 Hello, in this session, we would look at the balance sheet. The balance sheet is one of the major financial statements along the income statement as well as the statement of cash flow. So if you are an accounting students or a CPA candidate, you will need to know everything about the balance sheet. Now, if you're specifically a CPA candidate and you're studying for your CPA, I don't replace your course. I don't replace your Wiley, your Glyme, your Becker or your Roger. What I do is I am in addition, I can be a supplemental tool because when I'm going to go over the balance sheet today, I'm going to cover the balance sheet from A to Z. So I'm going to cover everything about the balance sheet in the tails and little bit more in the tails than a typical CPA course will go over. Now, what I suggest you do if you need additional help about this topic as well as other topics, please check out my website. If not for anything, check out how well your university is doing on the CPA exam. You can check your score by college by section. You can check the average score and the average score per section. I also have additional courses on my website, financial accounting, managerial accounting, intermediate accounting, so on and so forth. Please connect with me on LinkedIn and like my YouTube and subscribe to the channel because I constantly update my videos. So this way, I don't want you to miss anything and connect with me on Instagram and Facebook as well. The balance sheet sometime referred to as the statements of financial position. Okay, so it can be called the balance sheet. It could be the statement of financial position. It reports assets, liabilities and equities, and it report those at a specified time. So when you look at the date of the balance sheet, it's going to be one single date such as December 31st, 2020 or any year. So it's not as of December 31st. It's not as of it's a specified date. It provides information about the resources. Well, what are the resources? The resources are the assets, obligations to creditors and equity to equity and net resources. If you remember the accounting equation assets equal liabilities plus equity and you saw this so many times in my course, assets are your resources. So it tells you what resources do you have? What obligations do you have? And what's the equity in the business? So what is the purpose? What's the one of the main purpose of the final balance sheet? It's going to help us predict the amount, timing and uncertainty of that magic word, future cash flow. So look at the balance sheet. It's going to tell us it's going to help us predict the amount. When are we going to receive the money? You know, what uncertainties do we have about our future cash flow? So this is the purpose of the balance sheet. So how so? How does it help us? Well, we're going to be computing eventually rates of returns that deals with the balance sheet. And we're going to look at those later on. It's going to help us evaluate the capital structure. Now, when we say the capital structure, what do we what do we mean by the capital structure? Well, assets equal to liabilities plus equity. Okay, liability and equity is our capital structure. Are we relying more on debt? Or are we relying more on equity? Is it 5050? Is it 4060? 4060? Is it 6040? So this is going to help us to the capital structure. And this deals with how are we financing the company? Are we relying more on debt? Or are we relying more on equity? And by doing so by looking at our capital structure, it's going to help us assess our risk and our future cash flow, because if a company relies, generally speaking, if they rely more on debt, generally speaking, they are a riskier company. Okay, but specifically, when we analyze the companies and the balance sheet, we're going to look at three different categories, flexibility, solvency, and financial flexibility. And what does each one of those mean? When we when we talk about liquidity, it's, it's generally related to the amount of time that's expected to pass until an asset is converted to a cash or a liability is paid. So basically, solve liquidity deals with short term debt service. What do we mean by this? It means are you are you able to finance your company or to stay afloat in the next 12 months or in a short period of time? Okay, until the liabilities, at least the current liabilities are paid. So are you going to be good in the short term? This is what liquidity, liquidity is, do you have enough liquid asset to meet your obligations? Solvency similar, but solvency, think of it as it deals with long term debt. And long term debt deals with long term. Okay, do you have the ability in the longer, the long term to pay your debt as they come mature? So it's going to help us look at this, this idea of the company. So we're going to be looking at ratio such as that to equity, debt ratios, as well as long term liquid solvency ratios. And we'll look at this later on. And it's going to tell us how fine how flexible is the fine is the company is. Okay, what is the flexibility? For example, can the company take advantage of an opportunity? If that opportunity arises? When can you take advantage of an opportunity when it's when you have access cash? It's when you have access cash, or if you don't have access cash, you have low debt. When you have low debt, and an opportunity came, guess what, then you can respond quickly by going to the bank and taken out alone, because you are not under debt financial financial trouble. Okay, so this is the usefulness of the fine of the balance sheet specifically, the usefulness of the balance sheet. So what are some of the limitation of the balance sheet? So the balance sheet is great. But what are some of the limitation? Well, for one thing, most assets and liabilities are reported at historical costs. And the key word is most, not all of them, because you're going to see later, a lot of our assets are reported on something other than the historical cost, maybe the fair value, maybe the not realizable method, maybe the LCM lower of cost or market, but a lot of it's still reported at historical cost. And historical cost tells us how much we paid for it. And it doesn't change the value. So it's not very useful. Okay, that's that's one, that's one limitation. The extensive views of judgment and estimate, a lot of items on the on the balance sheet, we use estimates and judgments, like when we do depreciation. Well, guess what, depending on the method that we're using, it's going to give us the depreciation amount or when we estimate bet that expense, or when we estimate our liabilities for warranties. So there's a lot of estimates that goes on the balance sheet. So, well, if there's estimate, there's a room for error, there's a room for mistakes. But we do what we can. But once you have an estimate, it may not be 100% accurate. This is this is the point. And many items, many items of financial values are emitted, like what, like, for example, think about your workforce, your workforce, maybe your greatest asset, or maybe your R&D personnel. Guess what, those items don't appear on the balance sheet, maybe your customer base, you have an excellent customers, you have