Balance Sheet

Mehwish kiran
 Balance Sheet
A balance sheet shows the financial condition of
an accounting entity as of a particular date.

The balance sheet consists of assets(the resources

of the firm), liabilities(the debts of the firm)and
stockholders’(equity of the owners) interest in the
firm.
 Cont…
The balance sheet is a snapshot of the firm’s assets
and liabilities at a given point in time

It estimates Net worth or Owner Equity

Assets = Liabilities + Stockholders’ Equity

 Need of Balance Sheet
To ascertain the nature and value of assets of a
business.
To ascertain the nature and amount of liabilities of a
business.
To find out the financial solvency of an enterprise. An
enterprise is considered to be a solvent if its assets
exceed its external liabilities
 
The Balance Sheet
Current Assets Current Liabilities
Cash & Securities Payables
Receivables Short-term Debt
Inventories

+ +
Long-term Liabilities
Fixed Assets
Tangible Assets = +
Intangible Assets

Shareholders’ Equity
 Assets
Assets are all those things a company owns which are of
value to the business.
Assets can be tangible like e.g. a manufacturing plant,
computers or cash in the bank.
Tangible assets like cash or goods for sale that can easily
(i.e. within an accounting year) be converted into cash are
called current assets while other assets like properties and
equipment are called fixed assets.
Assets can also be intangible (meaning cannot be
touched) such as copyrights ,goodwill, patents etc.
 Cont…
Fixed assets–have a lifespan of more than one year,
e.g. machinery, motor vehicles

Current Assets–are constantly changing e.g. stock,

debtors, bank, cash

Current assets are listed on the balance sheet in order

of liquidity (the ability to be converted of to cash).
 Current assets
Current assets typically include cash, marketable securities,
short-term receivables, inventories, and prepaid.

Cash:
 The most liquid asset

Cash and cash equivalents

 Include currency, bank deposits, and various marketable
securities that can be turned into cash on short notice
merely by contacting a bank or broker.
 Liquidity
It shows us whether a business has enough assets to
cover its debts.
Turning assets into cash to pay off debts is what
normally happens.
Working Capital
Working Capital is:
Current Assets – Current Liabilities
If a business has too much working capital then they
are not using their resources properly. If too little, then
they may not be able to pay off short term debts.
 Cont…
Marketable Securities
 short-term investments
 A firm holds marketable securities to earn a return on near-
cash resources.

Accounts Receivable
Accounts that arise from sales or services rendered to
customers.
It represent credit sales that have not yet been collected
Cont..
Inventories
Inventories are the balance of goods on hand.
In a manufacturing firm, they include raw materials,
work in process, and finished goods.

Prepaid
A prepaid is an expenditure made in advance of the
use of the service or goods.
 Long term assets
Long-term assets are usually divided into four categories:
tangible assets, investments, intangible assets, and
other.
Tangible Assets
These are the physical facilities used in the operations of
the business.
Land
Land is shown at acquisition cost and is not depreciated
because land does not get used up.
 Cont..
Buildings
Structures are presented at cost plus the cost of permanent
improvements. Buildings are depreciated (expensed) over their
estimated useful life.
Construction in Progress
Construction in progress represents cost incurred for projects
under construction.
Accumulated Depreciation
Depreciation is the process of allocating the cost of buildings
and machinery over the periods benefited. Accumulated
depreciation is subtracted from the cost of plant and equipment.
 Straight-Line Method
The straight-line method recognizes depreciation in equal amounts over the
estimated life of the asset.
Compute depreciation using the straight-line method as follows:
Cost − Salvage Value = Annual Depreciation
Estimated Life

For the asset used for illustration, the annual depreciation would be computed
as follows:
$10,000 − $2,000 = $1,600
5 years

