PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

The Balance Sheet andFinancial Disclosures

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Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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The Balance Sheet

Limitations:• The balance sheet does not

portray the market value of the entity as a going concern nor its liquidation value.

• Resources such as employee skills and reputation are not recorded in the balance sheet.

Limitations:• The balance sheet does not

portray the market value of the entity as a going concern nor its liquidation value.

• Resources such as employee skills and reputation are not recorded in the balance sheet.

Usefulness:• The balance sheet describes

many of the resources a company has for generating future cash flows.

• It provides liquidity information useful in assessing a company’s ability to pay its current obligations.

• It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Usefulness:• The balance sheet describes

many of the resources a company has for generating future cash flows.

• It provides liquidity information useful in assessing a company’s ability to pay its current obligations.

• It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Reports a company’s financial position on a particular date.

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Resources (Assets)

Resources (Assets)

Claims against resources (Liabilities)

Claims against resources (Liabilities)

Remaining claims accruing to owners

(Shareholders’ Equity)

Remaining claims accruing to owners

(Shareholders’ Equity)

Classifications

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(In millions) January 30, 2009 February 1, 2008Assets:Current assets: Cash and cash equivalents 8,352$ 7,764$ Short-term investments 740 208 Accounts receivables, net 4,731 5,961 Financing receivables, net 1,712 1,732 Inventories, net 867 1,180 Other current assets 3,749 3,035 Total current assets 20,151 19,880 Noncurrent assets Property, plant, and equipment, net 2,277 2,668 Investments 454 1,560 Long-term financing receivables, net 500 407 Goodwill 1,737 1,648 Purchased intangible assets, net 724 780 Other non-current assets 657 618 Total noncurrent assets 6,349 7,681 Total Assets 26,500$ 27,561$

Dell Inc.Balance Sheet

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

transactions or events.

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

transactions or events.

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1.1. CashCash2.2. Cash EquivalentsCash Equivalents3.3. Short-term InvestmentsShort-term Investments4.4. ReceivablesReceivables5.5. InventoriesInventories6.6. Prepaid ExpensesPrepaid Expenses

1.1. CashCash2.2. Cash EquivalentsCash Equivalents3.3. Short-term InvestmentsShort-term Investments4.4. ReceivablesReceivables5.5. InventoriesInventories6.6. Prepaid ExpensesPrepaid Expenses

Current Assets (pages 116-118)

Will be converted Will be converted to cash or to cash or

consumed within consumed within one year or the one year or the operating cycle, operating cycle,

whichever is whichever is longerlonger..

Will be converted Will be converted to cash or to cash or

consumed within consumed within one year or the one year or the operating cycle, operating cycle,

whichever is whichever is longerlonger..

Current Current AssetsAssets

Current Current AssetsAssets

Cash equivalents include certain

negotiable items such as commercial paper, money market

funds, and U.S. treasury bills.

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Operating Cycle of a Typical Manufacturing Company (page 117)

Use cash to acquire raw materials

Convert raw materials to finished product

Deliver product to customer

Collect cash from customer

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Noncurrent Assets (page 119)

Other Assets

1. Include long-term prepaid expenses and any noncurrent assets not falling in one of the other classifications.

Investments

1. Not used in business operations

2. debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes.

Property, Plant, and Equipment

1. Are tangible, long-lived, and used in the business operations

2. Include land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells.

3. Reported at original cost less accumulated depreciation (or depletion for natural resources).

Intangible Assets

1. Used in the business operations - have no physical substance (rights to …)

2. Include patents, copyrights, and franchises.

3. Reported net of accumulated amortization.

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(In milions) January 30, 2009 February 1, 2008Liabilities:Current liabilities: Short-term debt 113$ 225$ Accounts payable 8,309 11,492

3,788 4,323 Short-term deferred service revenue 2,649 2,486 Total current liabilities 14,859 18,526 Long-term debt 1,898 362 Long-term deferred service revenue 3,000 2,774 Other non-current liabilities 2,472 2,070 Total liabilities 22,229$ 23,732$

Dell Inc.Balance Sheet

Accrued and other

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.

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.

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Current Liabilities (page 120)

1. Accounts Payable2. Notes Payable3. Accrued Liabilities4. Unearned Revenues5. Current Maturities

of Long-Term Debt

1. Accounts Payable2. Notes Payable3. Accrued Liabilities4. Unearned Revenues5. Current Maturities

of Long-Term Debt

Obligations expected to be satisfied through current

assets or creation of other current liabilities within one year or the operating cycle,

whichever is longer.

Obligations expected to be satisfied through current

assets or creation of other current liabilities within one year or the operating cycle,

whichever is longer.

