The Balance Sheet (Sections 3.4 - 3.6)

To get to a period closing balance sheet, we need to ___________. We can do this by ___________.

take into account all the things that happened during the year ; looking at the income statement

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How is the income statement linked to the balance sheet?

Linked via retained earnings (in shareholders’ equity). All income on the I/S (revenue, interest income, etc.) INCREASES retained earnings on the B/S (credits). All expenses on the I/S (COGS, SG&A, tax, etc.) DECREASE retained earnings (debits).

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We can only equate net income and retained earnings when ___________. This is because retained earnings is ___________ (i.e. it includes the beginning balance of RE, net income, and ___________).

no dividends are paid out ; cumulative ; dividend

On the B/S, assets are presented in the order of ______________.

descending liquidity

On the B/S, cash is listed as the _________ asset because it’s the _________.

first ; most liquid

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After cash on the B/S, are __________ and __________ since these can be ___________.

accounts receivable ; inventory ; liquidated (i.e. sold) quickly

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Less liquid assets like __________ and _________ are listed towards ___________ of the B/S.

PP&E ; intangible assets ; the bottom of the assets side

Current Assets

Any asset that can be converted (liquidated) into cash within 12 months is considered a current asset on the B/S.

Current Liabilities

The opposite of what current assets are; a current liability is anything that is expected to be paid/are payable within 12 months (e.g. short-term debt and accounts payable).

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Long-Term Liabilities

Liabilities that are not due within the year.

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