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CHAPTER 2 (Continuation)
The Balance Sheet
•  What are the resources of the company?
•  What are the company s existing
FINANCIAL STATEMENTS, obligations?
CASH FLOW, AND TAXES •  What are the company s net assets?

1-2

The Balance Sheet

Accounting Equation Assets: Current Assets
Assets = Liabilities + Owners Equity Cash & Cash Equivalent
•  Only cash represents the actual money that can be
Resources Sources of Funding
spent (Cash in Bank or Pe<y Cash)
•  Some marketable securi?es mature very soon and
are called “cash equivalents” and are included with
Resources Creditors Owners cash.
used to claims
+
claims •  Formula: Cash in Bank +Pe<y Cash +Cash Equivalents
generate = against against

revenues resources resources
Short-term Investments
•  Other marketable securi?es have a longer ?me un?l
maturity (like 90-day treasury bills) and are called
1-3 “short-term investments 1-4
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The Balance Sheet The Balance Sheet

Assets: Current Assets Assets: Current Assets
Accounts Receivable
•  the amount of sales the customers have not yet paid
for.

Inventory
•  shows the amount that the firm has invested in raw
materials, work-in-process, and finished goods
available for sale (FIFO vs. LIFO).
•  Formula: Raw Materials
+ Work-in-process
+ Finished Goods
1-5 1-6

The Balance Sheet The Balance Sheet

Assets: Non-Current Assets Assets: Non-Current Assets
Property, Plant & Equipment (PPE) Intangible Assets (IA)
•  the book value or acquisi?on cost of investment on •  the book value or acquisi?on cost of investment on
tangible assets (building, machinery, equipment & intangible assets (copyrights, trademarks, and
other hard assets) goodwill)
•  depreciated (or reduced) over ?me by deduc?ng the •  amor?zed (or reduced) over ?me by deduc?ng the
accumulated deprecia?on accumulated amor?za?on
Formula of Accumulated Deprecia?on (assuming no Formula of Accumulated Amor?za?on (no salvage
salvage value): value):
. Book Value of PPE . X Age (years used) of the asset . Book Value of IA . X Years passed from contract date
Es?mated Useful Life Contract Dura?on

1-7 1-8
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The Balance Sheet The Balance Sheet

Assets: Non-Current Assets Assets: Non-Current Assets
On January 1, 2015, ABC Corpora?on acquired a Henlin
franchise for P3.75M (contract valid for 10 years) and
constructed a mall outlet that costs P5.625M and can
be used for 10 years.

1-9 1-10

The Balance Sheet The Balance Sheet

Total Assets Liabili?es: Current Liabili?es
Accounts Payable (AP)
•  an obliga?on the firm has to pay its suppliers for its
purchases.

Accruals
•  the amount of taxes and wages the firm has yet to
pay in a year.

Notes Payable
•  represents loans the firm must repay within a year
•  Computed as: Original Long-Term Loan Amount
1-11 Tenor (No. of Years) of the Loan 1-12
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The Balance Sheet The Balance Sheet

Liabili?es: Current Liabili?es Liabili?es: Non-Current Liabili?es

Long-Term Loan
•  represents the remaining balance of the long-term
loan that is not yet due within the year
•  Computed as:
Original Long-Term Loan Amount
Given: 4,687,500 payable in 10yrs drawn on Jan. 1, 2015 (-) minus:
Notes Payable Original Long-Term Loan Amount X No. of Years Paid
= Original Long-Term Loan Amount Tenor (No. of Years) of the Loan
Tenor (No. of Years) of the Loan
= 4,687,500 = 468,750 payable within the year
10 years 1-13 1-14

The Balance Sheet The Balance Sheet

Liabili?es: Non-Current Liabili?es Total Liabili?es

Long-Term Loan
Original Long-Term Loan Amount
(-) minus:
Original Long-Term Loan Amount X No. of Years Paid
Tenor (No. of Years) of the Loan
= 4,687,500 – ((4,687,500/10 yrs) X 1 yr paid))
1-15 1-16
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The Balance Sheet The Balance Sheet

Owner’s Equity Total Owner’s Equity
•  Preferred stock is a hybrid between common
stock and debt.
•  Common stock account records the proceeds the
firm received from selling shares of stock in the
past.
•  Retained earnings are the cumula?ve amount of
earnings not paid out as dividends.
•  The sum of common stock and retained earnings
is called “common equity,” or simply “equity,”
represen?ng the assets net of the liabili?es, or
net worth.
1-17 1-18

The Balance
Sheet

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