The Classified Balance Sheet
presents a snapshot of a company's financial position at a point in time. To improve users' understanding of a company's financial position, companies often group similar assets and similar liabilities together. This is useful because it tells you that items within a group have similar economic characteristics.
-Property, Plant, and Equipment
Liabilities and Stockholders' Equity
These groupings help readers determine such things as(1) whether the company has enough assets to pay its debts as they come due, and (2) the claims of short- and long-term creditors on the company's total assets.
are assets that a company expects to convert to cash or use up within one year.For most businesses the cutoff for classification as current assets is one year from the balance sheet date. For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use it up in operations within one year.
Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. For most businesses this cycle takes less than a year, so they use a one-year cutoff. But, for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or long-term.
Common types of current assets are
The order goes: (1) cash, (2) short-term investments (such as short-term U.S. government securities), (3) receivables (notes receivable, accounts receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (insurance and supplies). On the balance sheet, companies usually list these items in the order in which they expect to convert them into cash (order of liquidity).
not classified as a current asset. The main line items in this section are long-term investments; property, plant, and equipment (PP&E); and goodwill and other intangible assets.
are generally investments in stocks and bonds of other corporations that are normally held for many years. This category also includes investments in long-term assets such as land or buildings that a company is not currently using in its operating activities.
Property, Plant, and Equipment
are assets with relatively long useful lives that a company is currently using in operating the business. This category includes land, buildings, machinery and equipment, delivery equipment, and furniture & (Less: accumulated depreciation)
is the practice of allocating the cost of assets to a number of years. Companies do this by systematically assigning a portion of an asset's cost as an expense each year (rather than expensing the full purchase price in the year of purchase). The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation. Even though it's an expense on the income statement, depreciation is not a cash charge, so it's added back to net income.
account shows the total amount of depreciation that the company has expensed thus far in the asset's life.
Many companies have assets that do not have physical substance yet often are very valuable. We call these assets intangible assets. They include patents, copyrights, and trademarks or trade names that give the company exclusive right of use for a specified period of time.
In the liabilities and stockholders' equity section of the balance sheet, the first grouping is current liabilities. are obligations that the company is to pay within the coming year. Common examples are accounts payable, wages payable, bank loans payable, interest payable, and taxes payable and unearned revenue. Also included as current liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations.
What informaiton is listed under the current liabilities section? and in what order?
Within the current liabilities section, companies usually list notes payable first, followed by accounts payable. Other items then follow in the order of their magnitude. In your homework, you should present notes payable first, followed by accounts payable, and then other liabilities in order of magnitude
are obligations that a company expects to pay after one year. Liabilities in this category include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. Many companies report long-term debt maturing after one year as a single amount in the balance sheet and show the details of the debt in notes that accompany the financial statements. Others list the various types of long-term liabilities.
It is also referred to as net assets, or net worth. Consists of two parts: common stock (Treasury Stock) and retained earnings. Companies record as common stock the investments of assets into the business by the stockholders. They record as retained earnings the income retained for use in the business. These two parts, combined, make up stockholders' equity on the balance sheet.
For example, the company may issue or retire shares of common stock. Most companies, therefore, use what is called a statement of stockholders' equity, rather than a retained earnings statement, so that they can report all changes in stockholders' equity accounts.
Baxter Hoffman recently received the following information related to Hoffman Corporation's December 31, 2007, balance sheet. Prepare the assets section of Hoffman Corporation's balance sheet.
Prepaid expenses $ 2,300
Accumulated depreciation 2,700
Property, plant, and equipment 10,700
Accounts receivable 1,100
Balance Sheet (partial)
December 31, 2007
Cash $ 800
Accounts receivable 1,100
Prepaid expenses 2,300
Total current assets $ 7,600
Property, plant, and equipment 10,700
Less: Accumulated depreciation 2,700 8,000
Total assets $15,600
Create a classified balance sheet: cash, mortgage payable, short-term investments (such as short-term U.S. government securities), land, common stock, patents, retained rearnings, invest in real estate, account receivables, unearned revenue, interest payable, notes receivable, and interest receivable, salaries payable, inventories, office equipment, prepaid insurance, prepaid supplies, and Less: accumulated depreciation.
Current Assets: cash, short-term investments (such as short-term U.S. government securities), account receivables,notes receivable, and interest receivable, inventories, prepaid insurance and prepaid supplies
Long Term Investments: invest in real estate
Property, Plant, and Equipment: Land, office equipment, Less: accumulated depreciation.
Current Liablity: unearned revenue, interest payable, salaries payable
Intangible assets: patents
Long Term Liability: mortgage payable,
Stockholders Equity: common stock, retained rearnings,
The statement of cash flows reports the cash effects of what?
(1) a company's operating activities,
(2) its investing activities,
(3) its financing activities.
Similarly, net income does not tell you how much cash the company generated from operations.
Cash Flows from Operating Activities
cash receipts and payments such as cash receipts from customers, cash paid to suppliers, cash paid for salaries, etc.
Useful measure for companies with lots of depreciation and other noncash items.
Cash Flows from Investing Activities
classified as either capital expenditures(items that last a long time)--money spent on items such as new equipment or anything else needed to keep the business running.
cash flows from financing activities
This section includes any activities that involve the company's owners or creditors. For example, the issuance or purchase of common stock, the issuance or repayment of debt, dividends paid to investors would be found in this section and repurchase of common stock. Although these line items are pretty self-explanatory--dividends paid is exactly what it says--we think investors should look carefully at how much stock a company is issuing or repurchasing.
This figure represents the amount of cash a company spent on items that last a long time, such as property, plant, and equipment (PP&E). Basically, capital expenditures--often referred to as "capex"--are brick-and-mortar types of investments that are necessary to keep the company running and growing in its current form. For example, in order for a supermarket to keep operating and growing, it will typically need to remodel its existing stores, replace its equipment, and build new stores. These expenditures will show up in the capex line item in the "cash flows from investing activities" section.
What two sources do companies get cash from?
operating activities and financing activities.
Statement of cash flows, cash provided by operating activities is intended to indicate the cash-generating capability of the company. Analysts have noted, however, that cash provided by operating activities fails to take into account WHAT?
company must invest in new property, plant, and equipment (capital expenditures) just to maintain its current level of operations. Companies also must at least maintain
dividends at current levels to satisfy investors. A measurement to provide additional insight regarding a company's cash-generating ability is free cash flow.
Free Cash Flow
.is calculated as net cash from operating activities minus capital expenditures. This figure represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations.
describes the cash remaining from operations after adjusting for capital expenditures and dividends
Suppose that MPC produced and sold 10,000 personal computers this year. It reported $100,000 cash provided by operating activities. In order to maintain production at 10,000 computers, MPC invested $15,000 in equipment. It chose to pay $5,000 in dividends. What is the its free cash flow?
Its free cash flow was $80,000 ($100,000 − $15,000 − $5,000). The company could use this $80,000 to purchase new assets to expand the business, to pay off debts, or to increase its dividend distribution.