1. Components and Format of the Balance Sheet
a. describe the elements of the balance sheet: assets, liabilities, and equity;
b. describe uses and limitations of the balance sheet in financial analysis
c. describe alternative formats of balance sheet presentation;
d. distinguish between current and non-current assets, and current and non-current liabilities;
What is a common metaphor used when thinking about the balance sheet?
Think of the balance sheet as a photo of the business at a specific point in time. It presents the assets, liabilities, and equity ownership of a company as of a specific date.
What are the eight components of a balance sheet?
1. Current assets
2. Long-term investments
3. Property, Plant, and Equipment
4. Intangible assets
5. Other assets
6. Current liabilities
7. Long-term liabilities
8. Owners equity
What is the "account format" vs the "report format" for a balance sheet?
- The account format, which follows the pattern of the traditional general ledger accounts, with assets at the left and liabilities and equity at the right of a central dividing line.
- A report format balance sheet lists assets, liabilities, and equity in a single column.
What is the operating cycle?
The operating cycle is the average time between the acquisition of materials and supplies and the realization of cash through sales of the product for which the materials and supplies were acquired. The cycle operates from cash through inventory, production, and receivables back to cash.
How does a company determine the operating cycle they will use on the balance sheet?
Where there are several operating cycles (avg time for materials through to cash) within one year, the one-year period is used. If the operating cycle is more than one year, the longer period is used.
What is working capital?
The excess of total current assets over total current liabilities is referred to as working capital. It represents the net amount of a company's relatively liquid resources.