UNDERSTANDING BALANCE SHEET

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ELEMENTS OF THE BS

• The balance sheet: reports the firm’s financial

position at a point in time. The BS consists of

assets, liabilities and equity.

• Assets: resources controlled as a result of past

transactions that are expected to provide the

future economic benefits.2Đặng Thị Thu Hằng

• Liabilities: obligations as a result of past events that

are expected to require an outflow of economic

resources.

• Equity: the owners’ residual interest in the assets

after deducting the liabilities. Equity is also referred

to as stockholders’ equity, shareholders’ equity, or

owners’ equity.

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LIMITATION OF THE BS

• The BS should not be interpreted as market value or intrinsic value.

• The BS consists of a mixture of values.• There are a number of assets and liabilities

that do not appear on the BS but certainly have value.

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ALTERNATIVE FORMATS OF BS PRESENTATION

• The current/ noncurrent format: classified balance sheet and is useful in evaluating liquidity.

• Under IFRS: firms can choose to use a liquidity based format if the presentation is more relevant and reliable.

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DISTINGUISH SOME COMPONENTS

• Current assets: likely to convert into cash or used up within one year or one operating cycle.

• Current liabilities: obligations that will be satisfied within one year or one operating cycle, whichever is greater.

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• Working capital: CA – CR• Noncurrent assets: do not meet the definition

of CA but also easily to convert into cash or used up within one year or operating cycle.

• Noncurrent liabilities: do not meet the definition of CL, provide information about the firm’s long- term financing activities.

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GOODWILL

• Is the excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired in a business acquisition.

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EXAMPLE• Wood corporation paid $600 million for the outstanding

stock of Pine corp. At the acquisition date, Pine reported the following condensed BS

• The fair value of the plant and equipment was $120 million more than its recorded book value. The fair value of all other identifiable assets and liabilities were equal to their recorded book values. Calculate the amount of goodwill Wood should report on its consolidated BS.

Book Value (million)

CA $80

Plant and equipment, net 760

Goodwill 30

Liabilities 400

Stockholders’ equity 470

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• Goodwill is only created in a purchase acquisition. Internally generated goodwill is expenses as incurred.

• Goodwill is not amortized but must be tested for impairment at least annually.

• Accounting goodwill # economic goodwill. Economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of past acquisitions.

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ESSAY

• Explain the concept of Goodwill. Give an example of a brand name of a Vietnamese company that would require additional costs above book value to acquire. (Each group write within 250 -300 words for this essay)

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FINANCIAL ASSETS

• are measured at historical cost, amortized cost or fair value.

• Measured at amortized cost = held to maturity securities.

• Measured at fair value = mark to market accounting

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Historical cost Amortized cost Fair value

•Unlisted equity investments •Loans and receivables

Held to maturity securities

•Trading securities•Available for sale securities•Derivaties

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EXAMPLE

• Triple D Cor. Purchased a 6% bond, at par, for $1.000.000 at the beginning of the year. Interest rates have recently increased and the market value of the bond declined $20.000. Determine the bond’s effect on Triple D’s financial statements under each classification of securities.

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COMMON SIZE BS

• A vertical common size balance sheet: expresses each item of the BS as a percentage of total assets.

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East West

Cash $2.300 1.500

Accounts receivable 3.700 1.100

Inventory 5.500 900

Current assets 11.500 3.500

Plant and equipment 32.500 11.750

Goodwill 1.750 0

Total assets 45.750 15.250

Current liabilities 10.100 1.000

Long term debt 26.500 5.100

Total liabilities 36.600 6.100

Equity 9.150 9.150

Total liabilities & equity 45.750 15.25016Đặng Thị Thu Hằng

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East (%) West (%)

Cash 5 10

Accounts receivable 8 7

Inventory 12 6

Current assets 25 23

Plant and equipment 71 77

Goodwill 4 0

Total assets 100 100

Current liabilities 22 7

Long term debt 58 33

Total liabilities 80 40

Equity 20 60

Total liabilities & equity 100 100Đặng Thị Thu Hằng

CALCULATE

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bilitiesCurrentlia

etsCurrentassioCurrentrat

bilitesCurrentlai

ceivablesuritiesMarketableCashQuickratio

Resec

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bilitiesCurrentlia

uritiesMarketableCashCashratio

sec

yTotalequit

Totaldebtoequitytotaldebtt

stotalasset

totaldebtdebtratio

ytotalequit

stotalasseteverageFinanciall

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EXERCISE 1

• Create the Balance sheet:- Cash on hand: 25.000 USD- Cash in bank: 300.000 USD- Payable to suppliers: 289.000 USD- Rights to use land: 150.000 USD- Workshops: 360.000- Capital: 600.000

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• The company ABC was established with the initial capital is 600 million USD, which included 400 million cash in the bank and 200 million cash on hand.

1.Buy the fixed assets and pay cash is 80 million USD2.Buy materials about 60 million USD which pay by

cash is 50 million USD and the rest will be paid within 60 days

3.Buy tools about 2 million USD and pay by cash.

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EXERCISE 2

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