Chapter 3: The Balance Sheet and Financial Disclosures

What is a subsequent event?

An event, that has a material impact on the company's financial position and occurs between the end of the fiscal year and the date the financial statements are issued.

Related Party Transactions

Occur when a company engages in a business transaction with owners, management, affiliated companies or other parties that can significantly influence or be influenced by the company. The correct treatment is to disclose this transaction in the notes, including the dollar amounts. Have potential for misrepresentation and a non-arms length transaction.

Customer Advances

Pre-payments or Unearned Revenue

Auditor's Report

Provides an independent, professional, third party opinion about the fairness of the representations in the financial statements.

The Balance Sheet

Reports a snapshot of the company's assets, liabilities and shareholder's equity at a given point in time.

What is the treatment for a recognized subsequent event?

Requires an adjustment of the numbers on the Financial Statements.

Equity

Shareholders Equity is the residual interest in the assets of an entity that remains after deducting liabilities. Ex.) Paid-in capital (Invested Capital) Retained Earnings (Earned Capital)

What should you do when you are trying to analyze balance sheet items?

Start with the end date.

Debt Ratio

Tells you how much of the assets are financed by debt and how much are financed by equity.

What is the final section in the annual report?

The compensation of Directors and Top Executives section.

Assets

Assets are resources with probable future economic benefits. Broken up into current and long-term assets.

Management Discussion and Analysis Section

In this section, the company's performance is viewed through the management's eyes. Including: company's operations, liquidity, and capital resources.

Current Assets

Include cash and all other assets expected to become cash within one year of the operating cycle. ex.) cash, cash equivalents, short term investments, A/R, Inventories, Pre-paid expenses, supplies

What is another term for unearned revenue?

Deferred Revenue.

What is the correct treatment for a non recognized, accounting event?

Disclose it in the notes.

Limitations of the Balance Sheet

1. Assets and Liabilities are not at fair market value because some are recorded at historical cost. Ex.) Land, Bonds 2. Some assets and liabilities are estimates Ex.) Accounts Receivable 3. Some Assets are omitted from the books. Ex.) Goodwill This means that the Equity measured by the balance sheet is not likely to be representative of the market value of the entity.

What are management's responsibilities with respect to the financial statements?

1. Preparing the Financial Statements and other information in the annual report. 2. Maintaining and assessing the company's internal control procedures.

What are the two types of subsequent events?

1. Recognized Subsequent Event: Something that is already on the books. Provide additional evidence about conditions that existed at the balance sheet date. 2. Non recognized Subsequent Event: Events that truly come in to existence after the balance sheet date.

Three types of Noteworthy Events and Transactions

1. Related Party Transactions 2. Errors and Fraud 3. Illegal Acts

What are the four types of audit opinions?

1. Unqualified: Present the Financial Position Fairly. 2. Qualified: Exception that is not sufficient to invalidate the financial statements as a whole. 3. Adverse: Exceptions are so serious that a qualified opinion is not justified. 4. Disclaimer: Not able to express an opinion.

Errors and Fraud

Accounting errors are intentional. While, fraud is an intentional distortion of the Financial Statements.

Liabilities

Claims against resources and are probable future sacrifices of economic benefits. Broken up into Current Liabilities and long-term liabilities

What is the correct treatment for a non recognized, non accounting event?

Neither adjust or disclose. Do nothing has no affect on the Financial Statements.

What is the first financial disclosure required?

The summary of significant accounting policies.

Notes to Financial Statements

These are for material items only. Used to further elaborate on specific balance sheet items. Ex.) Inventory (Components, WIP, FG) Breakdown of PPE Accrued Expenses

Long-term assets

These are the assets that are expected to provide benefits beyond the next year or operating cycle. Ex.) Long-term investments, Notes Receivables, PPE, Intangible Assets, Goodwill, Other Assets

Current Liabilities

These in general are expected to be satisfied within one year or the operating cycle, whichever is longer. Ex.) Accounts Payable, Accrued Liabilities, Current Maturities of long-term debt, Unearned Revenue

Illegal Acts

Unlawful transactions or business practices, Disclosure will be determined by an auditor after taking into account the materiality of the illegal act in question.