Balance sheets

The balance sheet (Table 2.1) reports the financial position and condition of the firm at a point in time, on a specific date. It shows what assets the firm holds and who owns them. The three parts of the balance sheet are as follows  

600 shares, issued, net of repurchased common stock at par value 1,529 and 1,544 shares, respectively) 

Assets are further classified as current or noncurrent (long-term) assets, separated only by the time the company thinks it will hold the asset. You can also think of this in the following way, how liquid is the asset Current assets are held for 1-year or less. These include cash, inventory, and receivables. Noncurrent or long-term assets are held longer than 1 year. Long-term fixed assets, such as plant, property, and equipment (PP E), have three common characteristics  

They have a physical presence (you can touch them). 

Examples of PP E are land, factories, distribution centers, tools, machinery, trucks and other vehicles, and furniture. Having assets are crucial to a company to offset liabilities. 

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Packer type is an HPDL without a decorative face intended for use as a balancing sheet in panel constmction. 

Maintenance costs influence the bottom line of every balance sheet. As a result, maintenance managers can improve the entire faciHty by helping make sure that the planning and design of new constmction and renovation projects takes place with maintenance in mind (1). 

BD Depreciation allowance shown in company balance sheet ... 

The relationships among the various annual costs given by Eqs. (9-1) through (9-9) are illustrated diagrammaticaUy in Fig. 9-1. The top half of the diagram shows the tools of the accountant the bottom half, those of the engineer. The net annual cash flow Acp, which excludes any provision for balance-sheet depreciation Abd, is used in two of the more modern methods of profitability assessment the net-present-value (NPV) method and the discounted-cash-flow-rate-of-return (DCFRR) method. In both methods, depreciation is inherently taken care of by calculations which include capital recoveiy. 

Closing the Books At the end of the accounting period, the individual accounts are closed by balancing each in accordance with Eq. (9-126). The balances are transferred either to the balance sheet in the case of capital expenditure or to the income statement in the case of revenue expenditure. An alternative name for the balance sheet is the position statement the income statement is also caUed the trading and profit-and-loss account. 

An income statement such as the one shown in Table 9-16 is used to obtain the profit or loss for a given period. The debit and credit balances of all the accounts that do not represent expenditure or income for a given accounting period are entered as assets and liabilities in a balance sheet such as that shown in Table 9-17. 

There is no rigid format for either the income statement or the balance sheet. Tables 9-16 and 9-17 show common layouts for the income statement and balance sheet respectively, but these are not the only forms. For example, vertical balance sheets, with the assets listed above the liabilities and equity, are also popular. 

Concept 1. Money measurement means that only those facts that can be represented in monetary terms are recorded. The balance sheet and income statement for a company give no indication as to what might happen in the future. The company may be about to be successfully sued for a large sum of money, or a competitor may be launching a new product that will seriously reduce future sales of the company s products. 

Concept 3. Going concern means that the accounting is based on the premise that the business will continue indefinitely. It is most unlikely that the values of the assets shown in the balance sheet are what the assets would realize if sold. No attempt is made in normal accounting to measure the value of the business to a potential buyer. 

Concept 4. Cost means that the assets are normally shown in the balance sheet at cost price together with their subsequent depreciation. Some assets such as land may be considerably more v uable than when originally purchased, but no indication of this is given in the balance sheet. However, some governments now require a note giving the current estimated value of the laud. 

Similarly, the distinction between current and long-term liabihties is also not clear-cut. Current liabilities include accounts payable (money owed to creditors), taxes payable, dividends payable, etc., if due within a year. Long-term liabihties include deferred income taxes, bonds, notes, etc., that do not have to be paid within a year. The owners equity includes the par, or face, value of the capital received from stockholders and any retained earnings. The balance sheet shows only the nominal value and not the current or real value of this capital. 

A balance sheet includes items that are not regarded as assets or liabihties in normal language, such as expenditures carried forward and accumulated profits. 

Accountants regard assets as resources that have not yet been used up. Assets are normally shown on the balance sheet at cost minus accumulated depreciation. In this sense, the depreciation charge for an accounting period is the means of converting a part of an asset into a current expenditure that is then listed as an expense in the income statement. 

