Lecture 2 Accounting, REI faculty, 2nd year, 2011-2012

Balance Sheet: presentation and layouts

ASSETS: Assets are the economic resources of the entity, and include such items as cash, accounts receivable (amounts owed to a firm by its customers), inventories, land, buildings, equipment, and even intangible assets like patents and other legal rights and claims. Assets are presumed to entail probable future economic benefits to the owner. LIABILITIES: Liabilities are amounts owed to others relating to loans, extensions of credit, and other obligations arising in the course of business. OWNERS' EQUITY: Owners' equity is the owners or the owner's "interest" in the business. It is sometimes called net assets, because it is equivalent to assets minus liabilities for a particular business. Required: fill in the first blank column of the attached example with A, L, or OE

1. Balance Sheet presentation

An entity must present classified balance sheets, separating current and noncurrent assets and liabilities. Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprises normal operating cycle; or assets held for trading within the next 12 months (assets that will be converted into cash or consumed within one year or the operating cycle, whichever is longer). All other assets are noncurrent. An asset shall be classified as current when it satisfies any of the following criteria: (a) it is expected to be realized in, or is intended for sale or consumption in, the entity's normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it is expected to be realized within twelve months after the balance sheet date; or (d) it is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date. Current liabilities are those to be settled within the enterprises normal operating cycle or due within 12 months, or those held for trading (obligations that will be liquidated within one year or the operating cycle, whichever is longer). All the other liabilities are noncurrent. Minimum items on the face of the balance sheet (a) property, plant and equipment; (b) intangible assets; (c) financial assets; (d) inventories; (e) trade and other receivables; (f) cash and cash equivalents; (g) trade and other payables; (h) provisions; (i) liabilities and assets for current income tax. Conf. univ. dr. C t lin ALBU 1

Lecture 2 Accounting, REI faculty, 2nd year, 2011-2012

Vocabulary
Property, plant and equipment are tangible assets that: (a) are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Work in progress: products in the process of being manufactured but are not completed. Raw materials: inventories purchased for use in the manufacturing process. Finished goods: manufactured products that have been completed and are ready for sale. Merchandise: goods bought and held for resale. Accounts receivable: amounts due from customers from credit sales of products or services, a.k.a. "trade receivable" (as opposed to financial receivable). Accounts payable are the amounts due to suppliers relating to the purchase of goods and services. Notes payable are formal short-term borrowings usually evidenced by a specific written promise to pay. A provision is a liability of uncertain timing or amount. The total owners' equity of a corporation usually consists of several amounts, generally corresponding to the owners investments in the capital stock (share capital) and additional amounts generated through earnings that have not been paid out to shareholders as dividends (dividends are distributions to shareholders as a return on their investment). Earnings give rise to increases in "retained earnings," while dividends (and losses) cause decreases. Prepaid expenses: Expenses recognized after cash is paid (for services paid in advance of their consumption). At the time of purchase, such prepaid amounts represent future economic benefits that are acquired in exchange for cash payments. As such, the initial expenditure gives rise to an asset. As time passes, the asset is diminished (through subsequent adjustments the asset goes into the IS). It is related to the accrual basis concept. Accounting conventions: accrual basis of accounting vs. cash-basis of accounting: we operate nowadays under an accrual convention (concept), i.e. revenues are measured and recorded as earned, while expenses are recorded as incurred. By opposition, cash basis of accounting is when revenue is recorded when cash is received (no matter when "earned"), and expenses are recognized when paid (no matter when "incurred").

Conf. univ. dr. C t lin ALBU

Lecture 2 Accounting, REI faculty, 2nd year, 2011-2012

2. Balance Sheet layouts 1) Horizontal layout

Assets can be presented current then noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa (but consistent). For example:

Noncurrent assets
Intangible assets Tangible assets Financial assets

Example Co. Balance Sheet Owners equity

Share capital Reserves (retained earnings) Profit for the period

Current assets
Inventories Debtors Investments Cash

Noncurrent liabilities
Loans Provisions

Current liabilities
Loans Accounts payable Wages (salaries) payable

Total assets

Total owners equity and liabilities

Noncurrent assets (fixed assets): 1. Intangible assets (patents, licenses, trade marks) 2. Tangible assets (land, buildings, plant and machinery) 3. Financial assets (shares, loans to third parties, investments held as fixed assets).

Current assets: 1. Inventories (raw materials and consumables, work in progress, finished goods, goods for resale or merchandise); 2. Debtors (accounts receivable) 3. Investments (shares and other short-term investments) 4. Cash at bank and in hand.

Liabilities: must be separated in current and noncurrent (loans, trade payable, wages payable).

Required: classify each balance sheet item and draw a horizontal balance sheet for the example provided

Conf. univ. dr. C t lin ALBU

Lecture 2 Accounting, REI faculty, 2nd year, 2011-2012 2) Vertical layout A net asset presentation (assets minus liabilities) can be used:

A B C D E F G H I J

Example Co. Balance Sheet Noncurrent assets (fixed assets) Current assets Prepayments Creditors amounts becoming due within one year Net current assets/net current liabilities (B+C-D-I) Total assets current liabilities (A+E) Creditors amounts becoming due after more than one year Provisions Deferred income Capital and reserves (F-G-H)

Deferred income = income receivable before the balance sheet date but relating to a subsequent financial year.

Required: draw a vertical balance sheet for the example provided Example Co. Balance Sheet A Noncurrent assets (fixed assets) B Current assets C Prepayments D Creditors - amounts becoming due within one year E Net current assets/net current liabilities (B+C-D-I) F Total assets current liabilities (A+E) G Creditors - amounts becoming due after more than one year

H Provisions I Deferred income J Capital and reserves (F-G-H)

Conf. univ. dr. C t lin ALBU