 Hello and welcome to this session. This is Professor Farhad and this session we would look at the classified balance sheet a topic That's typically covered in financial accounting and introductory course Also covered on the CPA FAR exam section as always I would like to remind you to connect with me on LinkedIn if you haven't done so YouTube is where you would need to subscribe I have 1600 plus accounting or I think finance and tax lectures. 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That's something that's gonna benefit the business. What we're gonna do. We're gonna have two categories of assets We're gonna have a current asset and a non current or a long-term asset. Now. Let's talk about current asset What is a current now these this this group is current well Current items are items that are expected to come do which is collected within and owed within the longer of one year or the company's operating normal Cycle company's normal operating cycle. What does that mean? Well, it's items. That's either gonna be Collected okay collected means we're gonna We're gonna get it in cash And we're gonna see a little bit little bit further. What does that mean and owed owed means we have to pay it Within the longer of one year or the company's operating cycle now We know what one year is so what is the company's operating cycle? Well, the company's operating cycle is Usually less than a year for most companies. So we would use one year But what is the company's operating cycle? Well, we'll talk about this topic in next in the next chapter But the company's operating cycle is how long does it take the company to take some cash? That's assumed $10,000 invest that cash An inventory and equipment Sell the sell the asset that they created Then collect the cash again and hopefully they would collect for example 15,000. So they start with 10,000 They invest that 10,000 somewhere an inventory. They sold it. They market it. They sold it They sold it maybe on account. They have an account receivable then they collected the cash How long does this process take? Let's think about for simplicity. Let's think about a retail store Well, how long does it take a retail store to buy something sell it and collect the money? Usually it takes them less than a month or maybe two months think of Walmart. How long does Walmart? Takes to buy an item and sell the item and collect the cash Usually it's less than a year. So most operating cycles are less than a year Therefore, we assume that the operating cycle is one year But some companies they do have a longer operating cycle, but we will not concern ourselves with that So our operating cycle will be one year. So the assets That are either collected or owed will be considered current and we'll see a little bit more about current assets Then we're gonna have a category called noncurrent. So think think of the assets as to the categories a Current to noncurrent now under noncurrent. We're gonna have three subcategories. We're gonna have long-term investments We're gonna have plant assets and we're gonna have Intangibles so notice those three subcategories are all noncurrent. It means they are long-term So we have current assets and long-term assets So current assets are gonna be collected converted to cash within one year and the other one will not under under liabilities We're gonna have two categories current liabilities and Noncurrent liabilities. We're gonna have to Under liabilities, what are they? Well current item are expected to be owed Within one year and noncurrent noncurrent liabilities are expected to be owed longer than one year Then we're gonna have the third category, which is equity now. We're gonna go through each Each category separately define it and see what goes there starting with Current assets. What are current assets? Well current assets are assets to have expected to be sold Collected or used within one year or the company's operating cycle. What does that mean? It's some assets that's gonna go away, you know, it's either sold. We're gonna sell it. We're gonna collect it. It's mean Conlected and obviously Collected mean collected in cash. That's what we collect or use. It's gonna go away. Well, think about this Which assets in your opinion, they're gonna be sold Collected or used within one year. Think of prepaid prepaid are usually used up within one year think of supplies and The easy one is cash Cash is always collected cash is always cash. Think about account receivable We collect account when we sell on account we expect to collect account receivable within one year So those are some common Current assets and we're gonna look at other current assets and we'll explain that later Okay, like investments, but we'll talk about that a little bit later So those are the current assets cash account receivable prepaid and Supplies, okay Now what about under non-current? We have three subcategories. The first one is long-term investments Now what are long-term investments? They are investments that are expected to be held for more than one year or the company's operating cycle What is an investment in the first place an investment is when you take some money and You buy either stocks Bonds or you buy a building a land for the purpose of Investment what is an investment? It's basically you want to buy something now hold it until it appreciate goes up in value Then sell it or for example buy a building and rent that building. It's an investment. Okay, so what could be examples under investments? well for example and investment in Stocks What does that mean? Well if the company has extra money? They have extra money and they don't know what to do with it So what would what they would do is invest that money in stocks buy like AT&T? Apple computer stocks Amazon any any stock they're interested in now If they plan to hold that stock for more than a year if they plan to keep it for more than a year It will be long-term investment They could also have this investment and they plan to sell it in the near future that that's the case the investment will be considered Current short term so investment in stocks investment. It could be short term It could be long-term you could also invest not only in stocks You could also invest in bonds investing in bonds. It's like borrowing money when you borrow money When you I'm sorry like lending money not borrowing money. It's like lending money When you buy a bond it means you are lending money to the company and when you lend money you expect to receive interest in return And you expect to receive your money back if you're lending money for the long term It's a long-term investment if you're lending money for the short term It's a short-term investment depending on how long you are lending the money same thing with notes receivable Notes receivable is basically selling or lending money on account. Well, that could be short term So notes receivable could be short term could be long term depending on the terms of the note Okay, so those are some typical account you will see under investments The the second category under non-current is plant asset and we should be familiar with plant assets Those are the assets that we depreciate Plastic assets plant assets are tangible. It means we can touch them see them They are long-lived. That's why they are in this category because they service us longer than one year used to produce or sell product and services like a building equipment and Those assets are depreciated. So any asset that's depreciated is Considered a plant asset now land is not depreciated and we'll talk about that later on because land have unlimited life Although it's not depreciated. It's considered a plant asset now We could have a land that's used in operation That's used in operation to produce goods and services and we can have a land as a long-term investment What does that mean? It means we can buy a piece of land and we just hold on it until the price goes up Then we sell it that will be