Topic 2: The Balance Sheet

Topic 2: The Balance Sheet Outline.

The Financial Position of A Company. Assets and Liabilities. Owners (Shareholders) Equity (Net worth or Net Asset). The Balance Sheet and The Balance Sheet Equation. Classification of Balance Sheet Items and Examples. Valuation of Assets and Liabilities. Working Capital
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 1

Relation between Business Activities and Balance Sheet and Income Statement
Goals and Strategies Investing Financing

Assets
(Balance Sheet)

Owners Equity and Liabilities Operating

(Balance Sheet)

Adapted from Stickney and Weil 2000: Financial Accounting, p.13

Net Income
(Income Statement)
Topic 2: The Balance Sheet 2

Financial Reporting Standards Babe Bolyai University

Topic 2: The Balance Sheet

The Financial Condition of A Company (1)

Running a business requires
Making Investments
Land and Buildings Equipment, Machinery Vehicles, Trucks Computers Patents, trade marks, contractual rights, computer software Financial investments in securities Inventories Accounts receivable (Credits to customers) Cash and Checking account

Obtaining Financing
Funds from owners (owners or shareholders equity) Subsidies Bank Loan (short- or long-term) Accounts payable to ... (Credits from suppliers, banks, employees, ...) Taxes payable

Financial Reporting Standards Babe Bolyai University

Topic 2: The Balance Sheet

The Financial Condition of A Company (2)

Running a business requires INVESTMENTS (Goods and Rights) Resources FINANCING (Obligations) Sources of Resources Claims on Resources EQUITIES (Owners equity and Liabilities)

= =

ASSETS

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 4

Topic 2: The Balance Sheet

A Companys Assets

Does the company possess or control the resource or the right?

No

Yes
Can the resources or rights generate a future economic benefit?

No

Yes It is an ASSET.
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 5

It is NOT an Asset.

A Companys Liabilities
Has the company received an asset item or external services?

Yes
Has the company paid for the asset or for external services?

Yes

No
Does the company have to pay for them in the future?

No

It is NOT a liability.

Yes It is a liability.
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 6

Topic 2: The Balance Sheet

The Owners Equity...

Definition Funds provided by the owners, the owners claim on the assets of a firm after deducting liabilities. Owners Equity = Assets Liabilities Assets Equities
Liabilities

Owners Equity

Paid-in Capital Funds provided by the owners + + Retained Additional owners equity Earnings generated by profits
Topic 2: The Balance Sheet 7

Financial Reporting Standards Babe Bolyai University

The Balance Sheet and The Balance Sheet Equation

Assets
Balance Sheet on Dec. 31, 2

Equities

Liabilities Assets Owners Equity

(Net worth)

INVESTING
How are the funds used?

= =

FINANCING
Where do the funds come from?

Resources Assets
Financial Reporting Standards Babe Bolyai University

Sources of Resources Equities

(Liabilities and Owners Equity)
8

Topic 2: The Balance Sheet

Topic 2: The Balance Sheet

Classification of Balance Sheet Items acc. to Liquidity and Maturity

Assets
Noncurrent

Equities
Low (long-term)

Liquidity

Maturity

Current

High (short-term)

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 9

The Balance Sheet

Assets
Noncurrent Assets Intangible Assets Tangible Assets Financial Investments (longterm) Propery Investments Current Assets Inventories Accounts receivable Cash and Cash Equivalents
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 10

Equities (L+OE)
Owners Equity

Long-term liabilities

Short-term liabilities

Topic 2: The Balance Sheet

Assets Definitions and Classification

Assets
Resources of a firm that are expected to provide future benefits to the firm.

Noncurrent Assets
Resources held and used more than one year.

Current Assets
Resources expected to be turned into cash, sold or consumed within less than one year from the date of the balance sheet.

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 11

Noncurrent Assets - Examples

Rights, Patents Land Buildings Equipment Furniture Long-term investment in shares, bonds
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 12

Topic 2: The Balance Sheet

Current Assets - Examples

Inventories (imagine a production process...)
Merchandise Raw materials Unfinished goods Finished goods

Accounts receivable (Customers, Debtors) Notes receivable

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 13

Current Assets Examples (continued)

Marketable securities (bonds, shares) Advances to suppliers Revenues receivable Cash or cash equivalents

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 14

Topic 2: The Balance Sheet

Liabilities Definitions and Classification

Liabilities
Obligations of a firm to make payments or deliver goods/services.

Long-term Liabilities
Obligations that have to be fulfilled within a period of more than one year from the date of the balance sheet.

Short-term Liabilities
Obligations that have to be fulfilled within one year from the date of the balance sheet.

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 15

Liabilities - Examples
Accounts payable to Suppliers, Creditors Notes payable Advances from customers Expenses payable Bonds payable

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 16

Topic 2: The Balance Sheet

Valuation of Assets and Liabilities

Tangible and Intangible Assets
At Acquisition Price or Production Costs

Liabilities
At Repayment Price

Lower of cost or Market Rule

Acquisition Price higher than Market Value Market Value Acquisition Price lower than Market Value Acquisition Price

Recognize all obligations already established and those which can only be estimated

Financial Assets
At Market Value
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 17

Working Capital
The working capital is a measure of the liquidity of the company:
We compute the working capital as follows:

WORKING CAPITAL = Current Assets Short-Term Liabilities

Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet 18

Topic 2: The Balance Sheet

Positive Working Capital

Assets Liabilities Assets
Working capital

Liabilities

Fixed Assets

Equity

Fixed Assets Equity

Current Assets

LT Debt

Current Assets ST Debt

ST Debt
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet

19

Negative Working Capital

Assets Working capital Negative Liabilities

Fixed Assets

Equity

Current Assets
Financial Reporting Standards Babe Bolyai University Topic 2: The Balance Sheet

S.T Debt

20

10