Summary Notes: A2–Balance Sheet

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The Balance Sheet (The Statement of Financial Position) records information on: Assets—the value of things that are owned Liabilities—the value of things that are owed The balance sheet tells us what the company is worth on a particular date (assuming we do a good job valuing assets and liabilities). The Accounting Equation always holds:

Liabilities + Owners’ Equity = Assets Balance sheet example (thousands): J&M, Inc. BALANCE SHEET December 31 2015 2014 Changes Assets Current assets: Cash and cash equivalents Short-term marketable sec. Accounts receivable Inventory Prepaid expenses Deferred charges Total current assets

$ 8,500 3,000 23,700 37,700 2,000 2,500 77,400

$ 6,100 5,000 19,500 39,800 1,500 3,000 74,900

+ $2,400 – 2,000 + 4,200 – 2,100 500 – 500 + 2,500

Long-term Assets: Plant and equipment Less accumulated depreciation Total assets

154,000 (70,000) $161,400

145,000 (50,000) $169,900

+ 9,000 + 20,000 – 8,500

Liabilities and Shareholders’ Equity Current liabilities: Accounts payable Wages payable Accrued taxes Total current liabilities

10,000 16,000 2,000 28,000

26,000 15,000 3,500 44,500

– 16,000 + 1,000 – 1,500 – 16,500

Other liabilities Long-term debt Total liabilities

30,000 $58,000

32,000 $76,500

– 2,000 – 18,500

Shareholders’ equity Preferred stock, 6%, $100 par value Common stock, $4 par value (10,000 shares) Additional paid-in capital Retained earnings Total owners’ equity Total liabilities and equity

10,000 40,000 11,000 42,400 103,400 $161,400

10,000 40,000 11,000 32,400 93,400 $169,900

0 0 0 + 10,000 + 10,000 – 8,500

Notes about Assets:

• Assets are arranged in order of liquidity–cash is listed first

Summary Notes: A2–Balance Sheet

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o Liquidity = easy to convert to cash ($) • Current assets = convertible to cash within a year

o Firms with good LT assets but lack of cash have a “cash-flow” problem • Short-term marketable securities–bonds that can be easily sold-like US govt. debt. • Accounts receivable—owed to the firm by customers (30- or 45-day accounts receivable) • Inventory–$ value invested in raw materials, work in process and finished goods

o Sometimes tricky to value–Last year’s unsold holiday sweaters? Gold stock of a jeweler? • Prepaid expenses (e.g.: insurance policy or rent) • Deferred charges (prepaid expenses for intangible asset like goodwill or startup costs in the pre-

operating period). • Long-term Assets = harder to convert to cash

o Purchase price of plant and equipment • Depreciation—With exception of land, an allowance is made for the “using up” of assets • Total Assets = Current + LT Assets

Notes about Liabilities:

• Current liabilities must be paid in the next year o Pay suppliers for raw materials, workers their wages, and government assessed taxes

• Long term liabilities—not payable within a year o Bonds, mortgages and long-term notes

Working capital = current assets – current liabilities

• In 2015, working capital = $77,400,000 – $28,000,000 = $49,400,000 • This company has enough short-term assets to cover its short-term debts

Notes about shareholders’ equity:

• Common stock—measured at par value o Par value–no relation to market value of a stock/set very low (e.g.: 10c/share)

• Preferred stock—fixed dividend, paid back ahead of common stock owners if company fails (but behind bondholders).

• Paid-in capital—money received from sale of shares to public over and above the par value. o Example: A company sells 1,000 shares for $50 a share. The par value is $0.10/share.

Paid in capital = ($50.00 – $0.10) x 1,000 = $49,900. • Treasury stock—Unsold shares retained by company. Sometimes corporations also buy back

their own stock, which then becomes treasury stock. • Retained earnings = Cumulative net income since inception – total dividends paid to

shareholders (See Summary Notes A3) Notice: Accounting equation satisfied in the sample balance sheet for 2015:

• Liabilities + Shareholder Equity = Assets = $161,400,000 Book Value of company = Total equity/# of shareholders (from balance sheet)

= $103,400,000/10,000,000 = $10.34 • Book value doesn’t have to be reflected in share price quoted on stock exchange today:

o Stock price higher than book value when investors anticipate future growth