Classified Balance Sheet

• Objective 3
– Identify and describe the basic components
of a classified balance sheet.

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 Classified Financial Statements
• General purpose financial statements divided
into useful subcategories
• Classifying often makes financial statements
more useful
• Allows investors and creditors to study the
relationships among the subcategories

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 Classified Balance Sheet
• Assets, liabilities, and stockholders’ equity
sections are subdivided into useful categories
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
Current assets Current liabilities Contributed capital
Investments Long-term liabilities Retained earnings
Property, plant, and equipment
Intangible assets

• Most companies use similar subdivisions,

but subdivisions usually depend upon the
type of business
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 Assets
• Often divided into four categories
– Current assets
– Investments
– Property, plant, and equipment
– Intangible assets
• The categories are listed according to how easily
they are assumed to be converted into cash
• Some companies may group investments,
intangible assets, and other miscellaneous assets
as “other assets”

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 Current Assets
Cash and other assets
that are reasonably expected to be converted to
cash, sold, or consumed
within one year
or within the normal operating cycle of the
business,
whichever is longer

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 Normal Operating Cycle
• The average time needed to go from cash to cash
– Spend cash to buy merchandise inventory
– Sell inventory on account
– Collect cash
• The normal operating cycle is usually less than one
year
– Exceptions
• Products requiring more than one year to produce
– Tobacco
• Companies selling on the installment basis
– Appliances

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 Reasonable Expectation
• Current assets include assets other than cash
that are reasonably expected to be converted
to cash, sold, or consumed within one year
• This means that it is probable and likely that,
under normal circumstances, these assets will
be converted to cash, sold, or consumed
within one year

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 Examples of Current Assets
• Cash
• Short-term investments
• Accounts receivable
• Inventory
• Prepaid expenses

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 Investments
Assets,
usually long-term,
that are not used in the normal
operation of the business
and that management does not plan
to convert to cash within the next year

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 Types of Investments
• Securities held for long-term investment
• Long-term notes receivable
• Land held for future use
• Plant or equipment not used in the business
• Special funds established to
– Pay off debt
– Purchase a building
• Large permanent investments in another company
– For the purpose of controlling that company

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 Property, Plant, and Equipment
Includes long-term assets used
in the continuing operation of the business

These assets represent a place to operate

(land and buildings)
and equipment to produce, sell, deliver, and
service the company’s goods

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 Property, Plant, and Equipment
• Also called
– Operating assets
– Fixed assets
– Tangible assets
– Long-lived assets
– Plant assets
• The costs of these assets are depreciated
– Spread over the periods they benefit
• Past depreciation is recorded in the Accumulated
Depreciation accounts

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 Classifying Natural Resources
• Natural resources used in the regular course
of business are listed in the property, plant,
and equipment category
– Forest lands
– Oil and gas properties
– Coal mines
• If the natural resources are not used in the
course of running the business, they are listed
in the investments category

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 Intangible Assets
Long-term assets
that have no physical substance
but have a value based on rights or privileges
that belong to their owner

These assets are recorded at cost.

The cost is spread over the expected life
of the right or privilege.

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 Examples of Intangible Assets
• Patents
• Copyrights
• Trademarks
• Brands
• Goodwill

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 Liabilities
Divided into two categories
based on when they fall due

Current liabilities
and
Long-term liabilities

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 Current Liabilities
• Obligations that must be satisfied within one
year or within the normal operating cycle,
whichever is longer
• Typically paid from current assets or by
incurring new short-term liabilities
• Examples: Notes payable, accounts payable,
current portion of long-term debt, salaries and
wages payable, taxes payable, and customer
advances (unearned revenues)

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 Long-Term Liabilities
• Debts of the business that fall due more than
one year in the future or beyond the
normal operating cycle, which will be paid
out of noncurrent assets
• Examples: Mortgages payable, long-term
notes, bonds payable, employee pension
obligations, and long-term lease liabilities

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 Deferred Income Taxes
• Are often disclosed as a separate category in
the long-term liability section of the balance
sheet of publicly held corporations
• Are the result of different rules that apply for
measuring income taxes for tax purposes and
for financial reporting purposes
– Amount is the cumulative annual difference between
income taxes payable to governments and income
taxes expense reported on the income statement

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 Stockholders’ Equity
• Made up of two components on on the balance
sheet:
– Contributed or paid-in capital
– Retained earnings

• Generally, contributed capital is shown as two

amounts:
– Par value of the issued stock
– Amounts paid in, or contributed, in excess of the par
value per share

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 Owners’ Equity
and Partners’ Equity
Sole Proprietorship Partnership
• Shows capital in • No need to
the owner’s name separate
at an amount equal contributed capital
to the net assets of from earnings
the company on the retained on the
balance sheet balance sheet

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 Stop & Review
A. What are four common categories of assets
on a classified balance sheet?

A. Current assets; Investments; Property, plant

and equipment; Intangible assets

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