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Balance Sheet

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) Hard Practice Test
3) Practice as You Learn  
4) Easy Practice Test  

Key Things to Know

1st:  You must know the format of the balance sheet. Memorize it!

            1)  The balance sheet is listed in order of liquidity (how fast an item is
expected to turn into cash, be used up, or be paid.)   

            2)  The subtotals (total current assets, property/plant/equipment, net,
intangibles, total current liabilities, total liabilities, total stockholder’s equity)
must be included on the balance sheet.

 

Assets:

Cash:  Money or any instrument that banks will accept (cash, checks, money orders, etc.).

 

Cash Equivalents:  Investments for 90 days or less, with no risk

 

Inventory:     Items held only for sale to the customer

 

Prepaid Expenses:  the company pays in advance before a service is provided
to the company.

 

Supplies:  Items that are used up in day to day operations; must be continuously replaced.

 

Investments and                 A financial instrument that is purchased for the purpose
Marketable Securities:          of earning money on the investment.

 

Notes Receivable:  Amounts owed to the company; normally interest is
charged and the note is repaid in longer than 3 months.

 

Property/Plant/Equipment:  Assets used long-term in the day to day operations
to generate revenues.
The long-term assets have physical substance.
(Land, Buildings, Equipment, Furniture, Computers, Vehicles)

 

Intangible Assets:  Assets used long-term to generate revenues.  The company has
an exclusive right to do something and there is no physical substance.

Trademarks give the exclusive right from the U.S. Government to use a symbol or name.

Copyrights give the exclusive right from the U.S. Government to reproduce written work. 
A copyright is granted for 70 years past the life of the author.

Patents give the exclusive right (from the U.S. Patent Office) to use a technology or drug
for a period of 20 years.  Patents are granted to protect the invention from imitators.

Franchises give the exclusive right to operate or sell a specific branded product.  The length of the franchise is negotiated between the franchisor and the franchisee.

Goodwill is the amount that is paid when acquiring a company that is greater than the fair market value of net assets acquired.   

 

Other Long-term Assets:  Assets held for more than one year that do not fit into the
other long-term asset categories. 

 

Liabilities:

Accounts Payable:           Amounts owed to suppliers; normally paid in 30-60 days.
                                           Suppliers are those who provide inventory and
                                           services over and over again, each month.

Commercial Paper:           Short-term amounts owed to investors.
                                            Very short term borrowing, usually 10 – 90 days

 

Current Maturities of         The portion of long-term debt that will be repaid
   Long Term Debt:                within 1 year or less.

 

L/T Notes Payable or        Amounts owed to banks and other financing companies
  Long-term Debt:              that will be paid later than one year from now.

                                            The amount is the principle amount owed only and does 
                                            not include interest. 

 

Notes Payable:                   Amounts owed from borrowing from a bank or
                                             a financing company.

 

Bonds Payable:                  Long-term amounts owed to investors

 

Owner’s Equity:

 

Common Stock       Money received from investors in exchange for ownership.

 

Retained Earnings:            Total of all years’ (cumulative) profits and losses
                                              less all years’ dividends paid to owners.

Beginning Retained Earnings
+ Net Income or - Net Loss 
-  Dividends Paid to Owners___
= Ending Retained Earnings (reported on the balance sheet)

 

 

3rd:  Other things you must know related to the balance sheet:

            1)  The balance sheet is initially reported at historical cost; fair market value on
                  the date of the transaction (buy the asset or borrow money). 

 

            2)  Short-term or current means the cash is expected to be collected or
                  paid in 1 year or less.

 

            3)  Long-term or non-current means the cash is expected to be collected or
                 paid in more than 1 year.

 

            4)  The “Operating Cycle” is the time it takes the company to spend cash to do
                  business and get the cash back again.  An operating cycle is typically
                  less than one year.  

            A typical operating cycle has the following transactions: 
                        1)  Purchase assets to be sold to customers
                        2)  Pay for assets purchased  
                        3)  Sell assets or provide service to customers            
                        4)  Collect from customers.  

The objective of business is to use cash and turn it into more cash.
The operating cycle indicates how quickly this is accomplished.

 

 

 
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