Post by admin1 on Jan 9, 2006 19:54:46 GMT -5
The Balance Sheet Chart of Accounts:
Current Assets
Current assets includes cash plus those assets to be turned into cash (marketable securities and A/R) or used up (inventory and prepaid expenses) within one year of the balance sheet date or the operating cycle, whichever is longer. (See observation 10 below.) For most companies the relevant time period is one year.
Cash and Cash Equivalents
Cash includes coin, currency, and checking account balances. Cash equivalents are highly liquid debt securities with a maturity date so near that their market value will not change significantly with a change in interest rates.
Marketable Securities
Marketable securities are financial securities, other that cash equivalents, that management plans to hold for no longer than one year from the balance sheet date. These securities are reported at their fair market value.
Accounts Receivable (net)
If a company makes credit sales, accounts receivable appears on the balance sheet and reflects the amounts from credit sales yet to be collected. Accounts receivable is typically reported net of the company’s best estimate of the amount of the receivables that is net expected to be collected.
Inventory
Inventory, for a merchandising firm, represents to cost of product purchased but not yet sold. When the product is sold, inventory is decreased and cost of goods sold on the income statement is increased. Inventory, for a manufacturing firm, is comprised of raw materials, work in process, and finished goods. Inventory value on the balance sheet is based on the cost flow assumption used by the company (LIFO, FIFO, or weighted average). Hence two companies’ financial statements are not comparable unless both use the same costing method.
Prepaid Expenses
Prepaid expenses appears on the balance sheet when a company has paid for such items as supplies, insurance coverage, and rental rights prior to the time when these items will be used in carrying out the operations of the business. In the period these assets are used up, prepaid expense on the balance sheet decreases and an expense is recognized on the income statement.
Property, Plant, and Equipment (net)
Property (land) is reported on the balance sheet at its historical cost. Plant (buildings) and equipment are reported on the balance sheet at their historical cost less accumulated depreciation. Accumulated depreciation is that portion of historical cost that has already been recognized as depreciation expense on the income statement. To the extent the buildings and equipment are related to a firm’s manufacturing activity, the related depreciation expense becomes part of factory overhead. The factory overhead is reflected in work in process inventory, then in finished goods inventory, and finally in cost of goods sold. If the buildings and equipment are not related to manufacturing activity, the related depreciation expense will be reported as part of operating expenses.
Intangible Assets
Intangible assets include such assets as copyrights, patents, trade names, trademarks, and goodwill. To the extent the intangible assets are related to a firm’s manufacturing activity, the related amortization expense becomes part of factory overhead. The factory overhead is reflected in work in process inventory, then in finished goods inventory, and finally in cost of goods sold. If the intangibles are not related to manufacturing activity, the related amortization expense will be reported as part of operating expenses.
Investments
This category of non-current assets is comprised of investments in financial securities. These securities are reported on the balance sheet at their fair market value unless they are securities without a market value or they are debt securities that management intends to hold to maturity.
Current Liabilities
Current liabilities are those liabilities expected to be paid off with current assets or replaced with other current liabilities.
Accounts Payable
Accounts payable represents a liability to merchandise (or raw material) suppliers for inventory acquired but not yet paid for.
Accrued Liabilities
“Accrued liabilities” is a balance sheet caption that summarizes numerous liabilities stemming from the incurring of operating expenses before the period of payment. For example, during the last week of the year the employees may work for the company, but payday may occur after year-end. The cost of the employee services in reported as an expense of the year, and a liability for wages is recorded and reported as part of accrued liabilities on the balance sheet. Other liabilities included in accrued liabilities include property taxes payable, rent payable, and utilities payable.
Interest Payable
Interest payable is the liability for interest cost incurred but not yet paid by the end of the period.
Income Tax Payable
Income tax payable represents that portion of the company’s current year income tax liability that remains unpaid at year-end.
