FINANCIAL MANAGEMENT_BALANCE SHEET.pptx

FINANCIAL MANAGEMENT The Balance Sheet The income statement reports the cumulative results from operating the business over a period of time, such as one year. By contrast, the balance sheet is a snapshot of the firm’s financial position on a specific date. In its simplest form, the balance sheet is...

FINANCIAL MANAGEMENT The Balance Sheet The income statement reports the cumulative results from operating the business over a period of time, such as one year. By contrast, the balance sheet is a snapshot of the firm’s financial position on a specific date. In its simplest form, the balance sheet is defined by the following equation: Total Assets = Total Liabilities + Total Shareholder’s Equity Total liabilities represent the total amount of money the firm owes its creditors (including the firm’s banks and suppliers). Total shareholders’ equity refers to the difference in the value of the firm’s total assets and the firm’s total liabilities recorded in the firm’s balance sheet. As such, total shareholders’ equity refers to the book value of their investment in the firm, which includes both the money they invested in the firm to purchase its shares and the accumulation of past earnings from the firm’s operations. The sum of total shareholders’ equity and total liabilities is equal to the firm’s total assets, which are the resources owned by the firm The Balance Sheet H.J. Boswell, Inc. Balance Sheet December 31, 2015 and 2016 (in $ Millions) The Balance Sheet Legend: Assets: The Left-Hand Side of the Balance Sheet Current Assets. Assets that the firm expects to convert to cash in 12 months or less. Examples include cash, accounts receivable, inventories, and other current assets. Cash. Every firm must have some cash on hand at all times because cash expenditures can sometimes exceed cash receipts. Accounts Receivable. The amounts owed to the firm by its customers who purchased on credit. Inventory. Raw materials that the firm utilizes to build its products, partially completed items or work in process, and finished goods held by the firm for eventual sale. Other current assets. All current assets that do not fall into one of the named categories (cash, accounts receivable, and so forth). Prepaid expenses (prepayments for insurance premiums, for example) are a common example of an asset in this catch-all category. Gross Plant and Equipment. The sum of the original acquisition prices of plant and equipment still owned by the firm. Accumulated Depreciation. The sum of all the depreciation expenses charged against the prior year’s revenues for fixed assets that the firm still owns. Net Plant and Equipment. The depreciated value of the firm’s plant and equipment The Balance Sheet Legend: Liabilities and Stockholders’ Equity: The Right-Hand Side of the Balance Sheet Current Liabilities. Liabilities that are due and payable within a period of 12 months or less. Examples include the firm’s accounts payable, accrued expenses, and short-term notes. Accounts payable. The credit suppliers extended to the firm when it purchased items for its inventories. Accrued expenses. Liabilities that were incurred in the firm’s operations but not yet paid. For example, the company’s employees might have done work for which they will not be paid until the following week or month. The wages owed by the firm to its employees are recorded as accrued wages. Short-term notes. Debts created by borrowing from a bank or other lending source that must be repaid in 12 months or less. Long-Term Debt. All firm debts that are due and payable more than 12 months in the future. A 25year mortgage loan used to purchase land or buildings is an example of a long-term liability. If the firm has issued bonds, the portion of those bonds that is not due and payable in the coming 12 months is also included in long-term debt. Common Stockholders’ Equity. Common stockholders are the residual owners of a business. They receive whatever income is left over after the firm has paid all of its expenses. In the event the firm is liquidated, the common stockholders receive only what is left over—but never lose more than they invested—after the firm’s other financial obligations have been paid The Balance Sheet Constructing a Balance Sheet Constructing a Balance Sheet Constructing a Balance Sheet