statements of financial position and cash flows and the annual report

statement of financial position (balance sheet)

lists and entity’s assets, liabilities, and equity as of a specific point in time

• consists of permanent accounts with cumulative balances that the company carries forward period to period over the life of the firm

• assets = liabilities + owner’s equity holds at every date

Balance sheet (B/S) is helpful in

• the economic resources and obligations of the entity

  • impacts the entity’s ability to generate future cash flows

• an entity’s rate of return on its investments

• risks associated with an entity by providing inputs for cash flow measures

limitations of balance sheet

• most assets and liabilities are reported at historical cost → less relevant

• many valuations involve estimates and judgements

  • ex: allowance for uncollectible receivables, useful life, salvage value, etc.

• B/S omits many items that are of financial value bc future economic benefits cannot be identified and objectively measured

  • reason: lack of reliability in measurement outweighs benefits of inclusion

  • ex: human capital, internally developed intangible assets

assets

1) probable future economic benefits 2) obtained or controlled by a particular entity 3) as a result of past transactions of events

liabilities

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 future as a result of past transactions or events

owner’s equity

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

balance sheet classifications: assets

• current assets

• long-term investments

• property, plant, and equipment

• intangible assets

• other assets

balance sheet classifications: liabilities

• current liabilities

• noncurrent liabilities

balance sheet classifications: stockholder’s equity

• contributed capital

• retained earnings

• accumulated other comprehensive income

• noncontrolling interest

current assets (CA)

resources a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer.

• presented in the B/S in order of liquidity

operating cycle

period of time from the acquisition of goods to the point at which the entity receives cash from the sale of the goods

• cash → inventory → production → receivables → cash

ca: cash and cash equivalents

cash:

• coins, currency, money orders and demand deposits

cash equivalents: short-term highly liquid investments that will mature within three months or less

• commercial paper, US treasury bills, money market funds

valued at fair value

CA: short term investments & AR (accounts receivable)

short term investments: investments in debt or equity securities of other corporations or governmental entities that the entity has the abiity and intent to sell within the next year or operating cycle, whichever is longer

accounts receivable (trade receivables): amounts owed to the entity resulting from the sale of goods or services to customers on credit

• measured net of an allowance for estimated bad debts

CA: inventory

tangible property that is either

• held for sale in the ordinary course of business

• used as raw materials in the manufacturing process to produce finished goods to be sold in the ordinary course of business

• held as supplies to be currently consumed when providing goods or services

CA: prepaid expenses

Assets that arise when expenses are paid before they are incurred

• ex: prepaid insurance, prepaid rent, office supplies

• Any portion of the associated benefit that extends beyond the current year is classified as noncurrent other assets

Noncurrent (NCA) assets - LT investments

Noncurrent assets that are not used directly in the operation of the business

1. Securities: bonds, common stock, long-term notes

2. Tangible fixed assets not currently used in operations: land or property not used in opeartions

NCA: property, plant, equipment (PP&E)

• tangible long lived assets used in the regular operations of the business

• Aka “fixed assets”

• Ex: land, buildings, machinery,