Balance sheet

The Statement of financial position (balance sheet) “provides information about an entity’s assets, liabilities, and equity and their relationships to each other at a moment in time.” It helps users to assess “the entity’s liquidity, financial flexibility, profitability, and risk.”

Balance sheet accounts are real (permanent) accounts their balances carry over from one period to the next.

Assets ⇒ Resource structure = Financing structure ⇒ Liabilities + Equity

The equation is based on the proprietary theory. The owners’ Equity in an enterprise (residual interest is what remains after the economic obligations of the enterprise are subtracted from its economic resources

Resource structure

Current assets

• Current assets precedes non current assets.
• Current assets are usually presented in descending order of liquidity.
• Prepaid expenses are valued on the B/S at cost less expired or used portion.

Noncurrent assets

Noncurrent assets are usually presented in an order determined by convention rather than by liquidity.

Categories of Noncurrent assets :

1- Long-term investments and funds typically include:

• Investments in securities intended to be held on a long-term basis.
• Restricted funds, such as bond sinking funds or plant expansion funds.
• Cash surrender value of life insurance policies.
• Capital assets not used in current operations, such as idle facilities or land held for a future plant site or for speculative purposes.

2- Property, plant, and equipment (PPE)

PPE ⇒ Consist of tangible items used in operations.

PPE ⇒ is recorded at cost and is shown net of accumulated depreciation if depreciable.

3- Intangible assets

Intangible assets are defined as nonfinancial assets without physical substance.

Examples are patents, copyrights, trademarks, trade names, franchises, and purchased goodwill.

4- Other noncurrent assets

This caption includes noncurrent assets not readily classifiable elsewhere. Accordingly, there is little uniformity of treatment.

Among the items typically reported as other assets are:

• Long-term receivables arising from unusual transactions, e.g., loans to officers or employees and sales of capital assets.
• Bond issue costs.
• Long-term prepayments.
• Deferred tax assets.

Financing Structure

a Firm’s Liabilities and Owners’ Equity include:

1- Current liabilities

Current liabilities are “obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities.”

Their order of presentation is usually governed by nearness to maturity.

Notes payable that included among current liabilities are tools of short-term cash generation.

Current liabilities include unearned revenues; that represent cash received in advance of the delivery of goods or services such as subscriptions.

Current liabilities include Current maturities of long-term debt, Current maturities of long-term debt are that portion of long-term debt (e.g., bonds issued) that must be retired using current assets.

Long term obligations that are or will become callable by the creditor because of a debtor’s violation of a provision of a debt agreement at the B/S date should be classified as current liabilities unless the creditor has waived the right to demand repayment for more than one year from B/S date. Also, reclassification is nor required if the debtor expect and has the ability to finance a current obligation on a long term basis.

Also short term obligations expected to be refinanced should be reported as a current liabilities unless the firm both plans to refinance and has the ability to refinance the debt on a long term basis, the ability to finance on a long term basis is evidenced by a post B/S date Issuance of long term debt or entering into a financing agreement that clearly demonstrates its ability to consummate the refinancing then, in such cases the amount to be reclassified as a long term liability depends on the demonstrated ability to consummate the refinancing.

2- Noncurrent liabilities

Non-current liabilities include Long-term notes payable, Bonds payable, Liabilities under capital leases, Pension obligations, deferred tax liability, Advances for long-term commitments to provide goods or services, Advances from affiliated entities, deferred long term revenue.

3- Equity

Equity of a business enterprise is the residual interest after total liabilities are deducted from total assets.

Preferred stock (if any) is generally listed first since it stands first in line during liquidation.

The retained earnings balance is sometimes divided into appropriated and un-appropriated amounts.

Treasury stock is the firm’s own stock that has been repurchased either to shrink the breadth of the firm’s ownership base or to have a pool of stock to disburse in the form of dividends, A corporation can never report its own stock as an asset, Treasury stock is reported either at cost (as an unallocated deduction from total equity) or at par (as a direct reduction of the relevant contributed capital account).