The Balance Sheet and

Financial Disclosures
Chapter 3

Intermediate Financial Accounting

The Balance Sheet

Reports a companys financial position on a particular date.
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.

Intermediate Financial Accounting

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 companys
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.

Classifications

Liabilities
Assets

Intermediate Financial Accounting

Shareholde
rs Equity

Intermediate Financial Accounting

Current Assets
1.
2.

Current
Assets

3.
4.
5.

Will be
converted to
cash or
consumed
within one
year or the
operating
Intermediate
Financial Accounting
cycle,
whichever is

6.

Cash
Cash Equivalents
Short-term
Investments
Receivables
Inventories
Prepaid Expenses
Cash equivalents
include certain
negotiable items
such as
commercial paper,
money market
funds, and U.S.
treasury bills.

Operating Cycle of a
Typical Manufacturing Company

Use cash to acquire raw materials

Convert raw materials to

finished product

Deliver product to customer

from customer

Intermediate Financial Collect

Accounting
cash

Noncurrent Assets
1.

Noncurrent
Assets

2.

3.

Not expected
to be
converted to
cash or
consumed
within one year
or the
operating
Intermediate
Financial Accounting
cycle,

4.

Investments
Property,
Plant, &
Equipment
Intangible
Assets
Other Assets

Noncurrent Assets

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.

Intermediate Financial Accounting

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.
Other Assets

1.

Include long-term prepaid

expenses and any noncurrent
assets not falling in to one of the
other classifications.

Liabilities represent obligations to other

entities. The information value of reporting
these amounts is enhanced by classifying
them
as current
Intermediate
Financial
Accountingliabilities and long-term
liabilities.

Current Liabilities
1.

Current
Liabilities

2.
3.
4.

Obligations expected to
be satisfied through
current assets or
creation of other current
liabilities within one year
or the operating cycle,
whichever is longer.

Intermediate Financial Accounting

5.

Accounts
Payable
Notes Payable
Accrued
Liabilities
Unearned
Revenues
Current
Maturities of
Long-Term Debt

Long-Term Liabilities
Long-Term
Liabilities

1.
2.
3.
4.

Obligations
that will not be
satisfied within
one year or the
operating
cycle,
whichever is
longer.
Intermediate Financial Accounting

5.

Long-term Notes
Mortgages
Long-term Bonds
Pension
Obligations
Lease Obligations

Shareholders equity is the residual interest

in the assets of an entity that remains after
deducting liabilities.

Intermediate Financial Accounting

U.S. GAAP vs. IFRS

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.

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 Financial
and liabilities.
Intermediate
Accounting

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.

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.

Intermediate Financial Accounting

Disclosure Notes
Summary of
Significant
Accounting
Policies

Subsequent
Events
Noteworthy
Events and
Transactions

Intermediate Financial Accounting

Conveys valuable information

about the companys choices
from among various
alternative accounting
methods.
A significant development
that occurs after the
companys fiscal year-end
but before the financial
statements are issued or
available to be issued.
Transactions or events that
are potentially important to
evaluating a companys
financial statements, e.g.,
related-party transactions,
errors and irregularities, and
illegal acts.

Management Discussion and

Analysis

Provides a biased but

informed perspective of
a companys operations,
liquidity, and capital
resources.

Intermediate Financial Accounting

Managements
Responsibilities
Preparing the financial
statements and other information
in the annual report.
Maintaining and assessing the
companys internal control
procedures.

Intermediate Financial Accounting

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
Intermediate Financial
Accounting
(PCAOB).

Auditors Opinions
Unqualified

Issued when the financial statements

present fairly the financial position, results
of operations, and cash flows and are in
conformity with U.S. GAAP.

Qualified

Issued when there is an exception that is

not of sufficient seriousness to invalidate
the financial statements as a whole.

Adverse

Issued when the exceptions are so serious

that a qualified opinion is not justified.

Intermediate

Disclaimer Accounting
Financial

Issued when insufficient information has

been gathered to express an opinion.

Compensation 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.
Intermediate Financial Accounting

Using Financial Statement Information

Comparative Financial
Statements

Allow financial statement users to

compare year-to-year financial position,
results of operations, and cash flows.

Horizontal Analysis

Expresses each item in the financial

statements as a percentage of that
same item in the financial statements of
another year (base amount).

Vertical Analysis

Involves expressing each item in the

financial statements as a percentage of
an appropriate corresponding total, or
base amount, within the same year.

Ratio
Analysis
Intermediate
Financial
Accounting

Allows analysts to control for size

differences over time and among firms.

Liquidity Ratios
Current ratio =

Current assets
Current liabilities

Measures a companys ability to satisfy its

short-term liabilities

Acid-test ratio

Quick assets
Current liabilities

Provides a more stringent indication of a

companys ability to pay its current
Intermediate Financial Accounting liabilities

Financing Ratios
Total liabilities
Debt to equity
=
ratio
Shareholders equity
Indicates the extent of reliance on
creditors, rather than owners, in providing
resources

Times interest
earned ratio

Net income + Interest

expense + Income taxes
Interest expense

Indicates the margin of safety provided to

Intermediate Financial Accounting creditors

Appendix 3: Reporting Segment

Information
Many companies operate in several business
segments as a strategy to achieve growth and
to reduce operating risk through diversification.
Segment reporting facilitates the financial
statement analysis of diversified companies.

Reportable Operating Segment

Characteristics
Engages in business activities
from which it may earn revenues
and incur expenses.
Discrete financial information is
available.
Intermediate Financial
Accounting

Operating results are regularly

reviewed by the enterprises
chief operating decision maker to
make decisions about resources
to be allocated to the segment
and assess its performance.

What Amounts Are Reported By An

Operating Segment?
General information about
the operating segment.

Reconciliations of the
totals of segment
revenues, reported profit
or loss, assets, and other
significant
Intermediate
Financialitems.
Accounting

Segment profit or loss,

segment assets, and the
basis of measurement.

Interim period information.

Segment Reporting
Reporting by Geographic
Area

U.S. GAAP requires an

enterprise to report
certain geographic
information unless it is
impracticable to do so.

Information About Major

Customers

Revenues from customers

generating 10% or more
of the revenue of an
enterprise must be
disclosed.

Intermediate Financial Accounting