Current Liabilities

Current Liabilities

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Long-term Liabilities (page 121)

1. Long-term Notes 2. Mortgages3. Long-term Bonds4. Pension Obligations5. Lease Obligations

1. Long-term Notes 2. Mortgages3. Long-term Bonds4. Pension Obligations5. Lease Obligations

Obligations that will not be

satisfied within one year or

operating cycle, whichever is

longer.

Obligations that will not be

satisfied within one year or

operating cycle, whichever is

longer.

Long-Term Liabilities

Long-Term Liabilities

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(In millions) January 30, 2009 February 1, 2008Stockholders' equityPreferred stock and capital in excess of $.01 par value; shares issued and outstanding: none -$ -$ Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,338 and 3,320, respectively; shares outstanding: 1,944 and 2,060, respectively 11,189 10,589 Treasury stock, at cost: 919 and 785 shares, respectively (27,904) (25,037) Retained earnings 20,677 18,199 Accumulated other comprehensive income (loss) 309 (16) Total stockholders' equity 4,271$ 3,735$

Dell Inc.Balance Sheet

Shareholders’ equity is the residual interest in the assets of an entity that remains after deducting

liabilities.

Shareholders’ equity is the residual interest in the assets of an entity that remains after deducting

liabilities.

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U. S. GAAP vs. IFRS (page 122)

• Does not specify a minimum list of items to be presented in the balance sheet.

• Some U.S. companies use the title :Statement of financial position”

• Presents current assets and liabilities before noncurrent assets and liabilities.

• Specifies a minimum list of items to be presented in the balance sheet.

• Statement title = Statement of financial position.

• Does not prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first.

There are more similarities than differences in balance sheets prepared according to U.S. GAAP and those

prepared applying IFRS.

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British Airways Balance Sheet

At March 31, 2009

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British Airways Balance Sheet

At March 31, 2009

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U. S. GAAP vs. IFRS

The FASB and IASB are working together on the Financial Statement Presentation project to establish

a common standard for presenting information in the financial statements.

Each of the financial statements will include

classifications by operating, investing, and

financing activities, as well as income taxes,

discontinued operations, and equity (if needed).

BusinessOperating assets and liabilitiesInvesting assets and liabilities

FinancingFinancing assetsFinancing liabilities

Income TaxesDiscontinued OperationsEquity

Statement of Financial Position

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Disclosure Notes (pages 125-127)Summary of Significant

Accounting Policies

Conveys valuable information about the company’s choices from

among various alternative accounting methods.

Subsequent Events

A significant development that occurs after the company’s fiscal year-end but before the financial

statements are issued or available to be issued.

Noteworthy Events and Transactions

Transactions or events that are potentially important to evaluating a company’s financial statements,

e.g., related parties, errors and irregularities, and illegal acts.

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Management’s Responsibilities (pages 128-129)

• Preparing the financial statements and other information in the annual report.

• Maintaining and assessing the company’s internal control procedures.

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Auditors’ Report (pages 129-130)

Expresses the auditors’ opinion as to the fairness of

presentation of the financial statements in conformity with

generally accepted accounting principles.

Auditors’ reports must comply with specifications of the Public

Companies Accounting Oversight Board (PCAOB).

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Auditors’ Opinions

UnqualifiedIssued when the financial statements present fairly the financial position,

results of operations, and cash flows are in conformity with GAAP.

QualifiedIssued when there is an exception that

is not of sufficient seriousness to invalidate the financial statements as a

whole.

AdverseIssued when the exceptions are so

serious that a qualified opinion is not justified.

DisclaimerIssued when insufficient information

has been gathered to express an opinion.

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Liquidity Ratios (pages 133-134)

=Current ratioCurrent assets

Current liabilities

Measures a company’s ability to satisfy its short-term liabilities

=Acid-test ratioQuick assets

Current liabilities

Provides a more stringent indication of a company’s ability to pay its current

liabilities

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Financing Ratios (page 135)

=Debt to equity ratio

Total liabilities

Shareholders’ equity

Indicates the extent of reliance on creditors, rather than owners, in providing

resources

=Times interest earned ratio

Net income + Interest expense + Income taxes

Interest expense

Indicates the margin of safety provided to creditors

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Appendix 3: Reporting by Operating Segment

Reportable Operating Segment Characteristics

Engages in business activities from which it may earn revenues

and incur expenses.

Operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be

allocated to the segment and assess its performance.

Discrete financial information is available.

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Segment Reporting (pages 140-142)

Reporting by Geographic Area

GAAP requires an enterprise to report certain geographic

information unless it is impracticable to do so.

Information About Major Customers

Revenues from customers generating 10% or more of the

revenue of an enterprise must be disclosed.

End of Chapter 3