The $1,600 depreciation amount would be recognized each year of the five-year
life of the asset. Do not depreciate the salvage value.
 Declining-Balance Method
The declining-balance method, an accelerated
method, applies a multiple times the straight-line rate
to the declining book value (cost minus accumulated
depreciation) to achieve a declining depreciation
charge over the estimated life of the asset.
Goodwill
Goodwill arises from the acquisition of a business for a
sum greater than the physical asset value, usually
because the business has unusual earning power. It
may result from good customer relations, a well-
respected owner, and so on.
Patents: Patents, exclusive legal rights granted to an
inventor for a period of 20 years, are valued at their
acquisition cost.
Trademarks: Trademarks are distinctive names or
symbols. Rights are granted indefinitely as long as the
owner uses it in connection with the product or service
and files the paperwork.
Franchises: Are the legal right to operate under a
particular corporate name, providing trade-name
products or services.
Copyrights:
Copyrights are rights that authors, painters, musicians,
sculptors, and other artists have in their creations and
expressions. A copyright is granted for the life of the
creator, plus 70 years.
 Liabilities
Liabilities are all those things for which the company
eventually needs to pay.
There are two types of liabilities:
 Current Liabilities need to be paid within one
accounting year. Examples are: Outstanding rent,
goods bought on credit.
 Long Term Liabilities are those liabilities which will
not be paid during the current accounting year.
Examples are: Long term debts, bank loans.
Payables
These include short-term obligations created by the
acquisition of goods and services, such as accounts
payable ,wages payable, and taxes payable.
Unearned Income
Payments collected in advance of the performance of
service are termed unearned. They include rent
income and subscription income. Rather than cash, a
future service or good is due the customer.
 Stockholders Equity
Stockholders’ equity: Is the residual ownership
interest in the assets of an entity that remains after
deducting its liabilities. Usually divided into two basic
categories, paid-in capital and retained earnings.
Paid-In Capital
The first type of paid-in capital account is capital
stock. Two basic types of capital stock are preferred
and common.
Cont…
Common Stock:
Common stock shares in all the stockholders’ rights and
represents ownership that has voting and liquidation rights.
Preferred Stock:
Preferred stock seldom has voting rights. When preferred
stock has voting rights, it is usually because of missed
dividends.
Retained Earnings
Retained earnings are the undistributed earnings of the
corporation—that is, the net income for all past periods
minus the dividends .
Cont..
Treasury Stock:
A firm creates treasury stock when it repurchases its
own stock and does not retire it.
 Owner’s Equity
Owner’s Equity is by definition the difference between
the Assets of a company and its Liabilities.
Owner’s Equity is the sum of two parts:
 Contributed Capital is the money that the owners
invested in the company.
 Retained Earnings are those earnings which were not
distributed to the owners. These can accumulate to a
large sum over the years.
Pepsico Inc. Balance Sheet (in mil. $)
Assets 28-Dec-02 29-Dec-01 Liabilities 28-Dec-02 29-Dec-01
Current Assets Cash And Current Liabilities 6,052 4,998
Cash
Short Term 1,638 683 Accounts Payable 5,490 3,484
Investments
Net 207 966 Short/Current Long Term Debt 562 354
Receivables 2,531 2,142 Other Current Liabilities -  1,160
Inventory 1,342 1,310 Total Current Liabilities 6,052 4,998
Other Current Assets 695 752 Long Term Debt 2,187 2,651
To tal Current As s ets 6,413 5,853 Other long-term liabilities 5,937 5,398
Long Term Investments 2,611 2,871 Total Liabilities 14,176 13,021
Property Plant and Equipment 7,390 6,876 Common Stock &Other Paid-up Capital 30 43
Goodwill 3,631 3,374 Retained Earnings 9,268 8,605
Intangible Assets 1,588 1,467 Total Sto ckho lder Equity 9,298 8,674
Other Assets 1,841 1,254
To tal As s ets 23,474 21,695 Tot Liabs & Shareho lders ' Equity 23,474 21,695
Market vs. Book Value
The balance sheet provides the book value of the
assets, liabilities and equity.
Market value is the price at which the assets, liabilities
or equity can actually be bought or sold.
Market value and book value are often very different.
Why?
Which is more important to the decision-making
process?
Market Value vs. Book Value
Example
According to GAAP, your firm has equity worth $6 billion, debt
worth $4 billion, assets worth $10 billion. The market values
your firm’s 100 million shares at $75 per share and the debt
at $4 billion.
Q: What is the market value of your assets?

A: Since (Assets=Liabilities + Equity), your assets must

have a market value of $11.5 billion.
Market
Example Value vs. Book Value
Book Value Balance Sheet
Assets = $10 bil Debt = $4 bil
Equity = $6 bil

Market Value Balance Sheet

Assets = $11.5 bil Debt = $4 bil
Equity = $7.5 bil

P.V. Viswanath 28