Topic 2 - The Balance Sheet

Topic 2: The Balance Sheet Outline.
The Financial Position of A Company.
Assets and Liabilities.
Owners (Shareholders) Equity (Net worth or Net Asset).
The Balance Sheet and The Balance Sheet Equation.
Classification of Balance Sheet Items and Examples.
Valuation of Assets and Liabilities.
Working Capital
Introduction to Financial Accounting

Universitat Pompeu Fabra
Topic 2: The Balance Sheet
Relation between Business Activities and

Balance Sheet and Income Statement
Goals and
Strategies
Investing
Financing
Assets
Owners Equity and

Liabilities
(Balance Sheet)
Operating
Adapted from Stickney and Weil 2000:

Financial Accounting, p.13
(Balance Sheet)
Net Income
(Income Statement)

The Financial Condition of A Company (1)

Running a business requires
Making Investments
Obtaining Financing
Land and Buildings

Equipment, Machinery
Vehicles, Trucks
Computers
Patents, trade marks,
contractual rights, computer
software
Financial investments in
securities
Inventories
Accounts receivable (Credits to
customers)
Cash and Checking account

Funds from owners (owners or

shareholders equity)
Subsidies
Bank Loan (short- or long-term)
Accounts payable to ...
(Credits from suppliers, banks,
employees, ...)
Taxes payable
The Financial Condition of A Company (2)

Running a business requires
INVESTMENTS
(Goods and Rights)
FINANCING
(Obligations)
Resources
Sources of Resources
Claims on Resources
EQUITIES
(Owners equity and
Liabilities)
ASSETS

A Companys Assets
Does the company possess

or control the resource or
the right?
No
Yes
Can the resources or rights
generate a future economic
benefit?
No
Yes
It is an ASSET.
It is NOT an Asset.
A Companys Liabilities
Has the company received
an asset item or external
services?
Yes
Yes
Has the company paid for

the asset or for external
services?
No
Does the company have to
pay for them in the future?
No
It is NOT a liability.
Yes
It is a liability.
The Owners Equity

Definition
Funds provided by the owners,
the owners claim on the assets of a firm after deducting liabilities.
Owners Equity = Assets Liabilities.
Assets
Equities
Liabilities
Owners
Equity

Paid-in Capital Funds provided by the owners

+
+
Retained
Additional owners equity
Earnings
generated by profits
The Balance Sheet and

The Balance Sheet Equation
Balance Sheet on Dec. 31, 2
Assets
Equities
Liabilities
Assets
Owners Equity
(Net worth)
INVESTING
How are the funds
used?
Resources
Assets

FINANCING
Where do the funds
come from?
Sources of Resources
Equities
(Liabilities and Owners
Equity)
Classification of Balance Sheet Items Spanish System

Assets
Equities
Noncurrent
Low (long-term)
Liquidity
Maturity
Current
High (short-term)

The Balance Sheet (Spanish System)

Assets
Equities
Noncurrent Assets
Intangible Assets
Tangible Assets
Financial Investments (longterm)
Propery Investments
Current Assets
Inventories
Accounts receivable
Cash and Cash Equivalents
Owners Equity
Long-term liabilities
Short-term liabilities
10
El Balance de Situacin
ACTIVO
FONDOS PROPIOS Y
PASIVO
No corriente
Intangible
Material
Inversiones inmobiliarias
Financiero
Corriente
Existencias
Realizable
Disponible
Neto o No Exigible
Exigible (Pasivo) a largo plazo
Exigible (Pasivo) a corto plazo
11
Assets Definitions and Classification

Assets
Resources of a firm that are expected to provide future benefits to the firm.
Noncurrent Assets
Resources held and used for

several years.

Current Assets
Resources expected to be
turned into cash, sold or
consumed within less than one
year from the date of the
balance sheet.
12
Noncurrent Assets - Examples
Rights, Patents
Land
Buildings
Equipment
Furniture
Long-term investment in shares, bonds
13
Current Assets - Examples

Inventories
Merchandise
Raw materials
Unfinished goods
Finished goods
Accounts receivable (Customers, Debtors)

Notes receivable

14
Current Assets Examples (continued)

Marketable securities (bonds, shares)
Advances to suppliers
Prepaid expenses
Revenues receivable
Cash or cash equivalents

15
Liabilities Definitions and Classification

Liabilities
Obligations of a firm to make payments or deliver goods/services.
Long-term Liabilities
Obligations that have to be

fulfilled within a period of
more than one year from the
date of the balance sheet.

Short-term Liabilities
Obligations that have to be

fulfilled within one year from
the date of the balance sheet.
16
Liabilities - Examples
Accounts payable to
Suppliers, Creditors
Notes payable
Advances from customers
Unearned revenues
Expenses payable
Bonds payable

17
Valuation of Assets and Liabilities

Tangible and Intangible Assets
Liabilities
At Acquisition Price or Production Costs
At Repayment Price
Lower of cost or Market Rule

Acquisition Price higher than Market Value
Market Value
Acquisition Price lower than Market Value
Acquisition Price
Financial Assets
Recognize all obligations

already established and
those which can only be
estimated
At Market Value

18
Working Capital
The working capital is a measure of the liquidity of the company:
WORKING CAPITAL = Current Assets Short-Term Liabilities

19
Positive Working Capital

Assets
Liabilities
Fixed
Assets
Equity
Current
Assets
Assets
Working
capital
LT
Debt
Equity
Current
Assets
ST
Debt
ST
Debt
Fixed
Assets
Liabilities
20
Negative Working Capital
Working
capital
Negative
Assets
Liabilities
Fixed
Assets
Equity
Current
Assets
S.T
Debt
21

Topic 2 - The Balance Sheet

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Topic 2 - The Balance Sheet

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Topic 2: The Balance Sheet Outline.

The Financial Position of A Company.

Assets and Liabilities.

Owners (Shareholders) Equity (Net worth or Net Asset).

The Balance Sheet and The Balance Sheet Equation.

Classification of Balance Sheet Items and Examples.

Valuation of Assets and Liabilities.

Introduction to Financial Accounting