a loyal customer base, you have a good reputation. Okay, but those are very hard to quantify assets, you really cannot put them on the balance sheet, as those are my assets, well, you can't. So there are some assets that are missing. Okay, so you can show some assets, but not all the company's asset. And this is where the role of analysts, the role of business, business experts, that will go into the company, talk to management, and find out what they are doing, and how well they are running the company. This is how the CEO of Berkshire Hathaway, Mr. Buffett, analyzes a company, he looks at soft assets, assets that don't appear on the balance sheet, management is the management, competent. So those are assets, those are assets that don't appear on the balance sheet. Identify the major classification of the balance sheet, what are the major classification, we already talked about them assets, liabilities and equities and hopefully you know what an asset is, probable future economic benefit obtained or controlled by a certain entity as a result of a past transaction, liabilities are probable future sacrifices. So assets are benefit, liabilities are sacrifices of economic benefit, usually cash, you sacrifice cash, arising from present obligation, you have an obligation to transfer an asset or provide a service. This is when you have an obligation, either you have to give them cash, or you have to provide a service in the future, and usually you do this in the future as a result of past transaction. So liabilities, something happened in the past created a current obligation, so it has a past current and future aspect. So something happened in the past, you borrowed money. Now you have a current obligation, you have to pay in the future. And the difference between assets and liabilities, assets minus liabilities equal to equity. And this is the residual interest in the asset of the entity that remains after deducting its liabilities and business enterprise, the equity, whatever remained, should be the ownership interest. So whatever remained is supposedly this is the value that goes to the shareholders. If we only have one shareholder, it goes to the whole shareholder. Now the relationship between assets, liabilities and equities were covered in chapter three. Okay, so if you're not sure, just go back, just keep going back in my lectures or go to chapter three in my channel, and take a look at how equity is created, so on and so forth. But now we're going to be looking at the classification of the balance sheet. And again, it's going to you're going to feel as if I'm going through a list of items, and I will because that's the only way I can go through this chapter. So we're going to look at assets, we're going to look at current assets, long term assets, PP&E intangible assets and other assets. Generally speaking, generally speaking, this is how a company reporter assets and these five categories, some you could look at them as two categories also. And what I mean by two categories, either long term, current or noncurrent. So everything else is noncurrent and you have your current assets. And current assets are what we're going to look at each one of them separately and liabilities, they have two categories, current and long term and equity, we have three main section of equity, we have more, but I will see that. So in practice, you'd usually see little departure of these major subdivision. Most companies, that's how they break down their balance sheets, current and noncurrent. Let's start with current assets, define what a current asset is. And after we define what a current asset is, look at what is included, what is included in that section. Okay, so current assets are what? Current assets are cash and other assets, generally speaking, cash is a current asset that a company expect to convert into cash, sell or consume, either in one year, or in the operating cycle, whichever is longer would always assume that one year is longer than the operating cycle, reason with a one year operating cycle. So what are we saying? Current assets are things that's going to be either converted to cash, sold or consumed, they're going to be gone in one year. What are some examples of those assets? Okay, and those assets, if you really think about it, they deal with liquidity. They're going to tell us, do we have enough liquid assets? Liquid is how fast could you turn something into cash? Do we have enough to pay off our current liabilities? And on the balance sheet, they are listed in the order of liquidity. Cash is the most liquid, short term investments comes next, one, two, three. Those three are considered the most liquid, then four is your inventory, five prepaid, and if you have supplies, supplies will be there. So again, those are the assets that's going to help you pay your short term obligation. Do you have enough of those? This is what the current assets are shown us. Do you have enough of those that you can survive in the near future? Okay, and how do we report them? How do we report them? So how do you report them on the balance sheet? Cash and cash equivalent is the fair value. If you have $100,000 in cash, it's $100,000 in cash. So if you have it in euros, you'll convert it into dollar and it's the fair value. Short term investments generally speak and you'd report them at fair value. And we have a whole chapter about investments, but generally speaking, if you have short term investments, you report them at fair value. Receivable are reported as the estimated amount collectible. So they are reported at how much you will expect to get for them. This is called NRV or net realizable value, NRV or net realizable value. So you'll have an inventory, receivable, then you will see how much of it you'll be expected to collect. And for each one of them, we're going to have a chapter. For example, for cash, just kind of walk you through this because this is the for cash and receivable, we're going to have one chapter. We're going to have one chapter for inventory, one chapter for investment. So eventually, we're going to cover each one of those in details. But receivable, that's how it's reported. Inventory is reported at something called LCM, lower of cost or market. So that's another method that we will use. And prepaid expenses are reported at cost. So notice what I said when we started this, I said most are reported at cost. So the only thing in these is reported at cost is the prepaid. And generally, the prepaid is not really a big, a large number in any company. So notice there is, we are going further and further from, we are going further and further from the cost. We're using other bases to value the asset. And what is LCM, lower of cost or market? We'll see that later on. We'll see that later on. I just note we use LCM, lower of cost or market. So what is the correct order to present the current assets? Well, cash is obviously the first. Then after cash, what comes next? Not inventory. Inventory is not. It does not come next because it's not as liquid. So account receivable, account receivable, they're both right. Then between, now we have, so we have cash account receivable, that sounds right. Then between prepaid and