Course Notes - Chapter 3: The Balance Sheet PDF

Chapter 3 The Balance Sheet Haidan Li  LO3-2 Balance Sheet Reports a company’s financial position at a point in time  LO3-2 Classification of Elements: Assets CURRENT ASSETS Assets expecte...

Chapter 3 The Balance Sheet Haidan Li  LO3-2 Balance Sheet Reports a company’s financial position at a point in time  LO3-2 Classification of Elements: Assets CURRENT ASSETS Assets expected to be converted to cash (or consumed) within the coming year or within the normal operating cycle of the business if that’s longer than one year The components of current assets are listed in decreasing order of liquidity:  Cash and cash equivalents  Short-term investments  Accounts receivable  Inventories  Prepaid expenses  LO3-2 Current Assets—Nike, Inc. May 31, May 31, 2017 2016 (In millions) Current assets: Cash and cash equivalents $ 3,808 $ 3,138 Short-term investments 2,371 2,319 Accounts receivable (net) 3,677 3,241 Inventory 5,055 4,838 Prepaid expenses and other current assets 1,150 1,489 Total current assets $16,061 $15,025 03-4  LO3-2 Classification of Elements: Assets NONCURRENT ASSETS  Assets expected to be converted to cash for consumed for more than one year (or operating cycle)  Typical classifications include:  Investments Property, Plant, and Equipment Intangible Assets Other Assets  LO3-2 Long-Term Assets – Nike, Inc. May 31, May 31, 2017 2016 ($ in millions) Long-term assets: Property, plant, and equipment (net) $ 3,989 $ 3,520 Identifiable intangible assets (net) 283 281 Goodwill 139 131 Deferred income taxes and other assets 2,787 2,422 Total long-term assets $7,198 $6,354  LO3-3 Classification of Elements: Liabilities CURRENT LIABILITIES Obligations that are expected to be satisfied within one year or the operating cycle, whichever is longer Obligations expected to be satisfied through the use of current assets or the creation of other current liabilities Examples Accounts payable Notes payable (short-term borrowings) Deferred revenues Accrued liabilities Current maturities of long-term debt  LO3-3 Classification of Elements: Liabilities LONG-TERM LIABILITIES  Obligations that are due to be settled, or have a contractual right by the borrowing company to be settled, in more than one year (or operating cycle, if longer) after the balance sheet date  Impact on future cash flows and long-term solvency is assessed by reporting payment terms, interest rates, and other details in a disclosure note Examples  Long-term notes  Bonds  Pension obligations  Lease obligations  LO3-3 Liabilities – Nike, Inc May 31, May 31, 2017 2016 ($ in millions) Current liabilities: Current portion of long-term debt $ 6 $ 44 Notes payable 325 1 Accounts payable 2,048 2,191 Accrued liabilities 3,011 3,037 Income taxes payable 84 85 Total current liabilities 5,474 5,358 Long-term debt 3,471 1,993 Deferred income taxes and other liabilities 1,907 1,770 Total liabilities $10,852 $9,121 03-9 Classification of Elements: Shareholders’ LO3-3 Equity Arises primarily from (1) Paid-in capital and (2) Retained earnings  Residual amount derived by subtracting liabilities from assets: Assets − Liabilities = Shareholders’ Equity  Sometimes referred to as net assets or book value  Includes other equity components such as accumulated other comprehensive (loss) income  LO3-3 Shareholders’ Equity—Nike, Inc. May 31, May 31, 2017 2016 ($ in millions) Shareholders’ equity: Common stock (1,643 and 1,682 shares outstanding) $ 3 $ 3 Additional paid-in capital 8,638 7,786 Retained earnings 3,979 4,151 Accumulated other comprehensive income (213) 318 Total stockholders’ equity $12,407 $12,258 03-11 The Balance Sheet: Usefulness and Limitations Usefulness: Limitations:  The balance sheet describes many of the  The balance sheet measures a resources a company has for generating company’s book value, which does future cash flows. not portray the market value of the  Assets are grouped according to entity. common characteristics  Two primary reasons that the balance  Grouping provides useful information sheet does not portray the company’s about: market value are: – Liquidity—the ability of a company to 1. Many assets are measured at their convert its assets to cash historical costs rather than their fair – Long-term solvency—whether a values company will be able to pay all its 2. Many aspects of a company may liabilities including long-term debts represent valuable resources, but  Financial flexibility—the ability these items are not recorded as assets of a company to alter cash flows in the balance sheet in order to take advantage of unexpected investment  Heavily reliant on estimates rather opportunities and needs than determinable amounts.