3.5.5 A. Read the text and single out the main items of the balance sheet.

In the course of operations a corporation needs numerous reports and statements to provide a permanent record of its financial activities. These statements and reports are prepared by the corporation’s own staff, and most are done in a standardized format. The US Securities and Exchange Commission (SEC), which exists to protect the interest of investors, requires the preparation of four basic financial statements which are: 1) a balance sheet, 2) an income statement, 3) a statement of retained earnings, and 4) a statement of changes in financial position.

The financial position of an accounting entity as of a specified moment in time is shown by a balance sheet. In fact, its formal name is statement of financial position. More specifically, the balance sheet reports the assets and equities and liabilities (liabilities and owner’s equity) of the entity at the specified moment in time.

In Illustration 5.2, the assets of the PROFF Company amount to $35,670.

Illustration 5.2.

PROFF COMPANY

Balance Sheet

July 31, 200x

Assets			Liabilities and Stockholders’ Equity
Current assets:			Current liabilities:
Cash	$12,470		Accounts payable	$600
Accounts receivable	700		Notes payable	3,000
		$13,170			$3,600
Property, plant and equipment:			Stockholders’ equity:
Delivery equipment	$20,000		Capital stock	$30,000
Office equipment	2,500		Retained earnings	2,070
		$22,500			$32,070
Total assets		$35,670	Total liabilities and stockholders’ equity		$35,670

They consist of current assets of cash and accounts receivable (amounts due from customers) and property, plant, and equipment consisting of delivery equipment and office equipment. Current assets consist of cash and other short-lived assets reasonably expected to be converted into cash or to be consumed or used up in the operations of the business within a short period, usually one year. Property, plant, and equipment refers to relatively long-lived assets that are to be used in the production or sale of other assets or services rather than being sold.

Liabilities are the debts owed by a firm. Typically, they must be paid at certain known moments in time. The liabilities of the PROFF Company are both relatively short-lived current liabilities. They consist of accounts payable (amounts owed to suppliers) and notes payable (written promises to pay) totaling $3,600. Other firms may have long-term liabilities on their balance sheets. Such long-term liabilities could include mortgages or bonds due in periods beyond one year.

The PROFF Company is a corporation. It is customary to refer to the owners’ interest in a corporation as stockholders’ equity. The PROFF Company’s stockholders’ equity consists of $30,000 paid in for shares of capital stock and retained earnings (earnings not paid out to stockholders) of $2,070. The balance sheet heading includes the name of the organization, the title of the statement, and the date of the statement, also note that the claims upon or interests in assets equal the assets. Every transaction affects at least two items and preserves the fundamental equation: Assets = Liabilities + Owner’s equity. The dual-aspect concept is evident from the fact that the assets listed on the left-hand side of a balance sheet are equal in total to the liabilities and shareholders’ equity listed on the right-hand side.

Because of the dual-aspect concept, the two sides necessarily add up to the same total. This equality does not tell anything about the company’s financial health. The label “balance sheet” can give an impression that there is something significant about the fact that the two sides balance. This is not so; the two sides always balance.

An alternative practice is to list assets at the top of the page and to list liabilities and owner’s equity beneath them. The former format is called the account form, and the latter is called the report form of balance sheet.

b. Decide whether the following statements are true or false. Account for your decision:

1. Companies give information about their financial situation in financial statements. The balance sheet shows the company’s assets – the things it owns; its liabilities – the money it owes and its revenue at the end of the reporting period.

2. The balance sheet shows the financial position of the economic entity at the particular moment in time. So the balance sheet is a status report rather than a flow report.

3. Property, plant, equipment and cash are long-lived assets.

4. Accounts payable, notes payable, mortgages, bonds are the debts owned by a firm.

5. The dual-aspect concept means that the assets listed on the left-hand side of a balance sheet are equal in total to the liabilities and shareholders’ equity listed on the right-hand side.

c. Choose the correct form of the Verbals.

Figures (appearing/appeared) in balance sheet represent the historical value of the stock of assets available to the firm (to generate/generating) sales and profits. Because the value of assets is (base/based) on original purchase price they tend to understate the real value of these assets if they had to be (replacing/replaced). In high inflationary periods, the cost of replacing (existing/existed) assets is relatively high. As a result, by (understating/having understated) the value of these assets, the returns on these assets become (overstating/overstated). Attempts have been made (state/to state) assets on a replacement basis, but accountants have been unable to resolve this problem to everyone’s satisfaction.

Generally (spoken/speaking), however, the balance sheet is a statement of assets, liabilities, and stockholders’ equity. As of a certain date, the left side on this statement shows a breakdown of current assets in the form of cash and other assets that (constituting/constitute) the working capital of the firm. Fixed assets are mainly long-term investments, including plant and equipment.