inventory, no prepaid is not. Inventory is more liquid than prepaid than prepaid. So the answer will be B. But between cash and account receivable, if we have investments, it's going to be investments. If we do have investments. So this is just an example of a multiple choice question. It's in order of liquidity. Which one can we convert into cash the fastest? So let's look at cash and what is considered cash? Generally any money available on demand is considered cash. Now we always say cash and cash equivalents. What are cash equivalents? What are cash equivalents? Cash equivalents are short term, highly liquid investments that mature within three months or less. So it could be U.S. Treasury. Okay, for example, you lend the government money for three months or for six months, but now there's three months less. A three month is remained for this, for the bond to mature. So any highly liquid investments that mature within three months. Again, we're talking about U.S. Treasury T-bills. And restriction or commitment must be discussed. So if you have any restriction or commitment on your cash account, you must disclose it. For example, here we're going to look at this company. Just we're going to look at some samples as we're working through this. So this way you'll have an idea what a balance sheet looks like and what type of description or notes do we need to attach to the numbers. So we have, we have Altera Health Care Corp. That's their cash position, 18 millions and some change. Restricted cash and investments, they have 7.1 million, almost 7.2 million. So now when they have something restricted, they have to tell you why is it restricted. So look at note 7. Note 7 it says we have restricted cash and investments consist of CDs, certificate of deposit, as collateral for lease agreement and debt service with interest rate ranging from 4 to 5 percent. So what they're saying is this, they have cash of 18 million, 18.7, that's free and clear. And they have some restricted cash for 7.2 million. And they tell you why the cash is restricted. As an investor, as a creditor, you need to know why they do they have restriction and they're telling us here, they have it in a form of a CD collateral for a lease agreement and debt service. So basically the bank tells them for me to lend you money, you have to deposit some money and keep it on hold. And this is why therefore the cash is not free, it's restricted. So if they combine those two together, it will appear as if they have that's 25, around 26 million. And they don't have to want, they do have 26 million, but 7.2 million of it, they cannot really touch. Okay, so they have to tell you that's the case. This is another example of current assets for O-incorporation. So they have, this is cash and this is restricted securities. Again, you would look at no 23 and sometime you might have other restricted securities under other assets. And here this is how they, you could read this just to see how sometime they have restriction on certain investments. The insurance settlements fund are held and invested by the fire board settlement trust and are available to satisfy depending on future asbestos related liabilities. Okay, these assets of the trust are comprised of cash and marketable securities and are reflected as O-incorporation consolidated balance sheet as restricted assets. Okay, so those are restricted securities and they're telling you why they're restricted. It's to pay asbestos liabilities. Okay, so if there's any restriction, you have to tell us what's the restriction is all about. Short-term investments, again, we're not going to look at them in details a lot in this chapter, but believe me, there's one whole chapter. There's one whole chapter devoted for this. And usually this chapter is intermediate too. Now, if you really want to see this, I do have the chapter on my YouTube, but okay. So if you have investments, investments, depending on how you classify your investments, you could classify it as trading, you can classify the investments as available for sale, or you could classify the investments as held to maturity. So if it's held to maturity, the only type of investments you could have is that, because that the only thing that mature, you would report this as amortized cost. So as far as your concern for this chapter, you're reported at cost. Okay, the classification could be current or noncurrent. So that could be a bond. So if you have money, you could have invest some money in bonds, and that investments could be current or noncurrent. If it's going to mature within 12 months, then the bond is current. If it's going to mature in five years, it's noncurrent. Now you could also have investments in stocks and bonds. So you could have stocks, stocks and bonds, and you could classify them for trading. Trading means what? Trading means you're going to buy and sell them for profit purposes in the short term. You report those investments at fair value, and because you're planning to sell them in the short term, they are considered current assets. And this is the short-term investment section. Available for sale securities, you could have available for sale. Available for sale means not trading. You're not going to trade them, not for trading in the short term, and not HTM. HTM is held to maturity. So it's not this category. It's not this category. What's left is available for sale. Kind of a default. You could have both debt and equity, which is stocks and bonds. They are reported at fair value. They could be current or noncurrent. And what's the difference between trading and available for sale? They do sound the same between this and this. They do sound the same, but they're not. The way they are reported, the way we report the gains and losses is different between the two. We'll worry about this later on in another chapter. And this is an example of short-term investments for Intuit. So this is if you look at their balance sheet, this is their cash and cash equivalent, and they have short-term investments. And definitely, definitely, definitely, the company will need to show you what are their short-term investments. They don't have to give you a detail, but they have to give you some sort of a summary. So the following schedule summarized the estimated fair value of our short-term investments. They are all available for sale. That's their category. And I used to do this for a company where I have to prepare the schedule when I used to prepare their financial statements. They have corporate notes. So they lend some money to corporations. They have municipal bonds. They invest some money in municipal bonds. And they have government securities. And I'm assuming that these all adopt. Yeah, this should be innate. So this is older investments, older short-term investments. So they don't have stocks. For one thing, if you notice here, they don't have stocks, mostly bonds and borrowing. It seems very conservative. This is Intuit. This is the company that creates TurboTax and QuickBooks. This is the company that pretty much drove H&R Block out of business. But yes, Intuit. They really do a good job. Receivables. So the company will have to show the receivable. Most categories of