Understanding the Balance Sheet: Key Concepts and Financial Ratios

1. Chapter 3 The Balance Sheet and Financial Disclosures

2. Limitations: Assets are recorded at historical cost, NOT at market value. Resources such as employee skills and reputation are not recorded on the balance sheet. Usefulness: Provides a description of available productive resources. Liquidity information. Long-term solvency information. Balance Sheet

3. Balance Sheet Claims against resources (Liabilities) Remaining claims accruing to owners (Owners’ Equity) Resources (Assets)

4. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

5. Assets Cash Receivables Inventories Prepayments Current Assets Will be converted to cash or consumed within one year or the operating cycle, whichever is longer.

6. Assets Investments and Funds Property, Plant, & Equipment Intangibles Other Noncurrent Assets Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer

7. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities as a result of past transactions or events.

8. Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Current Liabilities Obligations expected to be satisfied through current assets or creation of other current liabilities

9. Liabilities Capital Leases Bonds Payable Long-Term Notes Payable Pension Liabilities Long-Term Liabilities Obligations that will not be satisfied within one year or operating cycle, whichever is longer

10. Equity is the residual interest in the assets of an entity that remains after its liabilities are deducted.

11. Shareholders’ Equity Other Contributed Capital Capital Stock Treasury Stock Retained Earnings

12. Now, let’s move on to a new topic.

13. Disclosure Notes • Summary of Significant Accounting Policies • Subsequent Events • Noteworthy Events and Transactions

14. Management Discussion and Analysis (MDA) Includes management’s views on significant events, trends, and uncertainties regarding the company’s operations, liquidity, and capital resources.

15. Management’s Responsibilities • Preparing the financial statements. • Preparing other information in the annual report. • Maintaining the system of internal control.

16. Auditors’ Report • Expresses the auditors’ opinion as to the fairness of presentation of the financial statements. • The auditor can render one of four opinions: • Unqualified. • Qualified. • Adverse. • Disclaimer.

17. Auditors’ Report I need to have three paragraphs in my audit report: an introductory paragraph, a scope paragraph, and an opinion paragraph.

18. Proxy Statement Information Summary compensation table Table of options granted Table of options holdings Compensation of Directors & Top Executives

19. Now, let’s look at some ratios!

20. Current assets Current liabilities Current ratio = Measures a company’s ability to satisfy its short-term liabilities Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities Acid-test ratio = Liquidity Ratios

21. $3,449,061 $3,249,516 1.06 = $2,627,346 $3,249,516 Liquidity Ratios Current ratio .81 = Acid-test ratio

22. Total liabilities Shareholders’ equity Debt to equity ratio = Indicates the extent of reliance on creditors, rather than owners, in providing resources Net income + Interest expense + Taxes Interest expense Times interest earned ratio = Indicates the margin of safety provided to creditors Financing Ratios

23. $7,439,592 $5,900,420 1.26 = Debt to equity ratio $1,071,526 $143,953 = 7.4 Times interest earned ratio Financing Ratios

24. End of Chapter 3