The Balance Sheet - Assets

AuthorVern Krishna
Chapter 7: The Balance Sheet
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.
e following is a partial (asset portion) of the Balance Sheet of Dug-
gan Inc
Balance Sheet as at  September  
(thousands of dollars) $ $
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
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

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