Chapter
Balance Sheet
Balance Sheet
• Also called as statement of financial position and
statement of financial condition
• Shows financial condition as of a specific date
• The accounting equation expresses the
relationship among elements of balance sheet
Assets = Liabilities + Stockholders’ Equity
• Format
– Account form (side by side)
– Report form (assets at top and liabilities and
stockholders’ equity at bottom) dominant in the U.S.
Quaker Chemical Corporation
Quaker Chemical Corporation
Assets
• Probable future economic benefits obtained or
controlled by an entity as a result of past
transactions or events
• May be physical or intangible
• Major categories
– Current Assets
• Includes cash, and assets that will be realized in cash during
the operating cycle or one year which ever is longer
– Noncurrent or Long-term Assets
• Includes assets that take longer than one year or operating
cycle to convert or to conserve cash
Current Assets
• Cash and assets that will be converted into cash
during the operating cycle or within a year,
whichever is longer
• Presented in order of liquidity
• Cash
– Includes negotiable checks, unrestricted balance in
checking accounts, cash on hand, savings accounts
Current Assets—Continued
• Marketable Securities—readily determinable
market price
– Debt or equity securities
– Carried at fair value
– To be converted into cash during the current period
• Accounts Receivable
– Amounts due from sales or services rendered
– Carried at net realizable value (net of allowances)
– All allowances are carried in one allowance account
– Other receivables due from nontrade sources
Current Assets—Continued
• Inventories
– Balance of goods on hand
– Categories
• Merchandise on hand—retail or wholesale firms
• Raw materials
• Work in process Manufacturer
• Finished goods
– Carried at the lower of cost or market
– Supplies could include register tapes, pencils, or
sewing machine needles for the shirt factory
Current Assets—Continued
• Prepaids
– Expenditures made in advance of the use of the
service or goods
– Represent future benefits resulting from past
transactions
– Examples
• Insurance
• Advertising
• Early payments on long-term contracts
Long-Term Assets: Tangible
• Land
– Carried at acquisition cost
– Not subject to depreciation
– Natural resources are depleted
• Buildings
– Presented at cost plus permanent improvements
– Depreciated over their estimated useful life
Long-Term Assets: Tangible—
Continued
• Machinery
– Historical cost, including costs of delivery, installation,
and material improvements
– Depreciated over its useful life
• Construction in Progress
– Assets under construction
Liabilities
• Probable future sacrifices of economic benefits
arising from present obligations of a particular
entity to transfer assets or provide services to
other entities in the future as a result of past
transactions or events
– Current Liabilities
– Long-term Liabilities
Current Liabilities
• Obligations whose liquidation is reasonably
expected within one year or the operating cycle,
whichever is longer
• Require
– Use of existing current assets
– Creation of other current liabilities
Current Liabilities—Continued
• Payables
– Short-term obligations created by the acquisition of
goods or services
• Unearned Income
– Payments collected in advance of the performance of
services or delivery of goods
• Other Current Liabilities
Long-Term Liabilities
Due in a period beyond one year or operating
cycle, whichever is longer
Liabilities Relating to Financing
Agreements
• Notes Payable
– Promissory notes
– If secured by property, they are called mortgage
notes
• Credit Agreements
– Ready lines of credit that may require a compensating
balance
– In return for giving a credit agreement, the bank or
insurance company obtains a fee
– Not a liability until funds are drawn
Liabilities Relating to Financing
Agreements—Continued
• Bonds Payable
– Sold at par, premium, or discount
– Premium or discount is amortized into interest
expense
– Bond carrying value is amortized to par value
– Convertible bonds can be converted into common
stock
– Conversion feature enhances the bond’s selling price
Stockholders’ Equity
• Also called shareholders’ equity
• The residual ownership interest in the assets of
an entity that remains after deducting its
liabilities
– Paid-in capital
– Retained earnings