Balance Sheet - What Are You Worth?

OVERVIEW

The technical name for this report is the "Statement of Financial Position." In essence, the balance sheet tells you what you own, and what you owe. 

CURRENT ASSETS

Within this section are cash and anything else that'll be converted to cash, sold, or consumed within a year. 

Such items include:

Accounts Receivable - typically recorded at net realizable value, which is Gross A/R - AFDA. With respect to uncollectible accounts, you can use either the Allowance Method, or you can use the Direct Write-Off Method.

• Allowance Method - this is the preferred GAAP method. Bad Debt Expense is accrued each period based on one of two approaches (both acceptable); if the base is Net Credit Sales, the historical % of uncollectible accounts is multiplied by net credit sales. The resulting entry is a DR to Bad Debt Expense, CR to ADFA. If the base, alternatively, is Outstanding Receivables, a flat % is applied to all receivables, or a sliding % scale is applied based on length of aging/risk. Either way, the end result leads you with an entry to the same two GL accounts. For write-offs, these are done by DR'ing the AFDA account, CR'ing AR. If these are then recovered, you'll first need to reverse the write-off entry, and then re-enter the (effective) invoice. 
• Direct Write-Off Method - not GAAP, but allowable if bad debts are tiny. No allowance account is used. Other than that, almost identical to the above. "Recoveries of Uncollectible Amounts" becomes a P&L account. 

A/R as a Source of Financing 

• Pledging - can be used as collateral, to borrow
• Assignment - specific receivables can be assigned to a lender. These should be segregated in a separate A/R account. 
• Factoring - sold to a purchaser, who assumes the risk of ownership. A/R is removed, a loss is reported equal to the factoring fee. 

Inventories - this is tangible personal property that are either A) held for sale [finished goods], B) are in the process of production to eventually be sold [WIP], or C) to be currently consumed directly or indirectly in the production of goods for sale (raw materials, supplies). In terms of the the role of inventories in the financials, the goal is to match up costs with revenues to determine current period income. 

• Inventory Costs - sum of all expenses, directly or indirectly, incurred in bringing goods to sale. If an item is FOB shipping, it's the seller's buyer; if FOB destination, it's the seller. Transportation is part of this, including Freight-In. Purchasing, handling, and storage costs also included. 
• Valuing Inventory - cost, unless it needs to be written down. 
• Lower of Cost or Market - if the goods have been impaired by damage, deterioration, obsolescence, or changes in price, a loss is to be booked against the revenues. 
• Major Inventory Accounting Methods - Perpetual makes adjustments to inventory with each purchase and sale, so no closing or adjusting entries are required unless there's lost, stolen, or damaged goods. The Gross Profit method relies on an estimated GP%. COGS + Ending Inventory = Goods Available for Sale. Only acceptable in situations where it's impossible to determine ending inventory directly (IE, in a fire). Periodic method is most common. Effects of purchases/sales on inventory and COGS are determined at period end. 
• Unit-Based Inventory Valuation - Specific Identification is when the cost of individual inventory items is used to calculate ending inventory and COGS. Not practical unless the inventory is small in quantity. There are also two Average Cost methods; first is the Perpetual Moving Average, where the average cost/unit is recomputed after each purchase by divifding total costs in inventory by total units. Periodic Weighted Average is when the average cost/unit is calculated by dividing COG available for sale by number of units available for sale. 
• Last-In First-Out (LIFO) - costs associated with the most recently acquired goods are the first to flow out. LIFO has to be used for tax purposes if it's used for financial reporting. IRS permission is required. When it's adopted, BGN inventory for the year of the change is converted to weighted average and before the LIFO base layer. Advantage to LIFO is that it's a better match of current costs v. current revenues, but ending inventor might become too low over time. 
• First-In, First-Out (FIFO) - costs associated with the goods first acquired are the first to flow out of COGS. 
• Effect of Inventory Errors - understated inventory = overstated COGS. Overstated COGS = understated net income.

LONG-TERM INVESTMENTS

Here you'll find investments in related companies, bonds which aren't intended to be sold, funds accumulated to retire debt, cash surrender value of life insurance. 

PROPERTY, PLANT, & EQUIPMENT

Land, buildings, plant, furniture, fixtures, leasehold improvements. 

INTANGIBLE ASSETS

L/T rights under the control of a business due to something contractual. Includes patents, copyrights, franchises, trademarks, organization costs, etc. Goodwill is also here, which is the "premium" paid when acquiring a business (excess of FV of consideration v. FV of assets of acquisition). 

Purchased Intangibles include the acquisition costs and whatever other costs are necessary to secure the rights related to intangibles. An asset is intangible if (1) it arises from a contractual or legal right, and (2) is able to be separated from the entity and sold. Examples:

• Marketing-Related - Trademarks, trade-names, non-compete agreements
• Customer-Related - Lists, contracts, relationships
• Artistic-Related - Books, magazines, jingles, etc. 
  
• Contract-Based - Licensing, royalties, advertising, service contracts, lease agreements, etc. 
• Technology-Based - Patented and unpatented technologies, software, trade secrets
  

Internally Developed Intangibles - cost would include legal/filing/other incidental fees to secure the rights. R&D, though, expensed as incurred. 

