13-04-2012, 02:50 PM
Balance Sheet and Statement of Cash Flows
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Measurement of balance sheet items
Historical cost – most prevalent and most reliable
Current or Replacement cost (input value)
What we would have to pay to replace the item today
Current Market Value (exit value)
What we would expect to receive upon sale in its current condition
Net Realizable Value – cash expected to be realized
(Accounts receivable less allowance for bad debts)
Present Value – similar to NRV but with the time value of money concept
Historical cost is most prevalent but all five are acceptable and sometimes required by GAAP.
Limitations of the Balance Sheet
Historical cost. (reliability versus relevance)
B/S does not include all of the economic resources of the company.
Value of employees
Value of created intangibles
These items cannot be measured and therefore are not reported.
As long as the user is aware, this is not necessarily a problem.
Current Assets less Current Liabilities = Working Capital
To be “current” the asset must be expected to be converted to cash or to be used in the operations of the business and the liability must be due or expected to be paid, within one year, or within the normal operating cycle, whichever is longer. The starting period of the one year or operating cycle is the balance sheet date.
Long-term Assets
Long-term Investments
Investments which the company plans to hold till maturity versus trading
Cash surrender value of life insurance policies
Common, company pays the premium, employee identifies
The beneficiary, upon death the company gets the CSV. Although
The company could terminate the policy and receive the cash today
The intent is to hold until death.
Land or property purchased for future use but not currently in use.
Other Disclosures: (Footnotes)
Summary of accounting policies (APB Opinion #20)
Fair Value and Risk (FASB #133)
Contingent Liabilities and Contingent Assets
Contingent Assets or Contingent gains are not reported in the financial statements.