Types of Accountancy The traditional work of accountants has been to prepare balance sheets and income statements. Nowadays, accountants are becoming increasingly concerned with foi ward planning. Modern accountancy can roughly be divided into two branches, financial accountancy and management or cost accountancy. 

Financial accountancy is concerned with stewardship. This involves the preparation of balance sheets and income statements that represent the interest of stockholders and are consistent with existing legal requirements. Taxation is an important element of financial accounting. 

Let us consider the simplified balance-sheet or position statement shown in Table 9-21. Essentially, total assets are related to habilities and stockholders equity by... 

Equity Financing Typically, the company balance sheet will show the stockholders equity and list the preferred stock, common stock, and retained earnings as in Table 9-23. 

TABLE 9-23 Stockholders Equity as Shown in Section of a Company s Balance Sheet... 

Both common and preferred stocks normally have a par, or nominal, value. In the case of common stock, the market value at the time of issue usually differs from the par value. Stock can be issued either at a premium or at a discount, depending on prevailing economic conditions and the strength of the company. The difference between the actual amount paid and the par value is listed in the stockholders -equity section of the balance sheet, as shown in Table 9-23. The issuance of stock at a premium or a discount is done to protect existing stockholders. 

Stockholders equity in a company is made up of the capital contributed by the stockholders and the capital generated from retained earnings. The presence of retained earnings on a balance sheet, as shown in Table 9-23, does not necessarily mean that they are matched by an equal amount of cash. In fact, there may be little or no cash available. The retained earnings shown on a balance sheet may be largely fictitious. For example, the assets on a balance sheet may be worth less than shown by at least the value of the retained earnings. 

The amount of retained earnings shown on a balance sheet should not be taken as a measure of the amount of future dividends that the company is hkely to pay. A contract may exist that specifies a minimum balance of retained earnings, which is then not available for dividends until bonds issued by the company have been retired. 

Application of Overall Company Ratios The various ratios for a hypothetical company are listed in Table 9-26. The balance sheet shown in Table 9-27 has been built up from the ratios in Table 9-26 in terms of the revenue from net annual sales As. 

Let us calculate the following values for the right-hand side of the balance sheet as follows ... 

TABLE 9-25 Typical Balance Sheet for a United States Manufacturer of Industrial Inorganic Chemicals... 

In practice, the ratios are obtained from the information pubhshed in the balance sheet. The advantage of the above presentation is that it relates everything to the revenue from net annual sales and hence underlines the importance of sales. 

TABLE 9-27 Balance Sheet for a Typical Industrial Chemical Company Dec. 31/ 1991... 

Management and Cost Aeeounting In any given time period, cost may be divided into expired and unexpired cost. An expired cost is an expense an unexpired cost is an asset. This division is the basis for income statements and balance sheets. 

It is important to reahze that the method used to value inventoiy for cost accounting purposes is not necessarily the one used to draw up the balance sheet and financial accounts. In this case, inventoiy is valued either at the cost given by another method or at the market value, whichever is lower. 

Since ratios, like balance sheets, refer to a particiilar point in time, they have a hmited use unless they are compared with previous values. A study of ratio trends indicates whether or not a company is approaching a working-capital or a hquidity crisis and may enable management to compare the performance of the company with that of competitors. 

An income statement or profit-and-loss account gives the net annual profit A vp before tax. In order to assess the annual cash income Ac, as a source of funds from the value of the net annual profit A vp given in the income statement, it is necessary to add back all noncash expenses such as the balance-sheet annual depreciation charge Abd-This practice sometimes erroneously suggests that depreciation is a source of funds, whereas cash income is the only source of funds. 

Book values of fixed assets are determined by the balance-sheet annual depreciation charges Abd, which do not affect working capital. Although the accounting gain or loss on the sale of a fixed asset is based on its book value, working capital is not affec ted by depreciation assessments. 

After the balance sheet and the income statement or profit-and-loss account, the funds statement is generally regarded as the most important financial document. However, many financial managers regard a statement showing changes in cash as being of equal importance. 

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