Amortization - Intagible's may or may not be amortized. If their life is finite, it's amortized; if not, it's not. Goodwill isn't amortized, for example. Straight-line method used. An accumulated amortization account is typically not used. All intangibles should be tested annually for impairment. 

ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

Long-Lived Assets to be Held & Used - "impairment" is when the CV of an asset group > FV. Loss is recognized only when the CV of the asset/group isn't recoverable. 

• When to Test For Recoverability - basically it's whenever warranted by events or changes in circumstances. Decrease in market price, a change in the extent or manner in which it's being used, adverse change in the legal or the business climate. 
• Depreciation Estimates - after an impairment loss, depreciation will probably need to be revised. 
• Allocating Impairment Losses & New Cost Basis - recognized impairment loss is allocated pro-rata across the group. Any loss recorded creates a new cost basis for an asset which gets depreciated. 
• Estimates of Future Cash Flows for Recoverability Test - 3 aspects of the recoverability test; (1) cash flow estimation, (2) cash flow estimation period, (3) types of asset-related expenditures that should be included in developing estimates of future cash flows. 
• Reporting & Disclosures - impairment loss is to be reported as a component of income from continuing ops before taxes. Disclosures include: descriptions of the impaired asset/group and the facts leading to the impairment; amount of the impairment loss; method of determining FV. 

Reporting Requirements

• Discontinued Ops - results are reported here after something has been disposed of or is classified as held for sale if (1) operations and cash flows of the component have been killed from continuing ops from the disposal and (2) the entity won't have any continuing involvement in the ops after the disposal. 
• Disposal Gains/Losses in Continuing Ops - reported as income from continuing ops before taxes. 
• Long-Lived Assets as Held-For-Sale - these are presented separately. Disclose a description of facts leading to the expected sale, and the gain/loss relating to measuring an asset classified as held for sale @ FV less selling costs.

OTHER ASSETS

Usually for assets that don't fit anywhere else, such as deferrals and prepayments. 

CURRENT LIABILITIES

"Current" denoted by any obligations that'll be paid within a year. 

LONG-TERM LIABILITIES

These things will be paid in more than 1 year. Mortgages, capital leases, etc. 

STOCKHOLDERS' EQUITY

Ownership interests are represented here. Typical categories include common and preferred stock, retained earnings, treasury shares. 

• Preferred & Common Shares - preferred has some edge over common, typically in the form of dividends or liquidation. If only one class of shares exist, typically just referred to as Capital Stock. If shares have a par value, that's what they're supposedly worth. So if a stock's par value is $5, and it's sold for $6, the excess credit is booked to a "PIC in Excess of Par - Common" account, aka a premium. If no par, entire amount's credited to a single common stock account. 
• Additional Paid-In Capital - aka "PIC in Excess of Par," "Capital in Excess of Par," "Capital Contributed in Excess of Par." 
• Retained Earnings & Dividends - R/E is the cumulative earnings of the firm since inception, adjusted for distributions of assets or stock to stockholders, effects of treasury stock transactions. The Statement of Retained Earnings reconciles the R/E balance from beginning to end of year. Reconciling items are net income/loss, dividends, and prior-period adjustments. PPA's are beginning balance adjustments to R/E. Appropriations of Retained Earnings are when the BOD may agree to "appropriate" R/E for special purposes. This transfers part of the balance to a sub-R/E account. Doesn't affect net income and doesn't mean that there's cash on hand for it. Dividends are distributions to stockholders from R/E. Can be cash, stock, or property owned by the corp. PShares are usually tied to a fixed dividend %, and can be cumulative or non-cumulative, participating or non-participating. CShare dividends aren't cumulative. When dividends are declared, need to calculate the amount to go to PShareholders and CShareholders. 
• 4-Step Procedure to Paying Dividends - only proceed to the next step if additional dividends are to be distributed. Step 1 - Preferred Arrearage. There won't be anything to pay if they're noncumulative or if the PD's for previous years have already been paid. Step 2 - Preferred Current - pay PDs for current year. Step 3 - Current Year. If the PDs are non-participating, pay any remaining amounts to CSH. If PDs are participating, pay CSH to match the rate of dividends paid to PDs. Step 4 - Divide Remainder - any remaining overage is divided according to par values. 
• Cash Dividends - DR R/E, CR Dividends Payable. Dividends Payable is then DR'd and Cash is CR'd. 
  
• Property Dividends - booked using the FV of property distributed as of the declaration date. SO, may need to do an entry to account for any difference between BV and FV. 
  
• Stock Dividends & Splits - these both change the number of shares O/S. A stock dividend is expressed as the %change in the number of shares O/S. A split is the ratio of the new number of shares O/S to the old number of shares O/S. 3 acceptable ways to account for these changes. Small Stock Dividend - R/E is capitalized (transferred to capital accounts) equal to the FV of additional shares issued. Large Stock Dividend - R/E is capitalized equal to the par value of additional shares. Stock Split - no change in any of the S/H equity accounts. Balance in par value account unchanged. Method to use depends on the size of the distribution. If the additional shares are < 25% of original shares O/S, use Small Stock Dividend. When more than that, use Large Stock Dividend.