Deferred Income Tax Liability
This liability results principally from the use of accelerated depreciation on the corporate tax return while the straight-line method is used on the income statement. Accelerated depreciation means that, in the early years of the life of a depreciable asset more than the straight-line amount of depreciation expense is used on the tax return to decrease the current year income tax liability. This defers the payment of the tax to the later years of the asset’s life when, because of lower amounts of depreciation expense on the tax return, the company’s tax liability is high.
Notes Payable
A note payable typically arises when cash is borrowed from a financial institution in exchange for a promissory note. The note may be either a current or a long-term liability. The note is reported on the balance sheet at the present value of future cash payments to be made, discounted at the effective rate of interest on the note.
Bonds Payable
A bond is essentially a promissory note, except that it is typically used to borrow much larger amounts of money for longer periods of time, and it is a much more complex financial instrument than a promissory note. The bond is reported on the balance sheet at the present value of future cash payments to be made, discounted at the effective rate of interest on the bond.
Stockholders’ Equity
Stockholders’ equity represents owners’ rights to the assets of the business. Owners’ rights come from two sources: owner investment of personal assets in the company and profitable operations. Owners’ equity on a per share basis (book value per share) is not a good measure of the amount of cash an owner would receive upon disposition of the stock. Under normal circumstances, the value of a share of stock depends on what buyers in the market are willing to pay. In the case of liquidation of the company owners most often receive, after payment of creditors, less than book value.
Preferred Stock + Additional Paid-in Capital on Preferred Stock
These accounts normally represent the amount preferred stockholders would receive upon liquidation of the company, assuming sufficient cash was available after payment of creditors.
Common Stock + Additional Paid-in Capital on Common Stock
These accounts represent common shareholder rights to assets due to their investment of assets in the business.
Retained Earnings
Retained earnings is a measure of profitability of the business to date, less all dividends declared on all classes of stock. It represents common stockholders’ rights to the corporate assets, except to the extent of dividends in arrears on cumulative preferred stock.
Treasury Stock
Treasury stock represents the cost of shares of stock that the company has bought back from stockholders. Treasury stock, normally common stock, is typically bought to be resold to employees in a stock option plan or bought to increase the market price of the stock. Treasury shares have no rights to dividends and voting.
Current Assets
Current assets includes cash plus those assets to be turned into cash (marketable securities and A/R) or used up (inventory and prepaid expenses) within one year of the balance sheet date or the operating cycle, whichever is longer. (See observation 10 below.) For most companies the relevant time period is one year.
Cash and Cash Equivalents
Cash includes coin, currency, and checking account balances. Cash equivalents are highly liquid debt securities with a maturity date so near that their market value will not change significantly with a change in interest rates.
Marketable Securities
Marketable securities are financial securities, other that cash equivalents, that management plans to hold for no longer than one year from the balance sheet date. These securities are reported at their fair market value.
Accounts Receivable (net)
If a company makes credit sales, accounts receivable appears on the balance sheet and reflects the amounts from credit sales yet to be collected. Accounts receivable is typically reported net of the company’s best estimate of the amount of the receivables that is net expected to be collected.
Inventory
Inventory, for a merchandising firm, represents to cost of product purchased but not yet sold. When the product is sold, inventory is decreased and cost of goods sold on the income statement is increased. Inventory, for a manufacturing firm, is comprised of raw materials, work in process, and finished goods. Inventory value on the balance sheet is based on the cost flow assumption used by the company (LIFO, FIFO, or weighted average). Hence two companies’ financial statements are not comparable unless both use the same costing method.
Prepaid Expenses
Prepaid expenses appears on the balance sheet when a company has paid for such items as supplies, insurance coverage, and rental rights prior to the time when these items will be used in carrying out the operations of the business. In the period these assets are used up, prepaid expense on the balance sheet decreases and an expense is recognized on the income statement.
Property, Plant, and Equipment (net)
Property (land) is reported on the balance sheet at its historical cost. Plant (buildings) and equipment are reported on the balance sheet at their historical cost less accumulated depreciation. Accumulated depreciation is that portion of historical cost that has already been recognized as depreciation expense on the income statement. To the extent the buildings and equipment are related to a firm’s manufacturing activity, the related depreciation expense becomes part of factory overhead. The factory overhead is reflected in work in process inventory, then in finished goods inventory, and finally in cost of goods sold. If the buildings and equipment are not related to manufacturing activity, the related depreciation expense will be reported as part of operating expenses.
