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Chapter  2  
Balance  Sheet  
 

Interpreting and Analyzing Financial Statements
Schoenebeck & Holtzman

Learning  Objectives
•  Understand how the balance sheet is organized.
•  Identify individual components of the balance
sheet.
•  Understand similarities and differences between US
GAAP and IFRS among asset items.
•  Explain how debt and equity affect financial risk.
•  Compute and interpret liquidity and solvency ratios.
•  Prepare and interpret trend and common-size
balance sheets.

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Introduction
•  The Balance Sheet provides a snapshot of a
company’s financial position as of a certain date.
•  It reports assets and whether those assets are
financed with liabilities or stockholders’ equity.
•  The Balance Sheet is also referred to as the
Statement of Financial Position.

Walt  Disney  Company’s  Balance  Sheet

•  Assets = Liabilities + Stockholders’ Equity
•  Assets are items of value that a corporation has a
right to use.
•  Liabilities are amounts owed to creditors, the
amount of debt owed to third parties.
•  Stockholders’ Equity is the portion of assets the
owners own free and clear of liabilities.
Stockholders’ Equity can also be called
Shareholders’ Equity or Owners’ Equity.

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Liquidity
•  The Balance Sheet list assets and liabilities in the
order of liquidity, the ease with which each
account can be converted into cash.

•  The most liquid asset, cash, is listed first.

•  The least liquid asset, often goodwill, is listed last.

•  Liabilities are listed in order of payment.

•  The debts due first, usually accounts payable, is
listed first.
•  Long-term debt usually comes last.

Current  versus  Non-­‐‑Current

•  Both assets and liabilities are split into current and
non-current.
•  Current:
o  Current assets are expected to be converted into cash, sold, or
consumed with the next twelve months.
o  Current liabilities are liabilities due with 12 months.

•  Non-current:
o  All assets not listed as current.
o  All liabilities due after 12 months.

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Current  Assets

The$Walt$Disney$Company
Balance$Sheet
027Oct710 037Oct709
Current$assets$
Cash$and$cash$equivalents$ $$$$$$$$$$2,722 $$$$$$$$$$3,417
Receivables$ $$$$$$$$$$5,784 $$$$$$$$$$4,854
Inventories$ $$$$$$$$$$1,442 $$$$$$$$$$1,271
Television$costs$ $$$$$$$$$$$$$678 $$$$$$$$$$$$$631
Deferred$income$taxes$ $$$$$$$$$$1,018 $$$$$$$$$$1,140
Other$current$assets $$$$$$$$$$$$$581 $$$$$$$$$$$$$576
Total$current$assets $$$$$$$$12,225 $$$$$$$$11,889

Current  Assets
•  Cash & Cash Equivalents: are currency, bank accounts, and
investments that can be liquidated immediately.
•  Receivables: monies to be received by the company from
customers.
•  Inventories: are merchandise held for sale to customers.
Inventory primarily includes vacation timeshare units,
merchandise, materials, and supplies.
•  Television costs: cost of television programs that will be aired
during the next year. Disney will use them to earn revenues
from advertising.
•  Deferred income taxes: The Company accounts for current
and deferred income taxes and when appropriate, deferred
tax assets and liabilities are recorded with respect to
temporary differences in the accounting treatment of items
for financial reporting purposes and for income tax purposes.
•  Other current assets:

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Noncurrent  Assets

Noncurrent  Assets
•  Noncurrent assets are all assets not listed as current. Companies
use noncurrent assets in their operations, but do not plan to sell
them anytime soon.
•  Film and television costs: These are the costs of films and
television shows that the company plans to air long into the
future.
•  Parks, resorts, and other property: also known as Property, Plan
and Equipment or Fixed Assets. For Disney this includes
amusement parks, resorts, and cruise ships.
•  Projects in progress: includes theme parks, resorts, and cruise ships
under construction.
•  Land: the cost of land is never depreciated so it is always
categorized separately.
•  Intangible assets: includes patents, trademarks, and copyrights
that have value but not any physical presence.
•  Goodwill: is the extra value that is recorded when buying another
company.
•  Other assets:

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Noncurrent  Assets*
•  Prepaid Expenses:

Current  Liabilites

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Current  Liabilities
•  Current liabilities are liabilities due within 12 months.
•  Accounts Payable: are amounts owed to suppliers.
•  Current portion of borrowings: is the portion of long-
term debt due within the next 12 months.
•  Unearned royalties and other advances: include
prepaid amounts from advertising subscribers and
advance theme park ticket sales.

