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Services		The balance sheet gives good information if it is looked at carefully. The examination of liquidity (the ability to meet current debt payment when due) is very important. Creditors will be interested in the ratio of cash or equivalents to liabilities. Creditors and stockholders use the balance sheet to study the financial ability to adapt to changes. Classifications- Same accounts are grouped together and important associations are shown: A) Assets-Financial characteristics of economic resources-Cash, etc.-the interest in which is legally or justly obtained by a company from past transactions. They are then sub-classified in current and non-current (over 1 year old). 1-Current assets: Cash and other assets that can be changed in cash or sold or used in one year or operating cycle. They are shown on the balance sheet in the order of their liquidity. The five key accounts are cash, marketable securities, receivables, inventories, and prepayments. 2-Long term investments: held for over one year and are shown below current assets a) Securities-bonds, stocks, notes b) Pension, plant, and sinking funds 3-Property, plant and equipment: are capable of with standing wear and tear (Durable goods). Examples: Land, buildings, machinery, equipment, furniture, fixtures, etc. Most are depreciable except land. 4-Intangibles: can’t be physically touched. Examples: Patent, goodwill, trade names, trademarks, copyrights, etc. They are written down (amortization) over their useful life. 5-Other assets: This section is used differently by companies and the accounts includes: non-current receivables, special funds and advances to related companies. B) Liabilities- Financial responsibilities as by a contract or promise to pay resources to other enterprises caused by a past transaction of the company. 1-Current liabilities: debt that are expected to be paid by the use of current assets or converted into other current liabilities in the operating cycle including: a) Payables caused by purchasing goods and services- accounts payable, wages payable, taxes payable, etc. b) Advance collection for the delivery of goods or services Example: prepaid rent income or prepaid subscription income c) Other liabilities whose payment will be made within one Operating cycle. Examples: Current portion of long-term debt. 2-Long term liability: debts that are “not “expected to be paid by the use of current assets or converted into other current liabilities in the operating cycle including: a) Debts where more assets are purchased, such as bond issuance, long-term lease and notes payable. b) Debts incurred in the ordinary course of business such as pension or deferred tax obligations c) Debts where the occurrence or non occurrence of future events will determine the amount of the debt such as product warrantees C) Owner’s Equity-shows the ownership make up of the company. The stockholders. It is usually shown as follows: a) Capital stock-Common (Par or no par value of stock issued) b) Additional (excess) paid in capital-amounts paid over par or stated value c) Retained earnings-undistributed (reinvested) accumulated earnings d) Treasury stock-repurchase of issued stock. Shown as a reduction of equity D) Other information: The balance sheet is not considered finish because of the listing of the above items. Footnotes and other clarifications of the above items are needed such as: 1) Contingencies-Uncertainty of outcome that may have an effect on the balance sheet items. Example: Pending litigations 2) Valuation policies-Description of methods used in calculations. Examples: Inventory cost, depreciation calculation 3) Contracts-restrictions explained. Liability clauses for example. 4) After balance sheet disclosures-events that occurred after the balance sheet was prepared but before they are given out are to shown in footnotes. Let us “See-saw the numbers” for the balance sheet Assets = Liabilities + Equity Assets -- Liabilities = Equity You don’t need a college degree to “see saw” in the numbers in the above equations in checking your investment company’s balance sheet. Let’s try an example: Assets: Current $ 50 Non current 250 Total 300 Liabilities Current $ 30 Non-current 40 Total 70 Equity Common stock $ 20 Paid in capital 35 Retained Earnings 175 Total 230 Assets = Liabilities + Equity 300 equal 70 plus 230 Assets -- Liabilities = Equity 300 less 70 equal 230 The left side must equal the right side of the equation like a “see saw” or a “balance “ thus the term balance the books or balance sheet. That simple. We will use this example in the ratio analysis below. Current ratio=Current assets/current Liabilities 1.67 = 50 divide by 30 Note: A high ratio is preferred Debt to total assets= Total debt / total assets 23 % = 70 divide by 300 Note: Creditors prefer a low percentage ©/2003 to 2009 A Andrew Harrison CPA P.C. love a challenge
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