Description
Discussion Requirements: Your weekly discussion posts should be at least a paragraph (150 to 300 words) for each topic listed. In addition, you are required to post at least two responses to other students comments in each discussion-question thread by Friday Night.
- The financial news is always about income and income projections. If everyone including taxing authorities are so interested in net income, why is this section titled The Balance Sheet Reveals the Most?
- Choose two concepts/topics you learned from this section that you found most interesting or confusing? Please briefly explain the concepts and why you found them to be the most interesting.
Lecture Notes
The balance sheet is a snapshot of a companys financial position. It shows the items of economic value (assets) a company owns, what is owed to creditors (liabilities), and what is owed to owners (equity). It is the balance sheet because it represents a companys accounting equation: assets = liabilities + equity. Equations must always balance.
This statement also has a heading. It starts with the company name. The statement name comes next. The last line is the time-period covered. A balance sheet only represents a date. Therefore, it is called a snapshot.
Estimates and assumptions are present in the balance sheet. Cash is the only account that will not contain estimates and assumptions. Allowance for bad debt or allowance for doubtful accounts is an estimate of how much of the accounts receivable will not be collected. Accumulated depreciation is an account used to help spread the cost of a long-term, tangible asset over its useful economic life. It is an estimate that assumes the life term of an asset.
Intangible assets such as franchises, copyrights and trademarks are amortized. Amortization is the process of spreading the cost of an intangible asset over its useful or legal life. It is also an estimate based on an assumption.
Most of the time, assets and liabilities on the balance sheet are split between short-term and long-term. Short-term are assets that can be converted to cash within a year. Short-term liabilities are those that can be paid within a year. Long-term are those items that will take longer than a year to collect or pay. Long-term assets are frequently presented in more categories: Investments, Property, Plant, and Equipment (PPE), Natural Resources, Intangible assets.
As mentioned in the introduction, nonprofit balance sheets are called statements of financial position. The name alone will not identify the statement as a nonprofit statement because for profit statements are often referred to as statements of financial position. They both cover assets, liabilities, and equity. There will also be a difference in focus. A regular for profit entity focuses on revenue generation. A nonprofit balance sheet will focus on the sources of funds.
The Balance Sheet Reveals the Most
Please explore this video called How to Read a Balance Sheet by Brett Thornett
Weekly Commentary:
The section outline below highlights the main points of each section of your text, Financial Intelligence, and provides some additional commentary. It is a a good idea to read both for the best understanding possible.
Financial Intelligence: A Managers Guide to Knowing What the Numbers Really Mean
Part Three: The Balance Sheet Reveals the Most
10. Understanding Balance Sheet Basics
a. Assets = Liabilities + Capital or Equity
b. Statement of what is owned and what is owed at a particular point in time.
c. Retained or accumulated earnings is the earnings from the inception of the business until now minus any losses or distributions.
d. Equity: Assets liabilities. The companys book value.
e. Equity is also capital paid in by owners plus retained earnings
f. Personal balance sheet: assets = liabilities + net worth
g. Balance sheet covers a point in time not a time span.
11. Assets: More Estimates and Assumptions (Except for Cash)
a. Assets = things of economic value a company owns
b. Current assets are any asset that can be turned into cash within a year.
c. Long-term or Non-current assets are assets that are not current.
d. Categories of assets within current: Cash and cash equivalents, accounts receivable, inventory, prepaid assets, accruals
e. Allowance for bad debt is a contra-asset that goes along with Accounts Receivable. Accounts receivable allowance for bad debt = net realizable value of accounts receivable
f. Smoothing Earnings
g. Finished goods inventory, Work in process inventory, Raw materials inventory
h. Categories of assets within long-term: Property, Plant, and Equipment (PPE), Natural Resources, Intangible assets
i. Cost principle is used with long-term assets
j. Accumulated depreciation is a contra-asset used with PPE to help record and keep track of depreciation.
k. Goodwill is the difference between purchase price of a company and the fair value of its net assets. It is an intangible asset.
l. Acquisition, merger, purchase and consolidation are all pretty much the same thing.
m. Intangible assets: Goodwill, intellectual property, patents, copyright, and others
n. Mark-to-market: Allows or requires certain assets to be listed at current market value.
12. On the Other Side: Liabilities and Equity
a. Liabilities are what are owed to creditors
b. Equity is net worth
c. Current liabilities are due within one year. The current portion of long-term debt is also shown here along with accounts payable, short-term borrowings, deferred revenue and accruals.
d. Long-term liabilities due in longer than a year
e. Equity = capital and retained earnings
f. Equity, owners equity, shareholders equity, stockholders equity
g. Preferred shares or stock: Preference in dividends and liquidation, usually no voting rights
h. Common shares or stock: Usually the voting stock.
i. Dividends are funds distributed to shareholders.
j. Retained earnings
13. Why the Balance Sheet Balances
a. Assets = Liabilities + Equity
b. Individual: Assets liabilities = Net worth
14. The Income Statement Affects the Balance Sheet
a. Beginning retained earnings + Net Income dividends = Ending retained earnings
b. Beginning retained earnings + (revenues expenses)-dividends = Ending retained earnings
c. Ending retained earnings is what is needed to help balance the balance sheet.
d. Many business transactions involve accounts from both the balance sheet and the income statement.
e. Balance sheet helps show the health of a company.
15. Toolbox
a. Capital expenditure vs. expense
b. Mark-to-market