The right side of the balance sheet shows current liabilities, (consisting/consisted) of accounts payable, notes payable, and other short-term liabilities. From this point on you find long-term debt, which has a maturity date of over 1 year. This part of the balance sheet may also include the capitalized value of financial leases. After you (deduct/deducted) the liabilities from the assets, the (remaining/remained) value is the net worth of the firm. The components of net worth include the par value of common stock outstanding, paid-in capital surplus, and retained earnings (being accumulated/accumulated) from previous profits generated by the firm after the deduction of dividend payments. If the firm were (liquidated/liquidating) and all creditors’ claims (paid off/paying off), the net worth is what would be (left/leave) over for distribution to the stockholders.

By (deducting/deduct) current liabilities from current assets, you can find out something about the liquidity of the firm, and by matching profits against the assets invested in the firm, you can gain some idea of how effectively the firm has utilized assets to generate profits.

d. Test your knowledge by answering the following questions:

1. In the body of a balance sheet, what are the three sections called?

2. Of the two forms of the balance sheet, which form more closely approximates the accounting equation?

3. How can a balance sheet help the firm to spot areas of financial weakness and strength?

4. Why do companies record the original purchase price of assets, and not their (estimated) current selling price or replacement cost?

5. In which systems is replacement cost accounting used?

e. Match the two parts of the sentences:

1. The historical cost principle is that the price paid to buy assets

2. Intangible assets are usually long-term in nature

3. Liabilities are considered to be current liabilities

4. Some thing of value are never shown on a balance sheet

5. When you deduct a company’s liabilities from its assets

a. you are left with shareholders’ funds.

b. and not their current value is recorded in accounts.

c. if the obligation is to be settled within the current accounting period.

d. and lack physical substance.

e. for example the knowledge and skills of the company’s employees.

f. Test your ability to assign specific assets to various categories.

Here are 28 specific assets: traveler’s checks, tables, truck, typewriter, calculator, computers, lamp, pencils, typing paper, chairs, stationery, wrapping paper, automobiles, coins, money in bank, desk blotters, light bulbs, desk, correction fluid, currency, staplers, showcases, folders, disk, removable cartridge, facsimile, and computer disks.

Place each of these assets under the appropriate specific asset category heading in the following form:

Cash	Furniture and Fixtures	Delivery equipment	Office equipment	Office supplies

1. What is the difference between office supplies and office equipment?

2. Why is a removable cartridge considered an office supply, even though it is an integral part of the computer?

3. What type of asset (short-life or long-life) is a supply?

4. What type of asset (short-life or long-life) is a typewriter?

5. What type of asset (short-life or long life) is a computer disk? Why?

g. Place each of these 16 assets in the appropriate column of the following form:

Cash in bank, office equipment, First National City bonds, patents, accounts receivables, office supplies, notes receivables (due in 90 days), building, office machines, furniture and fixtures, mortgage notes receivables (due in 6 years), store equipment, petty cash, goodwill, factory supplies, and merchandise.

Current Asset	Investment	Intangible Asset	Plant asset

h. Consider the part of the consolidated balance sheet given below. Match the English word combinations in the left-hand column with the Russian equivalents in the right-hand column:

CONSOLIDATED BALANCE SHEET (in thousands of dollars)

1.	ASSETS	a.	Общая стоимость имущества (всего активов)
2.	Current assets	b.	Сумма (итог)
3.	Cash	c.	АКТИВЫ
4.	Marketable securities, at cost, which approximates market	d.	Машинное или станочное оборудование, транспортные средства и принадлежности
5.	Trade receivables	e.	Земельная собственность
6.	Other receivables	f.	Нематериальные и прочие активы
7.	Inventories	g.	За вычетом накопленного износа
8.	Prepaid expenses	h.	Здания и благоустройство
9.	Total current assets	i.	Инвестиции и прочие активы
10.	Property, plant and equipment	j.	Общая стоимость (сумма) нематериальных и прочих активов
11.	Land	k.	Денежные средства
12.	Buildings and improvements	l.	Недвижимость и оборудование (имущество, станки и оборудование)
13.	Cable systems	m.	Оборотные активы, оборотные средства
14.	Machinery, equipment and fixtures	n.	Торговая дебиторская задолженность, торговые счета дебиторов
15.	Construction in progress (uncompleted construction, construction-in-progress)	o.	Нетто-недвижимость и оборудование (чистое имущество, станки и оборудование)
16.	Total	p.	Запасы (резервы)
17.	Less accumulated depreciation	q.	Прочая дебиторская задолженность (прочие счета дебиторов)
18.	Net property, plant and equipment	r.	Превышение первоначальной стоимости над стоимостью приобретенных активов
19.	Intangible and other assets	s.	Связь (системы телекоммуникаций)
20.	Excess of acquisition cost over the value of assets acquired	t.	Обращающиеся на рынке ценные бумаги по стоимости, приближенной к рыночной
21.	Investments and other assets	u.	Незавершенное строительство
22.	Total intangible and other assets	v.	Авансовые выплаты (авансированные средства)
23.	Total assets	w.	Общая стоимость оборотных активов (сумма оборотных активов)