Accounting Lecture: Balance Sheets

Introduction to Balance Sheets

• Balance sheets capture different views:
  • Capital Invested: Records what you've invested in assets.
  • Current Value: Reflects the current market value of assets.
  • Liquidation Value: What you would get if you sold the assets.
• Balance sheets can pull in different directions due to these varying views.

Components of Balance Sheets

Assets

• Fixed Assets:

  • Physical assets with long lives (land, buildings, equipment).
  • Traditional accounting records at purchase cost, net of depreciation.
  • Fair value accounting tries to reflect current market value.

• Current Assets:

  • Assets with life span less than a year (inventory).

• Financial Assets:

  • Investments in securities or other companies.
  • Publicly traded securities often valued at current market price.
  • Minority stakes (e.g., 3-10%) use equity approach.
  • Majority stakes require consolidation.

• Intangible Assets:

  • Includes brand names, technology, but often poorly reflected.
  • Goodwill: Most common intangible, created during acquisitions, measures the excess of purchase price over book value.
  • Goodwill impairments occur if the acquisition value drops.

Liabilities

• Current Liabilities:

  • Non-interest-bearing liabilities (accounts payable).
  • Interest-bearing liabilities (short-term debt, deferred items).

• Debt:

  • Corporate bonds, bank loans, lease debt.
  • Notes to balance sheets provide additional debt details like payment due dates.

Shareholders' Equity

• Reflects the historical accumulation of a company’s earnings and investments.
• New approach includes marking items to market, reflecting more volatility.
• Share buybacks can reduce shareholders' equity significantly.

Conclusion

• Balance sheets attempt to balance historical recording with fair value adjustments.
• Emphasis on utility and real-world application will be explored in future sessions.
• Balance sheets might be more useful if focused solely on recording asset investments.