Prepare a balance sheet

1. Prepare a balance sheet as of December 31, 2020, for the Diablo Co., from the following information

2. Prepare a balance sheet as of December 31, 2021, for Waterhouse Co., from the following information:  Name: _________________________________ Points: 10.0
HM 476 * Homework 1-1 * Chapter 2: Balance Sheet
1. Prepare a balance sheet as of December 31, 2020, for the Diablo Co., from the following information:
Cash
$14,580
Machinery and equipment
60,000
Inventory
24,000
Accounts receivable
97,500
Furniture
45,000
Prepaid Insurance
24,200
Common stock
120,000
Accounts payable
94,000
Retained earnings—prior year
15,000
Retained earnings—current year
?
Accumulated depreciation
19,000
Accrued expenses
8,300
1
Name: _________________________________ Points: 10.0
HM 476 * Homework 1-2 * Chapter 2: Balance Sheet
2. Prepare a balance sheet as of December 31, 2021, for Waterhouse Co., from the following
information:
Machinery and equipment
520,500
Accumulated depreciation
163,500
Inventory
165,000
Short-term notes payable
105,000
Accounts receivable
90,000
Prepaid insurance
13,500
Cash
$82,500
Common stock
405,000
Accounts payable
112,500
Retained earnings—prior year
69,000
Retained earnings—current year
?
2
Name: _________________________________ Points: 10.0
HM 476 * Homework 1-3 * Chapter 2: Balance Sheet
3. Prepare a balance sheet for the Wood Corporation, given the following information:
Accumulated depreciations
38,000
Long-term debt
42,000
Inventory
5,000
Common stock
50,000
Short-term notes
750
Accounts receivable
10,000
Accounts payable
5,000
Buildings and equipment
120,000
Cash
11,000
Retained earnings—prior year
7,350
Retained earnings—current year
?
3
Ch. 2. The
Balance
Sheet
HYUNSUK CHOI
Balance Sheet
• Major financial statement prepared at the end of each accounting period.
• Reflects a Balance between an organization’s assets and claims to its assets
called liabilities and owners’ equity.
Assets = Liabilities + Owners’ Equity
Balance
Sheet
Questions Answered by the
Balance Sheet
•
How much cash was on hand at the end of the period?
•
What was the operation’s total debt?
•
What was the mix of financing at the end of the period?
•
How much did guests owe the hotel?
•
What amount of taxes was owed?
•
Can the operation pay its current debt?
•
How much of the operation’s assets do stockholders own?
The Unique Trait of the Balance
Sheet
• The income statement, the statement of owners’ equity, and the
statement of cash flows all pertain to a period of time.
• The balance sheet reflects an operation’s financial position—its assets,
liabilities, and owners’ equity—at a given date.
• The balance sheet reflects, or tests and proves, the fundamental
accounting equation (assets equal liabilities plus owners’ equity).
Assets = Liabilities + Owners’ Equity
The Current Ratio
• The current ratio is current assets divided by
current liabilities.
• Many long-term loans specify a required
current ratio; failure to meet the requirement
may result in all long-term debt becoming due
immediately.
• Since few operations could raise large sums
of cash quickly, bankruptcy could result.
• Therefore, management must carefully
monitor the balance sheet to ensure that the
operation is in compliance.
The Current Ratio
• The current ratio is current assets divided by
current liabilities.
• Many long-term loans specify a required
current ratio; failure to meet the requirement
may result in all long-term debt becoming due
immediately.
• Since few operations could raise large sums
of cash quickly, bankruptcy could result.
• Therefore, management must carefully
monitor the balance sheet to ensure that the
operation is in compliance.
The Current Ratio
Q: Is always the higher the current ratio the better?
Liquidity
• Liquidity measures an operation’s ability to convert assets to cash.
• Profit alone does not guarantee that a business will be able to meet its
financial obligations as they become due.
• Ideally, a business will have sufficient liquidity both to pay its bills and to
provide its owners with adequate dividends.
Limitations of the Balance Sheet
1. Valuations of assets are not current values.
2. Not all assets appear on balance sheets.
3. The balance sheet is static in nature.
4. Some valuations are inexact.
Limitation #1: Valuations
• Since the balance sheet is based on the cost principle, it
often does not reflect current values of some assets, such
as property and equipment. This difference may be
significant.
• Since real estate prices can fluctuate wildly, the value of
property is particularly vulnerable to inaccurate valuations.
• A misstatement of the value of a property’s assets could
lead to less than optimal use of those assets.
Limitation #2: Omissions
• Balance sheets fail to reflect many elements of value to
hospitality operations.
• The people providing the services are critical to hotels,
motels, restaurants, clubs, and other hospitality sectors,
but the balance sheet does not reflect the human resource
investment.
• Millions of dollars are spent in recruiting and training to
achieve an efficient and highly motivated work force, yet
this essential element is not shown as an asset.
Limitation #3: Static Nature
• Balance sheets reflect a property’s financial
position only at a single moment in time.
• They become less useful as they become
outdated.
• The financial position reflected at year-end may be
quite different one month later.
• This is particularly true if an operation makes a
major investment in fixed assets.
Limitation #4: Inexactness
• Several balance sheet items are based on
estimates:
• accounts receivable—net (estimate of collectible
portion)
• inventory (lower of cost or market)
• property and equipment (cost less estimated
depreciation)
• In each case, when the estimates are in error, the
balance sheet items will be wrong.