receivable should be shown on the balance sheet or the related notes. And the related notes. So a company should clearly identify anticipated losses due to in-collectables. So if the company thinks they will not be collecting certain amount of receivables, they have to tell you how much is it. Okay, this is the... You remember this? This is called bad debt expense. This is as a result of the bad debt expense. They have to show you the allowance amount. Amount and nature of any non-trade receivable. Generally speaking, when you sell your product and you sell it on account, it's considered a trade receivable. So when we say receivable, what we mean is trade receivable. Okay, so if the company has non-trade receivable, so what could be some non-trade receivable? Well, it could be an income tax refund. So the company filed for a refund and they're waiting for their money. It's a receivable, but it's a non-trade. It has nothing to do with their operation. It could be a lawsuit. They want a lawsuit and they are waiting to be paid. It's a non-trade receivable. Also, they have to show you if there's any receivable that's being held as collateral. Because what companies can do, they can take the receivables and do what? Pledge it, pledge it like any other asset for a loan. So if they have any of these receivables pledged as a loan, then they have to show you that is the case. That is the case. And they have to disclose it under financial statements. So this is the receivable for Stanley, Black and Decker. So this is the receivable. And notice it says net. Net means what? Net of the allowance. This is how much they expect to receive in cash. Expect to receive in cash. Maybe the gross is higher, but this is how much they expect to receive in cash. Okay. And here the notice here, if you look at the node B, they're showing you how much is trade. How much it's trade note where they're lending money to operate the business. Other account receivable, other means other things that they're waiting. It's a substantial amount. This is the gross. The gross is 1,473,000. Notice the gross obviously is higher. This is the gross. Whoops. This is the gross amount. This is the gross amount minus the allowance, minus the allowance for doubtful account, minus the allowance, gives us the net. And this is the amount. The net is the amount that we show on the income statement. Just give me one moment, please. There we go. We're back in business now. Okay. So this is the amount that we show on the income statement. Okay. The net amount. As far as receivable is concerned. Inventory, when we have the inventory, we have to tell you how are we reporting the inventory. For example, lower of cost or market. And most companies use this method. What is this? We're going to have a whole chapter about inventory. You would look at it later. Which cost flow assumption are they using? Are they using FIFO, LIFO, the weighted average, specific identification, any method they are using, they have to disclose it. And what we have in front of us, a A-bot laboratory, laboratories. So they have finished product, work and process and material. And most manufacturing companies, they have three types of inventory. Manufacturing companies, they will have material, work and process and finished goods. So this is their total inventory. And this is the note. And you always have to disclose your inventory method. Inventories are stated at lower of cost or market using the FIFO basis, first and first out. Again, we would have a one-fold chapter about inventories. Prepaid expenses, generally speaking, they are not an important number. They're usually a small amount in relationship to other assets. And what's prepaid expenses? Prepaid expenses are payment of cash that's recorded as an asset because the service or the benefit will be received in the future. You paid your rent, you prepaid your rent, you prepaid your insurance, you prepaid your supplies, you prepaid your advertisement, or you prepaid your taxes. So every time you make a cash payment before you expense it, because remember, you have to record the expenses in the appropriate period. So if you reported any expense before that expense is supposed to be incurred, you just have to keep it as a prepaid expense. And let's take a look maybe at a balance sheet that shows prepaid expense. And here's prepaid expenses and other current expenses. They blend them all together. And usually it's not much to it. It's not much to the prepaid expenses. And this is for Hasbro. And I believe they have a lot in relationship to their total asset. That's around less, more than 10 percent, more than 10 percent. A summary, basically, cash and other assets a company. So what's the summary? What's current assets? This is the definition of current asset. And this is the total current asset for a company, a picture of the whole thing. Now we're going to move from current assets, obviously, to non-current assets and non-current assets. Generally speaking, we have securities, which is a tangible fixed asset or PPNE, special funds, and non-consolidated subsidiaries or affiliate companies. So we're going to look at each one of them separately. Again, go through an overview. What would the balance sheet looks like? And eventually, we're going to find out, you know, how does it work? So securities, what are securities? Securities are investments. But those investments are long-term. Remember, we had short-term investments earlier. We talked about short-term investments. Those are long-term investments, not short-terms. Bond, common stock, long-term notes. We're going to have tangible fixed asset under investments, such as land, health, for speculation. We're going to have maybe a special fund, sinking fund, pension fund, plant expansion fund, or cash surrender value of life insurance. And we're going to have sometimes non-consolidated subsidiaries or affiliate companies. Again, we're not going to go through, you know, we're not going to go through each one of those in details, which is going to give you an idea what type of assets a company could list under long-term investments. Okay? So long-term investments usually will not include, so will not include this category, because trading is in the short-term. So it's either it will have investments available for sale or held to maturity, but it should not have trading securities. Generally speaking, because the nature of trading securities is to trade it in the short-term. So this is an example of a company with investments, an ABC company, investment in UC Inc. And they have a notes receivable, as well as they have land, health, for speculation, a sinking fund, a pension fund, and those are all investments. For marketable securities, management intent determines current or non-current. So if you have stocks and bonds, how do you know if the stock or a bond is a current or a non-current? It all depends on the company's intent. Are they planning to hold them in the short-term? Are they planning to sell them in the short-term? Are they planning to hold them forever? Or it's someplace in between. This is how we determine if it's trading, held to maturity, or available for sale. So what else we could have under