Introduction to Management Accounting Chapter 16, learning objectives 1 and 2 5 main sections of a balance sheet: current assets noncurrent

assets current liabilities noncurrent liabilities shareholders equitiy

CURRENT ASSETS = cash & all other assets that a company reasonably expects to convert to cash / sell to consume within one year or during the normal operating cycle = the time span during which it spends cash or acquire goods and services that it uses to produce it outputs, which in turn it sells to customers who pay with cash 1. cash 2. cash accounts are investments that a company can easily convert into cash with little delay they represent an investment of excess cash that a company does not immediately need 3. short-term investments temporary investments in marketable securities such as stocks and bonds of other companies or debt securities issued by government 4. accounts receivable total amount owed to the company by it customers 5. inventories is merchandise held for sale 3 inventory accounts: - raw materials - goods in the process - finished products 3 methods to account: - FIFO - LIFO - weighted-average cost 6. deferred income tax 7. prepaid expenses

8. other current assets

advance payments to suppliers. usually small in relation to other assets. prepayment of rent and insurance premiums for coverage over the coming operating cycle miscellaneous current assets

NONCURRENT ASSETS 2 types: fixed assets or tangible assets physical items that a person can see and touch separate asset and carry at ORIGINAL cost invoice amount + freight and installation cash discount - depreciation

1. land 2. buildings/machinery

Why depreciation? -> This is meant to allocate the assets original cost to the particular periods that benefit from the use original cost - accumulated depreciation = net book value (result of allocation process) amount of depreciation depends on: depreciable amount useful life of asset depreciation method difference between total acquisition cost & estimated residual value depends more on technological changes than on physical wear&tear straight-line, accelerated, activity-based investments made by lessee in items such as painting a class of long-lived assets that are not physical in value. they are rights to expected benefits

3. leasehold improvements intangible assets

1. trade marks 2. goodwill 3. patents 2 categories: those with definite lives and those with indefinite lives. costs of definite-life intangible assets: amortization (same as depreciation) costs of indefinite-life intangible assets: none

CURRENT LIABILITIES are an organizations debts that fall due within the coming year or within the normal operating cycle if longer than a year. 1. current portion of long-term debt payments due within the next year or bonds and other long-term debt 2. notes payable short-term debts backed by formal promissory notes held by a bank or business creditors 3. accounts payable amounts owed to suppliers who extended credit for purchases on open account 4. accrued liabilities amounts owed for wages, salaries, interest and similar items 5. income taxes payable special accrued liability of enough magnitude to warrant a separate classification working capital = current assets current liabilities. Investors watch working capital carefully to assess whether a company has enough current assets to pay current liabilities as they come due NONCURRENT LIABILITIES also called long-term liabilities, are an organizations debts that fall due beyond one year two identified noncurrent liabilities: 1. long term debt may be secured or insecured. Secured debt provides debt holders with first claim on specified assets. mortgage bonds are an example. If the company is unable to meet its regular obligations on the bonds, it may sell the specified assets and use the proceeds to pay off the firms obligations to its bondholders, in which case secured debt holders have first claim to these proceeds Unsecured debt consist of debentures (bonds, notes, loans), which are formal certificates of indebtedness accompanied by a promise to pay interest at a specified annual rate. unsecured debt holders are general creditors who have a general claim against total assets rather than a specific claim against particular assets Holders of subordinated bonds or debentures are junior to the other creditors in exercising claims against assets 2. deferred income taxes expected increases in future income taxes that arise because of past transactions