Week 2 Balance Sheet

Week 2: Lecture

Balance Sheet (sometimes called a Statement of Financial Position)

Here is a typical balance sheet we will use for illustration:

  2015 2016
Assets    
Cash and marketable securities $355,000 $430,000
Accounts receivable $555,000 $512,000
Inventory $835,000 $755,000
Prepaid expresses $123,000 $98,000
  Total current assets $1,868,000 $1,795,000
     
Gross property, plant, and equipment $2,100,000 $1,900,000
Less: accumulated depreciation $333,000 $234,000
Net property, plant, and equipment $1,767,000 $1,666,000
  Total assets $3,635,000 $3,461,000
     
Liabilities and Owner's Equity    
Accounts payable $450,000 $430,000
Accrued expenses $98,000 $77,000
Income tax payable $17,000 $9,000
Short-term dept $435,000 $500,000
  Total current liabilities $1,000,000 $1,016,000
     
Long-term dept $750,000 $660,000
  Total liabilities $1,750,000 $1676,000
     
Contributed capital $900,000 $850,000
Retained earnings $985,000 $935,000
  Total owner's equity $1,885,000 $1,785,000
    Total liabilities and owner's equity $3,635,000 $3,461,000

Table: Amalgamated Hat Rack Balance Sheet as of December 31, 2015.  Updated 2016.
Reference: Adapted from Finance for Managers, Harvard Business Essentials (2002)

It is important to note that the balance sheet describes the company's status as of a particular time. Did you notice that it must always balance i.e., all assets are claimed by someone?

Remember..... Assets = Liabilities + Equity

It is also important to note that the firm can add to accounts equally on both sides, or can "trade" among accounts on one side or the other as long as both sides end up being equal. For example, if in 2016 Amalgamated Hat Rack borrowed another $200,000 in a long-term loan, the cash and marketable securities account would increase by $200,000 and the long-term debt account would increase by $200,000. The balance sheet would still be in balance at the end of 2016 with totals of $3,661,000 on each side.

Also, if in 2016 Amalgamated Hat Rack could issue $750,000 worth of common stock and use the proceeds to pay off the $750,000 in long-term debt outstanding, the Contributed capital account would go up by $750,000 and the long-term debt account would drop by $750,000. No changes would occur on the asset side of the balance sheet. The balance sheet would still be in balance at the end of 2016 with totals of $3,461,000 on each side.

Typical Balance Sheet Accounts

Assets Liabilities Equity
  • Current Assets (cash, accounts receivable, inventory, etc.)
  • Fixed Assets (property, plant, and equipment, land, etc.)
  • Other Assets (patents, licenses, etc.)
  • Current Liabilities (accounts payable, notes payable, etc.)
  • Long-Term Liabilities (long-term loans, bonds, etc.)

Note: The division between short-term and long-term is usually (and arbitrarily) considered to be one year)

 Common stock, additional capital, retained earnings, etc.