long-term investments? So we're looking at stocks. We could also have land held for, and notice here for speculation. Speculation means to make a profit. Why do we need to differentiate this? Because if you bought a piece of land, the first thing you think about, well, it's a land, it's a property, plant and equipment, true. But sometimes the companies buy a piece of land as what? As a speculation. Speculation means what? Speculation means they want maybe to sell it if the prices go up. So that's not really an investment for property, plant and equipment. Because when we say property, plant and equipment, what we mean, what we mean is it's going to be used in operation. So this land, it's not going to be used in operation. Okay? So this is why we say it's held for speculation. If it's held for speculation, it's listed under investments. Now we could also have what's called the sinking fund, the pension fund, cash surrender value. Basically a sinking fund is when you put money away, you put money away for a purpose. And that purpose could be to retire a bond or for a future plan. But usually you invest this money and it's invested in the long term and you cannot touch it. It's a sinking fund. A pension fund is when you promise your employee pension, pension payments after they retire. So, well, before they retire, you have to create a fund and do what? And finance this fund, put money into that fund and invest that money for your employees when they retire. So this is called a pension fund. So you'll have different assets and that pension fund. Also you could have cash surrender value and life insurance. You could have investments in life insurance for employees and the company. What else do we have? And we could also have under these categories, investments in consolidated subsidiaries. So those are investments and other companies, but we don't consolidate those companies. So we have investments and other companies, but we don't combine both companies together. Therefore, we're showing the investment separately because if we combine them together, then we will not show the investment here. It will be combined with the main balance sheet. So this is the Motorola long-term investment section. So notice they have equity investments, which is stocks. They have other investments and they have fair value adjustments to available for sales securities. You don't have to worry about this fair value adjustment at least now, but later we're going to have, chapter 17 will cover this topic. So chapter 17, we're going to talk about investments, how to account for investments. So the next thing on the balance sheet comes property, plant and equipment. And obviously, what goes under property, plant and equipment? Property, plant and equipment are tangible long-lived assets. So notice they are tangible. Tangible means you can touch them because we're going to have assets that we cannot touch. Okay? Tangible long-lived assets used in regular operation or in operating the business. Okay? So what could be examples of property, plant and equipment? Those could be land, but remember, not land, health, for speculation, building, machinery, furniture tool, and waste and resources such as minerals. So those are the assets that we consider them property, plant and equipment. And sometime you know them as P, P and E. Sometime they are called fixed asset and not sure if they're called something else, but those are the two names that I can think of, P, P and E and fixed asset. Maybe they're called something else. With the exception of land, with the exception of land, with the exception of land, a company must either depreciate or deplete if it's a natural resources, these assets. So we have to eventually expense them, depreciate them, and deplete them means expense them. And expense, depreciation expense means allocate the cost to period benefited. To period benefited. Okay? So this is what we mean by depreciation. So we have to eventually expense them. Okay? Now why don't we depreciate land? Let's just talk about this because to depreciate something, you have to assign a life, a number of years. And land is considered to have indefinite life or unlimited life. That's why when we have an unlimited life, when we determine and an asset has an unlimited life, then you cannot depreciate. You cannot allocate the cost over the period benefit because remember, depreciation is taking the cost and allocate it over period benefit. Well, the period is unlimited. So how could you allocate, how can you allocate the cost over an unlimited period of time? So that's why land has unlimited life. Therefore it's not depreciable. And this is an example of a balance sheet with property, plant and equipment, building, land, machinery, capital leases, leasehold improvement, accumulated depreciation. This is the contra asset account. And basically what the company will have to do, they'll have to disclose the basis, it value property, plant and equipment. And if we're using USGAP, let me tell you what the basis are. The basis is the cost, basis. It's very simple. When we buy property, plant and equipment, we keep it at cost. And we have to disclose, for example, we may have a schedule of the buildings, of the major buildings that we have. Maybe we need to talk a little bit about the machinery and equipment. How do we depreciate the machinery and the equipment? How do we classify each assets in what group, so on and so forth? How do we come up with this? If there is a lien, if there is a lien against that machinery or that land or that building, we need to disclose this. So we would need additional disclosure, at least which depreciation method we are using, too, because we are depreciating those assets. So we need to tell the users, are we using the straight line, accelerated depreciation makers or whatever method we are using, not makers, makers for tax purposes. Also, this is the property, plant and equipment for Mattel. Mattel is the company that manufacture Barbie dolls. So they have land, building, machinery and equipment, leases, leasehold improvements, total assets, less accumulated depreciation. Then they have tools, dies and molds, net amount, then net property, plant and equipment. Okay. So this is an example of a company property, plant and equipment. Once again, they'll have to do additional disclosure, additional disclosure about those property, plant and equipment. Okay. Intangible assets. We're going to have a whole chapter about actually property, plant and equipment and intangible asset. I know we're going through this, it seems as I'm going through the index of the textbook because every topic you're covering now, we're going to cover in details and another chapter, one whole chapter for property, plant and equipment, one whole chapter about intangibles, one whole chapter about investments, one whole chapter about inventory. I know we're going through them now, but eventually we're going to learn the details of each one of them. So what are intangible assets? Intangible assets are assets that lack physical substance and are not financial instruments. In other words, they are not stocks or bonds and they lack physical existence. Okay. What are some