considered an investment. Okay, so a land could be under just land alone It's a plant asset if the land is held for speculation if you want to sell it then it's an investment The third category is intangible assets and what our intent the third category under noncurrent is intangible asset And those intensible asset are also long-term assets Obviously, that's why they are under under the green boxes because all of them are long-term are used to produce are used to sell Product and services that lack physical form. What are? Intangible assets intangible assets are stuff like Franchise like if you want to open a McDonald you have to pay a fee the fee that you paid gives you the right to operate a McDonald It's called an intangible asset copyright Trademark like if you see Apple trademark, that's a trademark. That's an intangible asset and many other intangible assets Which we'll talk about in a separate Session so notice the green ones are noncurrent noncurrent assets We have three categories and this is the current asset So we're done with the asset section and obviously we're gonna look at a balance sheet to see what how it looks like The next topic we're gonna look at our current liabilities and noncurrent liabilities The first thing is what is a current liability current liability is a liability that are disdue Within the longer of one year or the company's operating cycle simply put if you're gonna pay something within one year It's a current liability if you're gonna keep it longer than one year. It's a noncurrent. Well, let's talk about the most Common liability, which is accounts payable. How long do you think your supplier give you to pay your liability? I would say 30 days 60 days 90 days if they are desperate. Well accounts payable is a current liability wages payable When you owe your employees money, how long would they wait for that money? Not long maybe two weeks ten days a Month if they are desperate and they like you but that's about it. Okay Let's talk about Taxes payable how long would the government pay wait for their money? Not less than a year. I can assure you. Okay, so those are some common current liability now. What about notes? Notes payable alone. Well notes payable if it's short term If you're gonna pay the loan within one year at short term What happened if the notes payable is long term? It means you have a loan for five years See what's gonna happen when it's long term. It's gonna be breaking down into two components We're gonna have a short-term component and the long-term component. Let me explain Let's assume you have a loan for the sake of illustration for one hundred thousand dollar It's a long-term loan. It's a five-year loan and in the next year. You have to pay one fifth of it You have to pay twenty thousand. Well within the next year. You have to pay twenty thousand and What's gonna happen? You're gonna have eighty thousand long term because this is a five-year loan So the long-term loan part of it will be short-term part of it will be long-term and we'd look at an example on the balance sheet To illustrate this concept, but the long-term loan it could be it's could be both short-term and long-term now year five When you get year five, there's no more long-term because year five what's left? It's gonna be Twenty thousand and all of it will be do that year. Therefore it will be shorter. Okay, so this is what loan what? Liabilities are a current liabilities Now we have long-term liabilities. What are they liabilities that are not do within one year typically what we're looking at is long term Portion of notes payable So the loan that's do longer than a year. That's what's typically in there as well as bonds Which is we don't talk about bonds in this in this chapter, but other things, but typically Borrowing on a long-term basis. That's what goes under long-term liabilities And the last category is equity and what goes under equity? Well equity is the owner's claim on the assets We have common stock and retained earning. What is common stock? It's the money that the that the investors invested in the company the shareholders invested and what is retained earning retained earning is the cumulative of earnings minus dividend so it's net income minus Dividend Minus if you have net loss if you have net loss in certain years, it's gonna reduce it Minus net loss. So this is retained earnings also is is Listed under equity retained earning is the earnings of the company over the years That they kept it stay retained retained earnings Now the best way to look at a balance sheet is to actually look at a classified balance sheet rather than just talk about the classified balance sheet And let's look at assets first under assets. We have current assets Then we have the noncurrent under current assets notice. We have cash Short-term investments investments that we plan to sell in the near future a counter-receivable Merchandise inventory and prepaid then we total current assets 42,900 notice now we have subtotal within the balance sheet then under Then under noncurrent we have the first category which is called long-term investments under noncurrent We have notes. We have investments in stocks and bonds. We have land health for future expansion notice This is held land For future expansion. We're not using it yet. Therefore. It's an investment then we have we total this category Under plant asset. We have equipment and building minus accumulated depreciation Then we have simply land the land that we use in operation then we have total plant asset the third category Then intangible asset. We have 10,000 then we add up all the assets. This will be total assets Then under liabilities, we're gonna have two categories We're gonna have category a current liabilities and category B long-term liabilities under current liabilities You might see accounts payable wages payable notes payable taxes payable interest payable Most accrued liabilities are current liabilities You might also see in this category unearned revenue and notice world what I was talking about when I talked about the loan I said if it's a long-term loan if it's a long-term loan, you may see it under two categories So let me let me illustrate this If we're talking about a loan a Long-term loan it could be short-term and long-term What does that mean? Well? Let's look at this loan. We have a loan here and I'm gonna tell you for 175,000 this is long term, but this loan of this loan we have to pay 7,500 I'm sorry. It's 157 175 157 500 157 500 So we have a loan for 157 500 of this loan 7500 a short term and the remaining is long term so notice under current liabilities We have a short-term portion called current portion of long-term debt 7500 and under long-term liabilities We have a loan for 150,000 called long-term liability net of the current portion net of the 7500 so the so if we look at our loan balance the loan balance is 157 500 broken down into two categories the amount that we have to pay in the next 12 month is 7500 of that loan which we put under current liabilities and the amount we're gonna pay longer than 12 month Which is gonna be with us for several years. We don't know we're not told here, but it's more than a year is 150 That's why the loan is broken down into two categories Then we have equity which is common stock and retained earnings with total equity, you know total liabilities plus total equity gives us Total liabilities and equity which equal to total assets. So this is a classified balance sheet Now why do we classify the balance sheet for what purpose you're gonna see later? We're gonna run some ratios and it will give us more information about the business as always I would like to remind you to like this recording if you like it, please share it put it in playlist and Also, I would encourage you to visit my website Subscribe if you'd like additional resources to invest in your career Accounting is a challenging but rewarding career Study hard. It's worth it and good luck