Tag Archives: Chapter 2

Elements of Balance Sheet

Balance sheet is also called as the statement of financial position, because it presents the financial position of an entity at the end of each accounting period.
Three elements of balance sheet are assets, liabilities and equity.
Assets represent economic resources available to an entity.
Claims to the assets by creditors are liabilities and the claims to the assets by owners are equity. Because the amount of resources and claims should be same at any time, total assets is equal to total liabilities and equity in the balance sheet.

 

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Classified Balance Sheet

Classified balance sheet presents the components of assets, liabilities and equity classified as current and non-current items.
Assets are classified into current assets, property, plant equipment (PP&E), intangible assets and non-current investments.
Liabilities are classified into current liabilities and non-current liabilities. Stockholders’ equity are classified into paid-in capital and retained earnings.
Assets that are expected to be converted into cash within a year are classified as current assets. In some industries, if the normal operating cycle is longer than a year, assets that are expected to be converted into cash during the normal operating cycle are also classified as current assets.
Liabilities that are required to be paid within a year are classified as current liabilities. If the normal operating cycle is longer than a year, liabilities that are required to be paid during the normal operating cycle are classified as current liabilities.
Paid-in capital represents the amount invested by stockholders. Net income generated by an entity is added to retained earnings and the dividends paid to stockholders are subtracted from retained earnings. If an entity owns its own stock, it is classified as treasury stock. Treasury stock is subtracted from the stockholders’ equity section of balance sheet.

Review Questions

1. What are the components of a classified balance sheet?

  • Current assets
  • Non-current assets
  • Current liabilities
  • Non-current liabilities
  • Paid-in capital
  • Retained earnings
2. How are assets, liabilities and equity related?
Assets = Liabilities + Equity
3. How are the assets classified on the balance sheet?
Current assets and non-current assets
4. How are the liabilities classified on the balance sheet?
Current liabilities and non-current liabilities
5. How are the stockholders’ equity classified on the balance sheet?
Paid-in capital and retained earnings
6. What are the examples of current assets?
Cash, marketable securities, accounts receivable, inventory and prepaid expenses
7. What are the examples of non-current assets?
Land, buildings, equipment, patents, trademarks and copyrights
8. What are the examples of current liabilities?
Accounting payable, notes payable due within a year, salaries payable, income taxes payable and short-term borrowings
9. What are the examples of non-current liabilities?
Long-term borrowings and bonds payable

 

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Classification of Assets

Current Assets
The following assets are classified as current assets, because they are expected to be converted into cash within a year or normal operating cycle, if the operating cycle is longer than a year. Examples of current assets include cash, short-term marketable securities, accounts receivable, notes receivable due within a year, loans due within a year, inventory and prepaid expenses.

Investments
Investments and loans that are expected to be converted into cash within a year are classified as current assets. If the intention of the entity is to keep the investments and loans for more than a year, such investments and loans are classified as noncurrent assets.

Property, Plant and Equipment (PP&E)
Property, plant and equipment include land, buildings, machinery, vehicles and equipment. These assets are expected to be used to generate revenues for more than a year. Depreciation is the process of allocating the cost of property, plant and equipment over the life of the asset.

Intangible Assets
Intangible assets include the assets that do not have physical substance, such as goodwill, patents, copyrights and trademarks.

Review Questions
1. How are assets classified in a classified balance sheet?
Current assets, property, plant and equipment (PP&E), intangible assets, long-term investment and other assets
2. How is a current asset defined?
A current asset is an asset that is expected to be converted into cash within a year or normal operating cycle if the operating cycle is longer than a year.
3. What are the examples of current assets?
Cash and cash equivalents, short-term marketable securities, accounts receivable, notes receivable due within a year, inventory, prepaid expenses
4. What are the examples of Property, Plant and Equipment?
Land, buildings, equipment, machinery, furniture and fixtures
5. What are the examples of intangible assets?
Goodwill, patents, trademarks, copyrights

 

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