Intangible Assets
Intangible assets include such assets as copyrights, patents, trade names, trademarks, and goodwill. To the extent the intangible assets are related to a firm’s manufacturing activity, the related amortization expense becomes part of factory overhead. The factory overhead is reflected in work in process inventory, then in finished goods inventory, and finally in cost of goods sold. If the intangibles are not related to manufacturing activity, the related amortization expense will be reported as part of operating expenses.
Investments
This category of non-current assets is comprised of investments in financial securities. These securities are reported on the balance sheet at their fair market value unless they are securities without a market value or they are debt securities that management intends to hold to maturity.
Current Liabilities
Current liabilities are those liabilities expected to be paid off with current assets or replaced with other current liabilities.
Accounts Payable
Accounts payable represents a liability to merchandise (or raw material) suppliers for inventory acquired but not yet paid for.
Accrued Liabilities
“Accrued liabilities” is a balance sheet caption that summarizes numerous liabilities stemming from the incurring of operating expenses before the period of payment. For example, during the last week of the year the employees may work for the company, but payday may occur after year-end. The cost of the employee services in reported as an expense of the year, and a liability for wages is recorded and reported as part of accrued liabilities on the balance sheet. Other liabilities included in accrued liabilities include property taxes payable, rent payable, and utilities payable.
Interest Payable
Interest payable is the liability for interest cost incurred but not yet paid by the end of the period.
Income Tax Payable
Income tax payable represents that portion of the company’s current year income tax liability that remains unpaid at year-end.
Deferred Income Tax Liability
This liability results principally from the use of accelerated depreciation on the corporate tax return while the straight-line method is used on the income statement. Accelerated depreciation means that, in the early years of the life of a depreciable asset more than the straight-line amount of depreciation expense is used on the tax return to decrease the current year income tax liability. This defers the payment of the tax to the later years of the asset’s life when, because of lower amounts of depreciation expense on the tax return, the company’s tax liability is high.
Notes Payable
A note payable typically arises when cash is borrowed from a financial institution in exchange for a promissory note. The note may be either a current or a long-term liability. The note is reported on the balance sheet at the present value of future cash payments to be made, discounted at the effective rate of interest on the note.
Bonds Payable
A bond is essentially a promissory note, except that it is typically used to borrow much larger amounts of money for longer periods of time, and it is a much more complex financial instrument than a promissory note. The bond is reported on the balance sheet at the present value of future cash payments to be made, discounted at the effective rate of interest on the bond.
Stockholders’ Equity
Stockholders’ equity represents owners’ rights to the assets of the business. Owners’ rights come from two sources: owner investment of personal assets in the company and profitable operations. Owners’ equity on a per share basis (book value per share) is not a good measure of the amount of cash an owner would receive upon disposition of the stock. Under normal circumstances, the value of a share of stock depends on what buyers in the market are willing to pay. In the case of liquidation of the company owners most often receive, after payment of creditors, less than book value.
Preferred Stock + Additional Paid-in Capital on Preferred Stock
These accounts normally represent the amount preferred stockholders would receive upon liquidation of the company, assuming sufficient cash was available after payment of creditors.
Common Stock + Additional Paid-in Capital on Common Stock
These accounts represent common shareholder rights to assets due to their investment of assets in the business.
Retained Earnings
Retained earnings is a measure of profitability of the business to date, less all dividends declared on all classes of stock. It represents common stockholders’ rights to the corporate assets, except to the extent of dividends in arrears on cumulative preferred stock.
Treasury Stock
Treasury stock represents the cost of shares of stock that the company has bought back from stockholders. Treasury stock, normally common stock, is typically bought to be resold to employees in a stock option plan or bought to increase the market price of the stock. Treasury shares have no rights to dividends and voting.