CHAPTER 2: BALANCE SHEET

Components of financial statements

1. Balance Sheet 2. Income Statement 3. Statement of changes in equity or Statement of recognized gains or losses 4. Cash Flow Statement 5. Notes, comprising a summary of significant accounting principles

Classification of Assets

1. Current Assets 2. Non-Current Assets

Classification of Liabilities

1. Current Liabilities 2. Non-Current Liabilities

Principles of statement presentation

1. Fair Presentation 2. Going Concern 3. Accrual basis 4. Consistency of presentation 5. Materiality 6. Comparable information

Forms of Balance Sheet

1. Report Form/ Vertical Form 2. Account Form-Horizontal Form

Non-Current Liabilities

All liabilities not classified as current are classified as noncurrent liabilities include the following: a. Noncurrent portion of long term debt b. Capital or finance lease liability c. Deferred tax liability d. Long-term obligations to company officers

Non-Current Assets

All other assets not classified as current assets include the following: a. Property , plant and equipment b. Long-term investments c. Intangible assets d. Other non-current assets

Three elements of a balance

Assets Liabilities Equity

Current Assets in the Balance Sheet

Current assets are usually listed in the balance sheet in the order of liquidity are the following: A. Cash and Cash equivalents B. Financial assets such as trading securities, available for sale securities and other marketable financial assets C. Trade and other receivables D. Prepaid expenses

Current portion of long term payable

If a balance cannot be payed within the given period of time, it will be taken to the next accounting period.

Equity

Is the residual interest in the assets of the enterprise after deducting all its liabilities. Simply means "net assets" or total assets minus liabilities.

Current Assets

It satisfies any of the following criteria: a. Cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the balance sheet date. b. It is held primarily for the purpose of being traded. c. It is expected to be realized within 12 months after the balance sheet. d. It is expected to be realized or intended for sale or consumption within the entity's normal operating cycle.

Current Liabilities

It satisfies any of the following criteria: a. It is expected to be settled in the entity's normal operating cycle. b. It is held primarily for the purpose of being traded. c. It is due to be settled within 12 months after the balance sheet date. d. The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.

Liquidity

Liquidity means available cash. It is the ability of the enterprise to meet currently maturing obligations. Presentation of accounts are done according to liquidity, thus accounts receivable are recorded before inventories.

Terms used in reporting the equity of an enterprise

a. Owner's equity in a proprietorship b. Partner's equity in a partnership c. Stockholder's equity or shareholders' in a corporation

Current Liabilities in the Balance Sheet

a. Trade and other payables b. Current provisions c. Short-term borrowing d. Current portion of long e. term debt f. Current tax liability

Assets

are defined as "resources controlled as a result of past transactions and events and from which future economic benefits are expected to flow to the enterprise".

Definition financial statements

are the means by which the information accumulated and processed in financial accounting is periodically communicated to users.

Account Form

as the title suggests, the presentation follows that of an account, meaning the assets are shown on the left side and the liabilities and equity on the right side of the balance sheet.

Balance Sheet

is a formal statement showing the financial position of an enterprise as of a particular date.

Fair Presentation

is achieved if the financial statements are prepared in accordance with the accounting standards which represent the GAAP

Solvency

is the availability of cash over the longer tern to meet maturing obligations.

Capacity for adaptation

is the financial flexibility of the enterprise to use its available cash for unexpected investment opportunities.

Financial Structure

is the source of financing for the assets of the enterprise.

LIABILITIES

present obligations arising from past transactions , the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Materiality

provides that the specific requirements of statements need not be met if the resulting information is not material.

Accrual basis

revenue is recognized when earned and expense is recognized when incurred rather when cash is received or paid

Going Concern

the accounting entity is viewed as continuing in operation indefinitely

Comparable Information

the financial statements of the current period should be presented with comparative figures of the financial statements of the preceding year

Consistency of presentation

the presentation and classification of financial statement should be uniform from one accounting period to the next

Report Form

this form sets the three major sections in a downward sequence of assets, liabilities and equity.