A FURTHER LOOK

AT FINANCIAL
STATEMENTS
2
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 Preview of Chapter 2

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 The Classified Balance Sheet

◆ Presents a snapshot at a point in time.

◆ To improve understanding, companies group similar
assets and similar liabilities together.

Standard Classifications
Illustration 2-1

!3 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Illustration 2-2

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 The Classified Balance Sheet

Illustration 2-2

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 The Classified Balance Sheet

Current Assets
◆ Assets that a company expects to convert to cash or use up
within one year or the operating cycle, whichever is
longer.
◆ Operating cycle is the average time it takes from the
purchase of inventory to the collection of cash from
customers.
◆ Common types of current assets are (1) cash, (2)
investments, (3) receivables, (4) inventories, and (5)
prepaid expenses.

!6 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Current Assets
Illustration 2-3

Companies list current asset accounts in the order they expect to

convert them into cash.

!7 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Review Question
Cash, and other resources that are reasonably expected to be
realized in cash or sold or consumed in the business within
one year or the operating cycle, are called:

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

!8 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet
Alternative Terminology
Long-Term Investments Long-term investments are often referred
to simply as investments.

◆ Investments in stocks and bonds of other corporations that

are held for more than one year.
◆ Long-term assets such as land or buildings that a company
is not currently using in its operating activities.
◆ Long-term notes receivable.
Illustration 2-4

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 The Classified Balance Sheet

Property, Plant, and Equipment

◆ Long useful lives. Alternative Terminology
Property, plant, and equipment is
sometimes called fixed assets or
◆ Currently used in operations. plant assets.

◆ Includes land, buildings, equipment, delivery vehicles, and

furniture.
◆ Depreciation - allocating the cost of assets to a number of
years.
◆ Accumulated depreciation - total amount of depreciation
expensed thus far in the asset’s life.

!10 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Property, Plant, and Equipment

Illustration 2-5

!11 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Intangible Assets Helpful Hint

Sometimes intangible
assets are reported
◆ Assets that do not have physical substance. under a broader
heading called “Other
◆ Includes goodwill, patents, copyrights, and assets.”

trademarks or trade names.

Illustration 2-6

!12 LO 1
 The Classified Balance Sheet

Review Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

!13 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Current Liabilities
◆ Obligations the company is to pay within the next year or
operating cycle, whichever is longer.
◆ Common examples are accounts payable, salaries and
wages payable, notes payable, interest payable, and income
taxes payable.
◆ Also included as current liabilities are current maturities of
long-term obligations—payments to be made within the
next year on long-term obligations.

!14 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Current Liabilities
Illustration 2-7

!15 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Long-Term Liabilities
◆ Obligations a company expects to pay after one year.
◆ Include bonds payable, mortgages payable, long-term notes
payable, lease liabilities, and pension liabilities.
Illustration 2-8

!16 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Review Question
Which of the following is not a long-term liability?
a. Bonds payable.
b. Current maturities of long-term debt.
c. Long-term notes payable.
d. Mortgages payable.

!17 LO 1 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Stockholders’ Equity
◆ Common stock - investments of assets into the business by
the stockholders.
◆ Retained earnings - income retained for use in the business.

Illustration 2-2

!18 LO 1 Identify the sections of a classified balance sheet.

 Match each of the items to its proper balance sheet classification,
shown below. If the item would not appear on a balance sheet, use “NA.”
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Stockholders’ equity (SE)
Intangible assets (IA)

Solution
CL Salaries and wages payable LTI Investment in real estate
NA Service revenue PPE Equipment
CL Interest payable PPE Accumulated depreciation
IA Goodwill CA Debt investments (short-term)
NA Depreciation expense SE Retained earnings
LTL Mortgage payable CL Unearned service revenue
(due in 3 years)

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LO 1
 Financial Reporting Concepts

The Standard-Setting Environment

Generally Accepted Accounting Principles (GAAP) - A set of
rules and practices, having substantial authoritative support, that
the accounting profession recognizes as a general guide for
financial reporting purposes.

Standard-setting bodies determine these guidelines:

► Securities and Exchange Commission (SEC) International Note
Over 115 countries
► Financial Accounting Standards Board (FASB) use international
standards (called
► International Accounting Standards Board (IASB) IFRS).

► Accounting Standard Board (ASB)

!20 LO 6 Explain the meaning of generally accepted accounting principles.

 Financial Reporting Concepts

Review Question
Generally accepted accounting principles are:

a. a set of standards and rules that are recognized as a

general guide for financial reporting.

b. usually established by the Internal Revenue Service.

c. the guidelines used to resolve ethical dilemmas.

d. fundamental truths that can be derived from the laws

of nature.

!21 LO 6 Explain the meaning of generally accepted accounting principles.

 Financial Reporting Concepts

Qualities of Useful Information

According to the FASB, useful information should possess two
fundamental qualities, relevance and faithful representation.
◆ Relevance Accounting information has relevance if it would
make a difference in a business decision. Information is
considered relevant if it provides information that has
predictive value, that is, helps provide accurate expectations
about the future, and has confirmatory value, that is,
confirms or corrects prior expectations. Materiality is a
company-specific aspect of relevance. An item is material
when its size makes it likely to influence the decision of an
investor or creditor.

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 Financial Reporting Concepts

Qualities of Useful Information

According to the FASB, useful information should possess two
fundamental qualities, relevance and faithful representation.
◆ Faithful Representation Faithful representation means that
information accurately depicts what really happened. To
provide a faithful representation, information must be
complete (nothing important has been omitted), neutral (is
not biased toward one position or another), and free from
error.

!23 LO 7 Discuss financial reporting concepts.

 Financial Reporting Concepts

Qualities of Useful Information

Enhancing Qualities

Comparability Information is Information has the

results when different verifiable if quality of
companies use the independent understandability
same accounting observers, using the if it is presented in a
principles. same methods, obtain clear and concise
similar results. fashion.

Consistency means
that a company uses the For accounting information to
same accounting have relevance, it must be
principles and methods timely.
from year to year.
!24 LO 7 Discuss financial reporting concepts.
 Financial Reporting Concepts

Assumptions in Financial Reporting Illustration 2-18

Monetary Unit Economic Entity

Requires that only those things
States that every economic
that can be expressed in money entity can be separately
are included in the accounting identified and accounted for.
records.

!25 LO 7 Discuss financial reporting concepts.

 Financial Reporting Concepts

Assumptions in Financial Reporting Illustration 2-18

Periodicity Going Concern

States that the life of a The business will remain in
business can be divided into operation for the
artificial time periods. foreseeable future.

!26 LO 7 Discuss financial reporting concepts.

 Financial Reporting Concepts

Principles in Financial Reporting

Measurement Principles

Historical Cost Fair Value Full disclosure

Or cost principle, Indicates that Requires that
dictates that assets and liabilities companies disclose
companies record should be reported all circumstances
assets at their cost. at fair value (the and events that
price received to would make a
sell an asset or difference to
settle financial statement
a liability). users.

!27 LO 7 Discuss financial reporting concepts.

 Financial Reporting Concepts

Cost Constraint

Cost Constraint
Accounting standard-setters weigh
the cost that companies will incur to
provide the information against the
benefit that financial statement
users will gain from having the
information available.

!28 LO 7 Discuss financial reporting concepts.