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Welcome to: A
Andrew Harrison CPA P.C. Certified Public Accountant |
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Balance Sheet |
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The balance sheet gives good information
if it is looked at carefully. The
examination of liquidity (the ability to meet current debt payment when due)
is very important. Creditors will be interested in the ratio of cash or
equivalents to liabilities. Creditors and stockholders use the balance sheet
to study the financial ability to adapt to changes. Classifications- Same accounts are
grouped together and important associations are shown: A)
Assets-Financial
characteristics of economic resources-Cash, etc.-the interest in which is
legally or justly obtained by a company from past transactions. They are then
sub-classified in current and non-current (over 1
year old). 1-Current
assets:
Cash and other assets that can be changed in cash or sold or used in one year
or operating cycle. They are shown on the balance sheet in the order of their
liquidity. The five key accounts are cash, marketable securities,
receivables, inventories, and prepayments. 2-Long
term investments: held for over one year
and are shown below current assets a)
Securities-bonds,
stocks, notes b)
Pension, plant, and
sinking funds 3-Property, plant and equipment: are capable of with standing wear and tear (Durable goods).
Examples: Land, buildings, machinery, equipment, furniture, fixtures, etc.
Most are depreciable except land. 4-Intangibles: can’t be physically touched. Examples: Patent, goodwill,
trade names, trademarks, copyrights, etc. They are written down
(amortization) over their useful life. 5-Other assets: This
section is used differently by companies and the accounts includes:
non-current
receivables, special funds and advances to related
companies. B)
Liabilities- Financial responsibilities as by a contract or promise
to pay resources to other enterprises caused by a past transaction of the
company. 1-Current liabilities: debt that are expected to be paid by the use of current assets or converted into other current liabilities in the operating cycle including: a)
Payables caused by
purchasing goods and services- accounts
payable, wages payable, taxes payable, etc. b)
Advance collection
for the delivery of goods or services Example:
prepaid rent income or prepaid subscription income c)
Other liabilities
whose payment will be made within one Operating
cycle. Examples: Current portion of long-term debt. 2-Long term liability: debts that are “not “expected to be paid by the use of current assets or converted into other current liabilities in the operating cycle including: a) Debts where more assets are purchased, such as bond issuance, long-term lease and notes payable. b) Debts incurred in the ordinary course of business such as pension or deferred tax obligations c) Debts where the occurrence or non occurrence of future events will determine the amount of the debt such as product warrantees C) Owner’s Equity-shows the ownership make up of the company. The stockholders. It is usually shown as follows: a)
Capital stock-Common (Par or no par value of stock issued) b)
Additional
(excess) paid in capital-amounts paid
over par or stated value c)
Retained earnings-undistributed (reinvested) accumulated earnings d)
Treasury stock-repurchase of issued stock. Shown as a reduction of
equity D)
Other
information: The balance sheet is not
considered finish because of the listing of the above items. Footnotes and
other clarifications of the above items are needed such as: 1)
Contingencies-Uncertainty of outcome that may have an effect on the
balance sheet items. Example: Pending litigations 2)
Valuation
policies-Description of methods used in
calculations. Examples: Inventory cost, depreciation calculation
3) Contracts-restrictions explained. Liability clauses for example. 3)
After balance
sheet disclosures-events that occurred
after the balance sheet was prepared but before they are given out are to
shown in footnotes. 2003-2007 A. Andrew Harrison CPA P.C (A New York State Corp). |
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