ACCT 2001 Chapter : Chapter 2 Class Notes
Chapter Two : A Further Look at Financial Statements
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1. Identify the sections of a classified balance sheet.
2. Identify and compute ratios for analyzing a company’s profitability.
3. Explain the relationship between a retained earnings statement and a statement of
stockholders’ equity.
4. Identify and compute ratios for analyzing a company’s liquidity and solvency using a
balance sheet.
5. Use the statement of cash flows to evaluate solvency.
6. Explain the meaning of generally accepted accounting principles.
7. Discuss financial reporting concepts.
The Classified Balance Sheet
• Reports the assets, liabilities, and equity at a specific point in time.
• Groups together similar assets and similar liabilities, using standard classifications
Assets
Liabilities and Stockholders’ Equity
Current assets
Long-term investments
Property, plant, equipment
Intangible assets
Current liabilities
Long-term liabilities
Stockholder’s equity
Current Assets
• Assets that a company expects to convert to cash or use up within one year or the
operating cycle, whichever is longer.
o Assets that convert to cash:
• Accounts receivable (amt customers owe)
• Inventory
• Short term investments
• Notes receivable (promissory note)
o Assets that get used up within a year:
• Supplies
• Prepaid expenses
• Operating cycle is the average time it takes from the purchase of inventory to the
collection of cash from customers.
• For most businesses, the cycle is less than a year so a one-year cutoff is used.
• Current assets are listed in the order in which they convert to cash (liquidity).
• Total current assets – cash, short term investments, accounts receivable, inventory,
prepaid insurance, supplies
Investments
• Investments in stocks and bonds of other companies that are held for more than one year.
• Investments in long-term assets such as land or buildings not currently being used in
operating activities.
Chapter Two : A Further Look at Financial Statements
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Property, Plant, and Equipment
• Property, plant and equipment assets are assets with long useful lives that are currently
used in operating the business.
• Examples: land, buildings, equipment, vehicles, furniture, computers
• They are also called plant assets, fixed assets, or PPE.
• A process known as depreciation is used to allocate the cost of these assets to a number
of years
• The accumulated depreciation account shows the total of depreciation that a company
has taken so far on it’s assets
• On the balance sheet, the assets that are depreciated are shown at cost minus accumulated
depreciation.
Intangibles
• Assets that do not have a physical substance yet are often valuable
• Examples: patents, copyrights, trademarks, franchises, goodwill
• Goodwill – quantifiable "prudent value" in a business, such as a reputation the firm
enjoys with its clients; arises when one company acquires another, but pays more than the
fair market value of the net assets
Current Liabilites
• Current liabilities are obligations that the company is to pay within the coming year or
operating cycle, whichever is longer
• Examples: accounts payable, taxes payable, wages payable, short-term notes payable,
interest payable, unearned revenue*, current portion of long-term debt
• Usual order is notes payable, accounts payable, and then others in order of
magnitude.
Long-Term Liabilities
• Obligations that a company expects to pay after one year
• Examples: long term note payment, bonds payable
Stockholders’ Equity
• Two parts: Common Stock and Retained Earnings
Chapter Two : A Further Look at Financial Statements
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FRANKLIN CORPORATION
Balance Sheet
October 31, 2012
Assets
Current assets
Cash
$6,000
Short-term investments
2,000
Accounts receivable
7,000
Notes receivable
1,000
Inventory
3,000
Supplies
2,100
Prepaid insurance
400
Total current assets
$22,100
Long-term investments
Investment in stock of Walters Corp.
5,200
Investment in real estate
2,000
7,200
Property, plant, and equipment
Land
10,000
Equipment
$24,000
Less: Accumulated depreciation—equipment
5,000
19,000
29,000
Intangible assets
Patents
3,100
Total assets
$61,400
Liabilities and Stockholder’s Equity
Current liabilities
Notes payable
$11,000
Accounts payable
2,100
Salaries and wages payable
1,600
Unearned sales revenue
900
Interest payable
450
Total current liabilities
16,050
Long-term liabilities
Mortgage payable
10,000
Notes payable
1,300
Total long-term liabilities
11,300
Total current liabilities
27,350
Stockholder’s equity
Common stock
14,000
Retained earnings
20,050
Total stockholder’s equity
34,050
Total liabilities and stockholder’s equity
$61,400
Document Summary
The classified balance sheet: reports the assets, liabilities, and equity at a specific point in time, groups together similar assets and similar liabilities, using standard classifications. Current assets: assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer, assets that convert to cash: Investments in stocks and bonds of other companies that are held for more than one year. Investments in long-term assets such as land or buildings not currently being used in operating activities. Long-term liabilities: obligations that a company expects to pay after one year, examples: long term note payment, bonds payable. Stockholders" equity: two parts: common stock and retained earnings. Ratio analysis: ratio analysis expresses the relationship among selected items of fin stmt data, a ratio expresses the mathematical relationship between one quantity and another. Measure the income or operating success of a company for a given period of time.