Non-­‐‑Current  Liabilities

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Noncurrent  Liabilities
•  Noncurrent liabilities are liabilities due after 12
months.
•  Borrowings: are loans or other payables due over
the long term.
•  Deferred income taxes: usually come from tax rules
that allow companies to earn income now but pay
taxes later.
•  Other long-term liabilities: for Disney this is mostly the
underfunded amount of the pension plan.
•  Commitments & contingencies: this line reminds
investors that lawsuits and other events could
create new liabilities for the company.

International  Financial  Reporting  Standards  (IFRS)

•  IFRS allows a company to revalue property, plant,

and equipment (PPE) to fair value, rather than
keeping it at historical cost as required by US GAAP,
and previously by Canadian GAAP.

•  Although the recognition and measurement

guidance has not changed from current Canadian
GAAP to Accounting Standards for Private
Enterprise (ASPE), there is still a transitional provision
that allows an entity to measure any, or all, items of
PP&E at fair value at the transition date, and use
that fair value as a “deemed cost” under ASPE.

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Debt  versus  Equity

•  Companies finance their assets with a mix of debt
and equity.
•  Large amounts of debt are usually issued in the form
of bonds.
•  The borrowing corporation records bonds payable
and is referred to as the debtor.
•  The entity loaning the money records as asset –
bond receivable – and is referred to as the creditor.

•  Equity refers to the issuance of stock, which may be

common stock or preferred stock. Entities owning
shares of stock are the owners of the corporation
and are referred to as stockholders or shareholders.

Liquidity:  Current  Ratio

•  The current ratio measures the ability to pay current
liabilities as they come due. It is a measure of short-
term liquidity, a company’s ability to pay amounts
due in the next 12 months.

•  Current Ratio = Current Assets / Current Liabilities

•  A healthy current ratio is generally considered to be
around one*, indicating that current assets are at
least equal to current liabilities.

•  * while this is what your textbook states, the ratio

should be greater than one and dependent on the
industry may need to be as high as 1.5 or 2.0.

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Liquidity:  Current  Ratio

•  All three companies have current ratios above one

so none of them should have any liquidity issues.

Solvency:  Debt  Ratio

•  The debt ratio indicates the percentage of the
company financed with debt.
•  It is used to measure solvency, a company’s ability
to pay back long-term debt when due.

•  Debt Ratio* = Total Liabilities / Total Assets

•  When the debt ratio is lower, there is less financial

risk and stronger solvency.

•  * it can also be referred to as the Debt-to-Asset Ratio

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Solvency:  Debt  Ratio

•  The lower the ratio the better the company’s position. Disney
is the best followed by TimeWarner and then News Corp.

•  That said, the normal range is between 40% and 60%.

•  A debt ratio higher than 80% is considered high risk.
•  A company can exceed 100% if they have lost too much
money and have negative retained earnings (retained
deficit).

Trend  Analysis

•  Trend analysis helps to compare amounts of a more recent

year to an older base year.
•  This analysis measures the percentage of change from the
base year to shed light on growth trends in the company’s
financial position.
•  For this four-year period, Disney’s total assets have increased
by 14% while their noncurrent debt has remained unchanged.

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Common-­‐‑Size  Balance  Sheet

•  It is difficult to directly compare the balance sheets
of different companies because they are usually of
a different size and could be in a different currency.

•  By standardizing each balance sheet on a

percentage basis we can simplify this comparison.

Common-­‐‑Size  Balance  Sheet

•  Largest asset for all three companies is goodwill and other

intangibles. This means they have grown by acquisition.
•  While Disney has the highest percentage of RE’s, a significant
amount has been used to purchase Treasury Shares ($23,663).
•  TimeWarner has negative retained earnings (accumulated
deficit) as a result of their merger with AOL in 2001 and the
subsequent tech bubble burst. They wrote down $97,217M in
2002 as a goodwill impairment.

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Summary

•  Industry: Entertainment – Diversified

•  Industry and S&P 500 ratio averages from money.msn.com

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