examples of intangible asset, goodwill, which we'll talk about later, patent, trademark, franchise and copyright. And if you watch loan sharks and hopefully you do, they always ask them if they have an idea that they patent this idea because when you patent an idea that's considered an asset. Okay. Now we're going to learn later, you know, how do you put the patent on the books? How much you can and cannot if you bought it or if you created yourself, but a patent is an idea. Then it's a it's an asset. Trademark, for example, if you see the Apple phone, it has the Apple, that's the trademark for the iPhone. It's worth a lot. Why? Because trademark have a market value. So if someone sees the Apple sign, they trust the product because the product is repeatable. So that's why it's important. The franchise, for example, if you operate a McDonald or a Subway, when someone sees the signs, they most probably will stop by, they'll trust the name. Copyrights for books and songs. So so you will protect the author, protect the author's copyrights. We're going to see later that certain certain intangibles have limited life and others will have unlimited life. And when you have unlimited life for an asset, you will test it for impairment. For example, goodwill has an unlimited life. Okay. And limited life, you amortize. Amortize is the same thing as depreciation, but it's for intangible assets. You don't depreciate intangible assets, you amortize intangible assets. And let's take a look at this example. We have Patrick Corporation adjusted trial balance, contain the following, the following assets, prepaid rent, goodwill, franchise fees receivable, franchises, patent, trademark, prepare the intangible section. So which one of those are intangible and which one of those are not intangible? Okay. So let's take a look at this. All right. prepaid, prepaid rent, prepaid rent is not intangible. Remember prepaid rent is a current asset. Goodwill is an intangible asset. Now what is goodwill? Because again, I said I'm not going to cover goodwill, but goodwill is when one company buys another company. And let's assume one company, let me just explain this real quick. Company A buys company B. And when company A buys company B, they would look at company B. Let's do it on the, let's do it real quick here. So what they do is they look at company B and they would say company B, they have assets of 450,000. And this is the fair market value. In other words, this is how much those assets are worth today at fair market value on the market. And they would look at their liabilities. So because when you buy a company, you buy both their assets and their liabilities. And the fair market value of their liabilities, let's make it 100,000. So the equity or this business is worth on fair market value, $350,000 fair market value. So this is how much this business is worth, 350,000. Here comes company A and company A actually pays to buy it. They pay, let's assume they pay 500,000. So they pay 500,000 for something that's worth 350. So when they journalize the entry, they will debit the assets that they purchase. They bought assets 450 worth. They were credited their liabilities because they did add 100,000 of liabilities when they bought this company. They will credit cash because they paid cash 500,000. Now what's left? What's left is 150 because this entry, those two end, this is 600,000 and this is only 450. The difference between the two is called goodwill. Now what is goodwill? Goodwill is the excess amount that we paid over the fair market value that we cannot assign to any asset that we purchased. So in other words, we paid 500,000. 500,000 is 150,000 more than what the company is worth. Now why did we pay this? The question is why did we pay this? Well, we really don't know why or we cannot attach this additional value to an asset. It could be because of the location of the company. It could be because of this company's connection to the government. It could be because of their customer base. But certain things that we cannot assign are specifically assigned. So therefore we call it goodwill. So it's that everything else that everything else that we cannot explain. That we paid extra, we cannot explain, we cannot put on the financial statements. So goodwill indeed is an intangible asset. So goodwill is an intangible asset. Franchise fees receivable. Don't be misled. This is receivable. This is an asset. We are waiting for $2,000. Now franchise is yes. Franchise is an intangible because you paid a fee. Patent is an intangible. Basically a patent it's extremely important especially for pharmaceutical companies. That's an intangible. Trademark are also intangible. So those four are intangibles, which are goodwill, franchise, patent and trademark. Total of $140,000. This is the intangible. Again we'll see this in chapter 11 in details later on. Intangible asset, this is for PepsiCo. So they have goodwill. A lot of goodwill they buy other companies. That's why they create goodwill. They have trademark and they have other identifiable intangibles. So I don't want you to think that this trademark is the PepsiCo trademark because when you create your own trademark you don't put it on the books. We'll talk about that later on. But this is a sample of intangible assets. The companies could also have other assets. They may include long-term prepaid expenses, non-current receivable assets and special funds, the third income taxes, which we'll see that later on in chapter 19. This is the dreaded chapter 19. No one likes this chapter. Property held for sale, restricted cash or other securities. So those are if it doesn't fit anywhere, you could put them here if you'd like to. But remember, property held for sale, it could also be long-term investments. But this is the category. In other words, the company will always have this option. So if they don't know where to put an asset, it's like it's not long-term, it's not current, it's not PPNE, it's not property, plant and equipment, it's not intangible. Well, if it's none of those, guess what? You could put it under other assets. So you'll always have this category. Okay? For example, if you have long-term prepaid expenses, well, it's not current, but it doesn't fit any other category. So you put it here. Okay? Okay, so this is an example of other assets for this company. They have prepaid pension costs, and they have deferred income tax. Okay? That's what they have. Again, this is the assets that don't fit anywhere. So we have create a category. The next thing we'll look at is liabilities. And liabilities are a little bit straightforward because they only consist of two categories, either current liabilities or noncurrent liabilities. So it's either classify as current or noncurrent. And how do we determine if a liability is a current or a noncurrent? Well, a current liability is a liability that reasonably expect to look with date, either through the use of current assets or the creation of current liability within one year. Assume in one year is longer than the operating cycle. So any liability that we expect to pay off within the next 12 months is considered a current liability. So that's the liability that would