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Accounting 3

Accounting 3. Chapter 26 Section 3 Corporate Balance Sheet. Balance Sheet. Preparing a corporate balance sheet are similar to that of a partnership except that corporations must report their current and plant assets. The other difference is that there are three columns versus two.

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Accounting 3

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  1. Accounting 3 Chapter 26 Section 3 Corporate Balance Sheet

  2. Balance Sheet • Preparing a corporate balance sheet are similar to that of a partnership except that corporations must report their current and plant assets. • The other difference is that there are three columns versus two.

  3. Assets Section of a Balance Sheet • Some accounts have contra accounts that reduce the related account balance. • The difference between the asset’s account balance and its contra account balance is known as book value. • An asset’s book value is reported on a balance sheet by listing three amounts: • The balance of the asset account • The balance of the asset’s contra account • Book Value

  4. Winning Edge, Inc. Balance Sheet December 31, 2006 Assets Current Assets: Cash 10,584.00 Petty Cash 250.00 Notes Receivable 1,000.00 Interest Receivable 20.00 Accounts Receivable 72,458.00 Less Allowance for Uncollectible Accts 10,148.00 62,310.00 Merchandise Inventory 244,916.00 Supplies 1,686.00 Prepaid Insurance 2,550.00 Total Current Assets 323,316.00 Plant Assets: Office Equipment 25,978.00 Less Acc. Dep.-Office Equipment 10,823.00 15,155.00 Store Equipment 52,781.00 Less Acc. Dep.-Store Equipment 15,804.00 36,977.00 Total Plant Assets 52,132.00 Total Assets 375,448.00

  5. Liabilities Section of a Balance Sheet • Most liabilities are classified as Current Liabilities because they are due within one year. • Liabilities owed for more than a year are called Long-Term Liabilities. • An example of Long-Term would be Mortgage Payable.

  6. Continued from earlier slide Winning Edge, Inc. Balance Sheet December 31, 2006 Liabilities Current Liabilities: Notes Payable 5,000.00 Interest Payable 200.00 Accounts Payable 31,453.00 Employee Income Tax Payable 2,049.00 Federal Income Tax Payable 13,206.46 Social Security Tax Payable 1,783.00 Medicare Tax Payable 412.00 Sales Tax Payable 10,482.00 Unemployment Tax Payable-Federal 38.00 Unemployment Tax Payable-State 244.00 Health Insurance Premiums Payable 498.00 Dividends Payable 10,000.00 Total Liabilities 75,365.46

  7. Stockholder’s Equity Section of aBalance Sheet • This section contains the total amounts of capital stock and retained earnings. • These amounts are calculated and reported on the statement of stockholder’s equity. • A complete picture of a finished Balance Sheet is on page 672 of your textbook.

  8. Continued from earlier slide Winning Edge, Inc. Balance Sheet December 31, 2006 Stockholders’ Equity Capital Stock 120,000.00 Retained Earnings 180,082.54 Total Stockholders’ Equity 300,082.54 Total Liabilities and Stockholders’ Equity 375,448.00

  9. Analyzing a Balance Sheet • The balance sheet is a primary source of data to determine the financial strength of a company. • Creditors and financial investors also use financial strength analysis to determine if the company is good credit and investment risk. • Before a creditor will consider a company, it will look at its balance sheet to determine the company’s viability.

  10. Working Capital • Working Capital – The amount of total current assets less total current liabilities. • This is a measure of the financial resources available for the daily operations of a business. • It is not to be confused with cash. A business does not have huge amounts of cash available but they do have resources available, including assets, to work with.

  11. Working Capital • To calculate working capital: • Total Current Assets – Total Current Liabilities = Working Capital • From the Balance Sheet: • $323,316.00 (TCA) - $75,365.46 (TCL) = $247,950.54 (WC) • An acceptable Working Capital is $150,000 or more.

  12. Current Ratio • Although working capital is a useful measure, working capital does not permit a business to compare itself to its industry or to provide a convenient relative measurement from year to year. • A more useful measure results from comparing the amount of total current assets to total current liabilities. • The comparison between the two is called a current ratio. • This ratio is a measure of a company’s ability to pay its current liabilities.

  13. Current Ratio • To calculate current ratio: • Total Current Assets/Total Current Liabilities = Current Ratio • From the Balance Sheet: • $323,316 (TCA)/$75,365.46 (TCL) = 4.3 (CR) • The current ratio is reported as 4.3 to 1 • Each corporation is allowed to set what it thinks is an acceptable current ratio. This is done based on previous experience, industry guidelines, and the need to maintain sufficient inventory.

  14. Work Together p. 674 • Part 7 will be on 2-3 slides. • Part 8 will be on one slide. • Part 9 will be on one slide. • Your assignments link is on the part 9 slide.

  15. Webster Corporation Balance Sheet December 31, 2006 Assets Current Assets: Cash 90,052.23 Petty Cash 300.00 Notes Receivable 10,952.00 Interest Receivable 275.00 Accounts Receivable 70,094.10 Less Allowance for Uncollectible Accounts 7,394.64 62,699.46 Merchandise Inventory 90,116.30 Supplies 252.08 Prepaid Insurance 3,071.60 Total Current Assets 257,718.67

  16. Continued from previous slide You do not write Total Current Assets twice. I have it on here again as a continuation from previous slide. Webster Corporation Balance Sheet December 31, 2006 Total Current Assets 257,718.67 Plant Assets: Office Equipment 27,940.00 Less Acc. Dep. – Office Equipment 9,535.00 18,405.00 Store Equipment 22,199.20 Less Acc. Dep. – Store Equipment 8,058.00 14,141.20 Total Plant Assets 32,546.20 Total Assets 290,264.87 Liabilities Current Liabilities: Notes Payable 14,400.00 Interest Payable 555.16 Accounts Payable 60,116.18 Employee Income Tax Payable 1,652.40 Federal Income Tax Payable 1,752.70 Social Security Tax Payable 1,549.19 Medicare Tax Payable 357.51

  17. Continued from previous slide Webster Corporation Balance Sheet December 31, 2006 Sales Tax Payable 6,652.60 Unemployment Tax Payable – Federal 33.44 Unemployment Tax Payable – State 225.72 Health Insurance Premiums Payable 702.60 Dividends Payable 10,800.00 Total Liabilities 98,797.50 Stockholders’ Equity Capital Stock 100,000.00 Retained Earnings 91,467.37 Total Stockholders’ Equity 191,467.37 Total Liabilities and Stockholders’ Equity 290,264.87

  18. Working Capital and Current Ratio • TCA – TCL = WC • $257,718.67 - $98,797.50 = $158,921.17 • TCA/TCL = CR • $257,718.67/$98,797.50 = 2.61 to 1

  19. Webster believes that working capital in excess of $150,000 and a current ratio between 2.0 and 3.0 to be acceptable. Assignments

  20. Assignments • Do Application 26-3 by hand. • Turn it in. • Move on to Section 4.

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