LO1 (Part 1) Assets: Financial Statements - Balance Sheet

This module focuses on the four financial statements.
Refer to slide number two in the module two lecture slides.
Important to build vocabulary and apply concepts to personal, employer, and company transactions.

The balance sheet consists of three sections: assets, liabilities, and stockholders' equity.
Stockholders' equity is also known as shareholders' equity, owners' equity, or equity.
Assets are the resources of the company.
Resources must equal the claims against those resources.
Claims are from liability holders and stockholders.
Balance Sheet Equation:
$Assets = Liabilities + Stockholders' Equity$
The balance sheet is a "point statement" representing a company's financial position at a specific point in time.
Each balance sheet account is a permanent account, carrying over from one period to the next.

Important concept to understand.
Cost resulting in immediate benefit: Recognized in the income statement as an expense.
Cost providing future economic benefit: Recorded on the balance sheet as an asset (capitalizing the cost).
As the asset is used, its cost moves from the balance sheet to the income statement as an expense.
Example:
- Paying $800$ cash for a new phone.
- AT&T charges $60$ a month for service.
- The monthly phone bill is an immediate expense.
- The cost of the phone provides future economic benefit, so it is capitalized and expensed over the phone's life.
The flow of cost depends on whether it's capitalized or expensed immediately.
All costs will eventually end up in the income statement; it's just a matter of timing.

A resource expected to provide future economic benefits.
To be reported on the balance sheet, an asset must:
- Be owned or controlled by the company.
- Have been the result of a past transaction or event.
As benefits are used up, the asset's cost transfers to the income statement as an expense.

Include cash and assets expected to be converted to cash or used up within one year.
Examples:
- Cash: Currency on hand and bank deposits.
- Cash Equivalents: Relatively riskless and highly liquid investments with original maturity of $90$ days or less.
- Short-Term Investments: Marketable securities the company expects to sell within one year.
- Accounts Receivable: Amounts owed for goods or services sold on credit.
  - Adjusted downward (net) based on expected uncollectible amounts.
  - This gives the amount the company expects to collect.
- Inventories: Goods purchased and held for sale or used in manufacturing goods to be sold to customers.
- Prepaid Expenses: Costs paid in advance for goods or services.
  - Examples: rent and insurance.
  - Reported as an asset initially, then expensed as the benefit is received.
    *Paying rent allows one to live in the accomodation for a month.

Most assets are reported at original cost (historic cost).
Very few assets are reported at current market value.
Problematic for valuation because investors prefer market values.
If a company cannot value an asset with relative certainty, it's not reported on the balance sheet.
Examples of unreported assets: Knowledge-based or intellectual property.
Even though these assets may provide a competitive advantage and result in above-normal returns, they are not reported because they cannot be reliably measured.
Example: Apple's logo has value but isn't reported on the balance sheet.

You cannot definitively determine the value of a company's assets by looking at the balance sheet.
Most assets are reported at historic cost.
Many assets are not reported on the balance sheet at all.