expect us to look with date, either a current asset, which is cash, or the creation of a current liability, basically refinance it. Ask the creditor to give us more time. Examples are notes payable, short-term note, accounts payable, which is, account payable is when you buy on account, okay, when you buy on account, accrued compensation, this is the amount that you owe for your employees, unearned revenue, somebody paid you upfront, you haven't performed the work, income taxes payable, taxes that you owe, and current maturities of long-term debt. We'll talk about this maybe in a moment later on, current maturities of long-term debt. Now, this is an example for a hella-burton company. This is their current liabilities, notice, short-term notes, and most companies, they will have those too for sure. They'll have some sort of a short-term loan and accounts payable, and also they would have accrued employee compensation and benefit, because if they have employees, they're going to have, they're going to accrue some wages, unearned revenue, maybe somebody paid them upfront, income taxes payable, accrued special charges. So those are some typical, and here they have a large, other current liabilities, which is, they'll have to explain this in the notes. We don't know what this is, but this is, those are the typical current liabilities that you will see for a company. The next thing we look at is long-term liabilities, long-term liabilities. Long-term liabilities are obligation that do not reasonably expect to be liquidated within the operating cycle, which is, we assume to be one year. So those liabilities that will stay with us, that will stay with us, longer than one year, longer than one year. Okay? Like what? Like long-term debt, obligation capital lease, of a capital lease, and the third income taxes. Those are liabilities that will stay with us longer than one, longer than one period, or those liabilities we would require to reissue long-term, long-term debt to refinance them, to refinance them. Okay? You could read this article, it's about before the dot-com, bubble. Concerns about liquidity and solvency let creditors of many dot-com companies to demand more assurance that these companies could pay their bills when due. A key indicator for creditors is the sum of vendors demanded that their dot-com customer sign notes stating that the good ship to them would serves as a collateral for the transactions. Okay? So really, if you really think about it, your suppliers, the company that supply goods and services, they're the best people that knows how to evaluate a company because think about it. When a company runs into trouble, the first thing they do, they will start to ask their suppliers to give them more time or to give them more time to pay or they will even stop paying altogether. So your suppliers knows a lot about the company and that's why a company like Apple, when they deal with a supplier, they make sure they have a secretive agreement between them and the supplier and the supplier cannot breathe a word about how much they are supplying Apple. It has to be a secret. Another recent bubble in the real estate market created a working capital and liquidity crisis for no less than a company that's called Bear Stern, which is gone now. Bear Stern won one of the biggest investors in mortgage-backed securities, but when the housing market cooled off, the value of the collateral basically went down. Okay? For example, when a reported, when a report predicted that Amazon working capital turned negative, the companies vendor began to explore steps that would ensure Amazon would pay them. Securities dropped dramatically, which is their stock and the market began to question Bear Stern's ability to pay its obligation. Well, again, short-term liabilities are extremely important for any company because if you cannot, if you cannot meet your obligation, it's a problem. It's really a problem. Let's take a look at this example. Included in Adam's company, December 31st, 2014, trial balance are showing the following account. Accounts payable, pension asset liability, pension asset slash liability, discount on notes payable, unearned revenue, bonds payable, salaries and wages payable, interest payable. So the assets have to appear the long-term liability section. So which assets are considered long-term? Well, I'm going to tell you right now. Accounts payable is not. So this is not. And then we cross accounts payable, the easy one that we can easily cross. Accounts payable is not. Pension asset liability, yes. Pension usually, generally speaking, when a company has a pension liability, it's definitely not in the short-term because this is planning for the future. So this is planning for the future. Discount on bonds payable, generally speaking, bonds payable are long-term debt and the discount on them is a contra liability, which is also long-term debt. Unearned revenue, generally speaking, no one pays you and they expect you to perform longer than a year. Bonds payable is a long-term debt. Salaries and wages payable, that's a no, no. That's a current liability because no one will wait for you one year to pay them. Interest payable, generally speaking, banks, they want their money and the government don't wait longer than a year. So the three long-term liabilities are pension liability bonds and discount. And discount is a contra liability to reduce this amount. And the other ones that I crossed out, you might be asked what are the current liabilities and those will be the current liabilities. All right, let's take a look at this example and this is an example for the Great Atlantic and Pacific Tea Company. Their current liabilities then their long-term liabilities and they'll say C-note and here what they do is they break down their long-term liabilities. They have that consist of 9.5 senior notes. So this they pay 9.5% on this note. They have a mortgage and other notes that they pay 9.9. They borrowed from the bank this much at 9.7 in commercial papers at 9.4. And I remember when I used to prepare I remember certain things really well. For when you have that, you have to list all the classification of your debt. So that's one of the things that you have to disclose. Show me the breakdown of your debt and what is your average interest rate now? They can either put it there or someone can easily calculate the average interest rate that this company pays. Now you have this is your total long-term debt. Then what you do when you have what you do after you calculate your total long-term debt you take out you then you deduct the current portion. This is the current portion of the long-term debt. So this is so the total debt that this company owes is 314,931. This is the total debt total long-term debt of this amount 60,619 this amount here which is I'm going to highlight in blue highlight in a different color. This amount here is due the next 12 months. So the total debt that's going to be with them later on after they make the payments next year is 254,312. And I used to do this a lot when I was in practice. Well I still practice little bit but I no longer have clients that have a lot of debt but for companies they might have