset today?

from the buyer’s perspective.

Current Market Value (Fair Value)

That same van has wear and tear and could be sold for $15,000 in the used car market.

How much could you sell the asset for today?

It’s from the seller’s perspective.