Major Elements of the Balance
Sheet
• Assets: current assets, noncurrent receivables, investments, property
and equipment (fixed), and other assets
• Liabilities: current and long term (include accounts payable, wages
payable, mortgage payable)
• Owners’ equity: capital stock (Common stock and preferred
stock) and retained earnings
Balance
Sheet
Formats
The balance sheet can be
arranged in either the
account or report format.
•
The account format lists
the asset accounts on
the left side of the page
and the liability and
owners’ equity accounts
on the right side.
Balance
Sheet
Formats
The balance sheet can be
arranged in either the
account or report format.
• The report format shows
assets followed by
liabilities and owners’
equity. The group totals
on the report form can
show either that assets
equal liabilities and
owners’ equity or that
assets minus liabilities
equal owners’ equity.
Current Accounts
• Current assets refers to items to be converted to cash or used in operations
within one year or a normal operating cycle.
• Current liabilities are obligations that are expected to be satisfied either by
using current assets or by creating other current liabilities within one year or a
normal operating cycle.
• A normal operating cycle may be a few days or several months long.
• The hospitality industry commonly classifies assets as current/noncurrent on
the basis of one year rather than the normal operating cycle.
Typical Components of Current
Assets
• Cash
• Short-term investment (available
for conversion to cash)
• Receivables (within one year)
Trade
Receivable
Typical Components of Current
Assets
• Cash
• Marketable securities
• Receivables
Trade
Receivable
• Inventories
• Amounts due from owner, management company, or related party
• Prepaid expenses
Typical Components of Current
Assets
• Cash
• Short-term investment
• Receivables
• Inventories
• Prepaid expenses
Typical Components of Current
Liabilities
• Payable resulting from the purchase of
goods, services, and labor and from
the applicable payroll taxes
• Amounts received in advance of the
delivery of goods and services, such
as advance deposits on rooms and
banquet deposits
• Obligations to be paid in the current
period relating to fixed asset
purchases or to reclassification of
long-term debt as current
• Dividends payable and income taxes
payable
Typical Components of Current
Liabilities
• Notes payable
• Accounts payable
• Accrued expenses
• Advance deposits
• Income taxes payable
• Current maturities of long-term debt
Noncurrent Receivables
• Noncurrent Receivables includes both accounts and notes receivable
that are not expected to be collected within one year from the balance
sheet date.
• If any collectibility is uncertain regarding noncurrent receivables, an
allowance for doubtful noncurrent receivables should be used.
• The allowance for doubtful noncurrent receivables is subtracted from
total noncurrent receivables to provide net noncurrent receivables.
Total noncurrent
receivables
Doubtful noncurrent
receivables
Net noncurrent
receivables
Investments
• Investments generally include debt or equity securities and ownership
interests that are expected to be held on a long-term basis.
• Investments in property for future development generally should also be
accounted for as investments.
• The accounting method and valuation basis should be disclosed in notes
to the financial statements.
Property and Equipment
• Property and Equipment consists of fixed assets
including land, buildings, furnishings and
equipment, construction in progress, and leasehold
improvements as well as property and equipment
under capital leases.
• With the exception of land, the cost of all property
and equipment is written off to expense
(depreciation) over time in accordance with the
matching principle.
• Depreciation methods used should be disclosed in a
footnote to the balance sheet.
Property and Equipment
Other Assets
Other Assets consists of all noncurrent assets not included in previous
categories. Other assets include:
•
Intangible assets (e.g., trademarks, customer lists, and goodwill)
•
Cash surrender value of life insurance
•
Deferred charges
•
Deferred income taxes—noncurrent
•
Operating equipment
•
Restricted cash
Long-Term Liabilities
• Long-term liabilities are obligations at the balance sheet date that are
expected to be paid beyond the next 12 months.
• Common long-term liabilities include notes payable, mortgages payable,
bonds payable, capitalized lease obligations, and deferred income taxes.
• Any long-term debt to be paid with current assets within the next year is
reclassified as current liabilities.
Owners’ Equity
•
The detail of the owners’ equity section depends on the operation’s
business form.
•
For a corporation, this section includes capital stock (common and,
when issued, preferred), additional paid-in capital, retained earnings,
and treasury stock.
•
For a sole proprietorship, partnership, or Limited Liability Companies,
equity is listed by owner, partners, or members, respectively.
Balance Sheet Analysis
The analysis of a balance sheet may include the following:
• Horizontal analysis (comparative statements)
• Vertical analysis (common-size statements)
• Base-year comparisons
• Ratio analysis (Ch. 5.)
Horizontal Analysis
• Horizontal analysis compares two balance sheets—the current balance sheet
and the balance sheet of the previous period.
• The two balance sheets are often referred to as comparative balance sheets.
• Horizontal analysis is the simplest approach to analysis and is essential to fairly
reporting financial information.
• This approach often expresses the changes from one period to the next in both
absolute and relative terms.
Vertical Analysis
•
Vertical analysis, also known as
common-size statement
analysis, reduces figures to
percentages.
•
Individual assets are stated as
percentages of total assets.
Liability and equity accounts are
expressed as percentages of
total liabilities and owners’
equity.
•
Common-size balance sheets
permit a comparison of
amounts relative to a base
within each period.
Base-Year Comparisons
• Another approach to analyzing balance sheets is base-year comparisons.
• This approach allows a meaningful comparison of the balance sheets for
several periods.
• A base period is selected as a starting point, and all subsequent periods
are compared with the base.
• Base-year comparisons make it easy to quickly determine the changes
over a period of time.
Base-Year Comparisons