six, seven different debts maybe sometime more but this is what you have to do. You have to break it down and you have to show if there's any collateral against that debt. The last section of the balance sheet is the owner's equity section. We're not going to really get into this because we're going to look at this later on in the tails when we get to chapter sorry when we get to chapter 16 but let's cover what we need to cover. When the company issues stocks they have to show if the company has a power value. So the power value or the stated value of the shares issued. So there's a power value. Let's see if there's an example. Oh there's an example for Las Vegas Sands Corporation. For example the power value is 0.001. So what does that mean? It doesn't really mean anything but if there's a power value they have to disclose the power value. They also have to disclose how many shares are authorized. So they are authorized to issue 50 million shares. Of those 50 million 3.6 million are issued and outstanding. It means they are sold. Actually this is the preferred stock. The common stock the power value is 0.001. The same as the preferred. They have a billion shares authorized. 707 million of them are rounding. 707 million are issued. Okay and this is the dollar amount. This is the dollar amount. So those are the common stock. Additional paid in capital is what the investors put into the company. So those accounts here. Preferred stock, common stock and paid in capital. Those are called capital contribution. And capital contribution is what the investors invested in the company. Okay so those three accounts shows that. Then so this is capital stock. We looked at the power value then additional paid in capital. Those are the capital contribution. So those two are considered capital. Represent capital contribution. Then what happened is the company will have another major category which is called retained earnings. Oops sorry. Okay and retained earning is the corporation. Let's do a different color. Retained earnings is the corporation and distribute earnings since the company started. So when the company makes a profit they can either distribute it or keep it. The amount that they keep from the earning is called retained earnings. So this is usually another main component of the balance sheet. The equity section. So this is the first main section which is contributed capital. I just highlighted in red. This is what the investors put into the company. Then retained earning is another major component of the equity section. Now you're saying so what's that in between? What's that in between? That's called accumulated other comprehensive income. We'll talk about that later on. It has to do with comprehensive income. It has to do with certain items that bypass the income statement for now. We'll look at those later on. Just know that there's something called other comprehensive income. Generally speaking is not a large component. And sometimes the company might have non-controlling interest. Non-controlling interest is the portion of the equity of the subsidiary not wholly owned by the reporting company. So basically what happened at some point what companies this Las Vegas Sands maybe they bought another casino and they purchased 95% of that casino. Some other casino. So there's 5% that they not own. So 5% of the company they don't own. So they have to show the non-controlling interest. The interest that they don't own which is represented that much. Why is it an equity? You don't have to worry about this. Just know that non-controlling interest you know what it is. It's the portion of the equity of the subsidiaries not wholly owned by the reporting company. Just know what it is. Eventually you will take advanced accounting and you will know exactly how to calculate this component. And let's take a look at this example and basically what we need to find out is a classification on the balance sheet. Where do these items goes on the balance sheet? Well let's start with the first one. If you have an investments in a preferred stock so you bought stocks well think about it investments. Well we need more information because remember an investments could be short-term and investments could be short-term or long-term investments. So for this it could be current or long-term investments. Treasury stock which we did not talk about it should have been listed here under equity. Treasury stock is an equity and treasury stock to be more specific it's a contra-equity. Contra-equity. What is treasury stock? Is when the company buys back its own stock. When it buys back its own stock. Common stock we already know it's part of stockholders equity. Cash dividend payable the word payable tells you what? It's a liability. And what type of a liability when the company promise to pay dividend they don't wait a year longer than a year to pay it. Usually they pay it fairly quickly so it's a current liability. Accumulated depreciation. This is a contra asset and it goes under the property plant and equipment. PP and E it's a long-term property plant and equipment. Interest payable we know from payable it's a liability. And when you owe someone interest they want it fairly quickly. A deficit a deficit and this is what they mean deficit in retained earnings. And remember retained earnings is that amount that we keep the profit but sometime what happened and we distribute all the profit and more than the profit that we incurred over the years. And what happened when we do this or we keep on on carrying losses and the retained earnings goes to zero there it goes negative zero. Once retained earnings goes below zero we call it deficit. Now trading securities this is easy. Trading securities is a current asset. And unearned revenue remember unearned revenue is the money that they paid us before we perform the service. When someone pays you this money they don't wait longer than a year for you to perform. So it's a current liability. Let's see what we have. Prepare the classified balance sheet using the report and the account format. So when we prepare a balance sheet we could use the account form or the report form. Okay. So the AICP indicated that all of the 500 survey companies either use the report form or the account form. Sometime collectively refer as the customer reform. Okay. That's fine. This is the report form. The presentation of the balance sheet meets the objective of the financial reporting to provide information about the entities, claims and resources. Obviously this is what we were talking about. This is the report format. At the end of this recording I'm going to invite you again to visit my website for head lecturers.com. Please like this recording, share it. And if you are again if you have a CPA prep course that's fine you can keep your CPA prep course but you might need additional explanation. I do provide you with additional explanation. Your CPA exam is 20 to 40 year investment. Don't shortchange yourself. My subscription is nominal based on the value and based on the long-term investment that you're going to be making in yourself by passing the exam. So go ahead pass the exam, put it behind you, study hard and most importantly stay safe.