The Balance Sheet - Assets

• Author: Vern Krishna
• Pages: 140-179



Chapter 7: The Balance Sheet —

Assets

A. OVERVIEW

In Chapter , we introduced the balance sheet equation and its com-

ponents: assets, liabilities, and equity and their respective roles in

summarizing nancial information. In this chapter we will look at the

components in greater detail to examine their underlying account-

ing principles. Although balance sheets vary between industries, they

share common characteristics and accounting principles, which we

examine here.

Traditional nancial statements use the historical cost model in

recording assets and liabilities. Hence, they present a retrospective

picture of an entity’s nancial condition and are useful for duciary

and regulatory accounting purposes but have limited value for invest-

ment purposes. Accountants also use dierent accounting rules for

dierent purposes. For example, an entity may use one set of rules

for nancial reporting purposes, another for regulatory purposes, and

still another for tax purposes. Hence, there is nothing oensive about

keeping dierent “books” for dierent purposes. e important point

is that the reader should rst understand the purpose for which the

accountant prepared the statements.

ere is a trend towards a “mixed-attribute model,” which reports

certain assets and liabilities, such as nancial instruments, at fair

value or current market value, which, although dicult to measure,

Chapter 7: The Balance Sheet — Assets 

are more relevant. e fair value of a nancial instrument is the price

that the enterprise would receive to sell an asset or pay to transfer a

liability in an orderly transaction between market participants as at

the measurement date. Accountants determine fair value by incor-

porating various factors that market participants would consider in

setting a price, including commonly accepted valuation approaches.

B. HYPOTHETICAL BALANCE SHEET

e following is a partial (asset portion) of the Balance Sheet of Dug-

gan Inc

Balance Sheet as at  September  

(thousands of dollars) $ $

Assets

Current Assets:

Cash  

Cash equivalents  

Marketable securities  

Accounts receivable  

Allowance for doubtful accounts − −

Inventories  

Deferred tax assets  

Prepaid expenses  

Total current assets  

Fixed Assets:

Land  

Buildings  

Machinery & equipment  

Leasehold improvements  

Accumulated depreciation − −

Capital assets (net)  

Intangible Assets:  

Other Assets:

Accrued benef‌its  

Total Assets  

 Financial Skills for Professionals

C. CURRENT ASSETS

Assets are resources that a business uses in its operations to earn

income. Current assets are a subset of assets that the business expects

to use or consume within the next year or within the operating cycle

of the business if the cycle is longer than one year. e operating cycle

is the length of time that a business needs to acquire raw materials

or other inputs, produce or sell its goods or services, and collect the

cash generated from its revenue producing activities. e cycle can be

short — for example, with a restaurant — or very long — for example,

with a winery. Current assets typically include cash, marketable secur-

ities, accounts receivable, inventories, and prepaid expenses. ese are

listed on the balance sheet in order of their liquidity or how soon they

can be converted into cash or utilized in the business.

1. Cash

Cash, the most liquid of all assets, includes all currency and bank

accounts that an entity can withdraw at any time without restric-

tions. Cash also includes “cash equivalents,” such as short-term,

liquid instruments, money market funds, and commercial paper that

is readily convertible into cash. Duggan Inc has a cash balance of

$, at the end of -.

2. Cash Equivalents

Cash equivalents are short term, highly liquid money market instru-

ments with a maturity of three months or less, such as commercial

paper, treasury bills, and money market funds. Duggan Inc reported

cash equivalents of $, in -.

3. Restricted Cash

Restricted funds are not included in cash. Restricted funds are amounts

that an entity must set aside for specic purposes. For example, a

bank may loan money to a business, but require that it maintain a