WHY DO COMPANIES PREPARE BALANCE SHEET? Balance sheet is a financial statement which is widely used by accountants for businesses. Balance sheet is also known as the statement of financial position because it helps us to present company’s financial position at the end of a specified period. (fresh books, 2016) Balance sheets are very important for parties like suppliers, investors, competitors, customers, etc. to know the company’s position, company’s strength and company’s weaknesses. Balance sheets helps to ascertain the amount of capital employed in the business so that we can further calculate different types of ratios. Some important objectives of preparing balance sheets are: To know the nature of liabilities and actual capital; It …show more content…
than we can assume that the financial position of the company is not sound. This also indicates that there is over trading. If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal. Discussing some major components of balance sheet ASSETS Assets are those things that are owned by an organization which have future economic value that are measurable and expressed in terms of monetary value. Basically assets are those resources which are acquired by a company through various transactions. (accounting coach, 2016) Some examples of assets are; cash, petty cash, goodwill, prepaid insurance, furniture, etc. • Contra assets; normally assets are debit balance but contra asset is asset with credit balance. Some examples are; accumulated depreciation, allowance for doubtful debt, etc. In classified balance sheet categories of assets are: current assets, investments, fixed assets, intangible assets, etc. Some …show more content…
Conservatism directs accountants to reduce the inventory to lower amount (the replacement cost). For example: if bhatbhateni’s inventory cost $20000 but in current scenario the cost has dropped to $16000, than the company records $16000 in its balance sheet and records $4000 difference amount as a loss in income statement. (accounting coach, 2016) • Effects of matching principle; It states that all expenses must be matched in the same accounting period as the revenues they helped to earn. Matching principle is a combination of accrual accounting and the revenue recognition principle. For example: if the company’s sales are made through sales representative who earn 10% commission. (The commissions for each calendar month’s sales are paid on 15th day of the following months). If the company’s has $60000 of sales in December, the company will pay commission of $6000 on Jan 15. The matching principle requires to records $6000 commission expenses on the December income statement along with December sales of $60000. (accounting coach, 2016)
Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead
The Commissioner of Internal Revenue (Commissioner) argued that Jim Turin & Sons, Inc. should have used the accrual method of accounting. By using the accrual method of accounting “you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.” (IRS, 2017).
A strong balance sheet gives an investor an idea of how financially stable the company really is. Many professionals consider the top line, or cash, the most important item on a company’s balance sheet. The big three categories on any balance sheet are “assets, liabilities, and shareholder equity.” Evaluating Barnes & Noble’s assets for the time 2014 at $3,537,449, 2013 at $3,732,536 and 2012 at $3,774,699, the company’s performance summarizes that it is remaining stable. These numbers reflect a steady rate over the three year period. Like assets, liabilities are current or noncurrent. Current liabilities are obligations due within a year. Key investors look for companies with fewer liabilities than assets. Analyzing this type of important information, informs a potential investor that if the company owes more money than they are bringing in that this company is in financial trouble. Assessing the liabilities of the balance sheet, for the same time period, it is also consistent with the assets. The cash flow demonstrates a stable performance in the company’s assets and would be determined that the liabilities of this company are also stable. Equity is equal to assets minus liabilities, and it represents how much the company’s shareholders actually have a claim to. Investors customarily observe closely
Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid at the time the expense was incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in
Current assets: Cash and cash equivalents Short-term marketable securities Accounts receivable, less allowances of $86 and $99, respectively Inventories Deferred tax assets Vendor non-trade receivables Other current assets Total current assets Long-term marketable securities Property, plant and equipment, net Goodwill Acquired intangible assets, net Other assets Total assets
Liquidity: A company’s liquidity depends on the amount of liquid assets it possesses, which are cash or assets that can easily be converted into cash. The cash flow statement shows how much money is coming in and going out of the business therefore it shows how liquid a company is and how flexible it is to cope with emergencies. Working capital is a significant part of the cash flow analysis, it consists of the current assets less the current liabilities and can help assess the liquidity of the business for the upcoming accou...
Balance sheet: It is often referred to as the statement of financial condition. It is a snapshot of what you have and what you owe at a given point in time. It lists all assets, liabilities and equity or net worth, with their values. The value of the assets must equal the value of the debt and the
The balance sheet is used to report the financial position, including amount of assets, liabilities, and stockholders’ equity of an accounting entity at a specific point in time. It includes the name of the entity, title of the statement, specific date of the statement, and units of dollars. The accounting entity should also be precisely defined (Bethel, 2011).
In reviewing the company’s balance sheet, the current assets and liabilities were reviewed and liquidity ratios were calculated. The capital structure and the fixed and intangible asset accounting of the company were also reviewed. Off-balance sheet items such as leases and contingent liabilities were reported and noted. All of these aspects of the balance sheet were reviewed in order to do a proper analysis of the company’s balance sheet.
Matching concept is at the heart of accrual basis of accounting. Big Apple Doughnut has sold different types of doughnuts for 30 years in a small town. It purchases a large amount of flour for RM3,000 to bake doughnuts and resells it to a local restaurant for RM10,000. At the end of the period, Big Apple Doughnut should match the RM3,000 cost with the RM10,000 revenue. Moreover, Majority of the company who make sales are against credit term. Example, when the customer receives delivery of goods or services but promises to make the payment within 30 days. In accordance with accrual concept, revenue is recognized when the delivery is made. Now, risk that the customers may not pay the amount due against those sales, which results in the company writing off the account receivable as bad debts expense. The possibility of bad debts exists when the sale is made, so expense should be recognized right at that moment when the sale is made. Recognizing bad debts expense requires considerable
Matching concept is an accounting concept or accounting practices that match the amount of revenues with the amount of any related expenses incurred together during the same accounting period. (Bragg, 2017)
A company’s creditworthiness, accuracy of their tax returns, and profitability can be determined through an analysis of their financial statements. Financial statements are utilized to make long-term decisions by performing financial analysis to further understand their performance/disposition as well as to examine their financial health. Managers and investors review financial statements such as the income statement, the balance sheet, the cash statement, cash flow statement and the retained earnings statement. All four of these financial statements are inter-related and serve of great importance in making rational financial decisions by the managers of the company, investors, and creditors. Financial statements enable business leadership to analyze various investment opportunities/projects facing a company and to give department heads an understanding of how to meet the objectives.
). Examples of current asset include: Cash, debt claims, stock, account receivable, inventory, prepaid expenses, short-term investments and other liquid assets that can be converted to cash.
The assets are found by adding liabilities and stockholder’s equity together. Liabilities are the company’s debt or obligations that derive from normal business actions. Liabilities usually include the word “payable” such as accounts payable, dividends payable, notes payable or income taxes payable. Stockholder’s equity is the stockholder’s assertion on the assets of a company. Stockholder’s equity can include common stock, preferred stock, or retained earnings. The equation for stockholder’s equity is the total number of assets minus the total number of liabilities. Liabilities, assets and stockholder’s equity are only going to be found on a balance
Balance sheet does not reveal the true picture of the business. In the balance sheet, assets are shown at exact costs. Realizable value is ignored.