Video Transcript: A Classified Balance Sheet

Hello and welcome back now we're going to talk about our classified balance  sheet. The balance sheet we presented so far have been unclassified balance  sheets. An unclassified balance sheet has three major categories, assets,  liabilities and stockholders equity. A classified balance sheet contains the same  three major categories and subdivides them into to provide useful information for interpretation and analysis by users of financial statements. The exhibit below  shows a slightly revised classified balance sheet for the Home Depot  incorporated and sub and subsidiaries. Note that the Home Depot classified  balance sheet is in a vertical format rather than the horizontal format. The two  formats are equal. Are equally acceptable. The Home Depot classified balance  sheet. Subdivides two of its three major categories. The Home Depot subdivides its assets into current assets, property and equipment, long term investments,  long term notes, receivable, intangible assets, which is a cost in excess of the  fair value of net X assets acquired and other assets. The company subdivides its liability into current liabilities, long term liabilities, and that includes deferred  income taxes. A later chapter describes minority interests, Stockholders equity is the same in a classification balance sheet as it is in an unclassified balance  sheet. Later chapters describe further subdivisions of the stockholders equity  section. We discuss the individual items in the classified balance sheet later in  the text, our only purpose here is to briefly describe the item that can be listed  under each category. Some of these items are not in the Home Depot balance  sheet. So as you can see, you have, you have your your your major  classification asset, and then underneath that, you have some current assets,  which include your cash or cash equivalents, which you could have several  checking accounts. You can just have petty cash, would all fall underneath that.  And then you have any investments receivables, which is your accounts  receivables, merchandise, your inventory, property and equipment, buildings,  furniture, capital leases, depending on what your business is comprised of,  okay? And then, with any s, with any property other than land, you have your  depreciation on that property, which you see here, less accumulated  depreciation. And then you have your total assets. And then, and under your  liabilities, as you can see, you have some salaries, sales tax, income tax,  payable any long term debt, that you have any kind of debt, short term, long  term debt. And then, of course, your stockholders equity. And that comprises of  your, again, you have your your stockholders equity, and depending on what  kind of stock you're going to issue, common or preferred is listed under your  stockholder equity, okay, any paid in capital, which we can talk about later. And  then, for a final balance, your total liabilities will balance to your assets. Current  assets are cash and other assets that a business can convert to cash or use up  in a relatively short period, one year or one operating cycle. Whichever is longer, an operating cycle is the time it takes to start with cash buy necessary items to  produce revenues, sell services or goods and receive cash by collecting the 

resulting receivables. Companies in service industries and merchandising  industries generally have operating cycles shorter than one year. Companies in  some manufacturing industries such as distilling and lumber have operating  cycles longer than one year. However, since most operating cycles are shorter  than one year, the one year period is usually used in identifying current assets  and current liabilities. Common current assets in a service business include  cash, marketable securities, accounts receivable, notes receivable, interest  receivable and prepaid expenses. Note that on the balance sheet, current  assets are in order of how easily they are convertible or unconverted into cash.  Cash from most liquid to least liquid. Cash includes deposits and banks  available for current operation at the balance sheet date, plus cash on hand,  consisting of currency, undeposited checks, drafts, money orders. Cash is the  first current asset to appear on a balance sheet, the term cash normally includes cash equivalencies. Cash equivalents are highly liquid short term investments  acquired with temporary idle cash and easily converted into a known cash  amount. Examples are treasury bills, short term notes maturing within 90 days,  certificates of deposit and money market funds. Marketable securities are  temporary investments such as short term ownership of stocks and bonds of  other companies. Such investments do not qualify as cash equivalents. These  investments earn additional money on on on cash that the business does not  need at present but will probably need within one year. Accounts receivable, you can is also known as trade. Accounts receivable are amounts owed to a  business by customers. An account receivable arises when a company performs a service or sells merchandise on credit customers normally provide no written  evidence of indebtedness on sell invoices or delivery tickets except for their  signatures. Notice the term net in the balance sheet of the Home Depot exhibit  26 this term indicates the possibility that the company may not collect some of  the accounts receivable in the balance sheet, the accounts receivable amount is the sum of the individual accounts received from customers, showing the  subsidiary ledger or file. Merchandise inventories are goods held for sale. A note is an unconditional written promise to pay another party, the amount owed either when demanded or at a certain specific date, usually with interest at a specific  rate. A note receivable appears on the balance sheet of the company to which  the note is given. A note receivable arises one when a company makes a sale  and receives a note from the customer, or when a customer gives a note for an  amount due on an account receivable, or when a company loans money and  receives a note in return, unit unit 10 will discuss notes that in more length.  Other current assets might include interest receivable and prepaid expenses,  interest receivable arises when a company has entered but not collected interest by the balance sheet date, usually the amount is not due until later. Prepaid  expenses include rent, insurance, supplies that have been paid for, but all the  benefits have not yet been realized or consumed from their from these 

expenses. If prepaid expenses had not been paid for in advance, they would  require the future disbursement of cash. Furthermore, prepaid expenses are  considered assets because they have service potential long term assets are  assets that a business has on hand or uses for a relatively long time. Examples  

include property, plant and equipment, long term investment and intangible  assets. Property, plant and equipment are assets with useful lives of more than  one year. A company acquires them for use in the business rather than for  resale. These accounts are called property and equipment in the Home Depot's  balance sheet, the terms plant assets or fixed assets are also used for property,  plant and equipment to agree with the order in the heading balance sheets  generally list property first, plant Next, and equipment last, these items are fixed  assets because the company uses them for long term purposes. We discuss  several types of property, plant and equipment. Next, land is the ground that the  company uses for business operations. This includes ground on which the  company locates its business buildings and that is used for outside storage  space or parking land owned for investment is not a plant asset because it is a  long term investment. Buildings are structures the company uses to carry on its  business again, the buildings that a company owns as investments are not plant assets. Office furniture includes file cabinets, desk chairs and shelves, office  equipment includes computers, copiers, fax machines, phone answering  machines, your lease hold improvements or any physical alterations made by  the lease releasee to the lease property when these benefits are expected to  last beyond the current accounting period. It. An example is when the leasee  builds a room partitions in a leased building. The lessee is the one obtaining the  rights to possess and use the property. Construction in progress represents the  partial, partially completed stores or other buildings that a company, such as the  Home Depot plans to occupy when completed. Accumulated Depreciation is  called a contra asset account to depreciable assets, such as a building,  machinery and equipment. This account shows the total depreciation taken from the depreciable asset on the balance sheet companies deduct the accumulated  depreciation from its related asset. Long Term Investments usually consist of  securities of another company held with the intention of one obtaining a control  of another company, securing a permanent source of income for the investor or  establishing a friendly business relation, the long term investment classification  in the balance sheet does not include those securities purchased from short  term purposes. For most businesses, long term investments may be stocks or  bonds of other corporations. Occasionally, long term investments include funds  accumulated for specific purposes, rental properties and plant sites for future  use. Intangible assets consist of non current, non monetary, non physical assets of a business companies must charge the cost of intangible assets to expense  over the period. Benefited. Among the intangible assets are rights granted by  government bodies, such as patents and copyrights. Other intangible assets 

include leaseholds or goodwill. A patent is a right granted by the federal  government. It gives the owner of an invention the authority to manufacture a  product or to use a process for a specific time. A copyright granted by the  federal government gives the owner the exclusive privilege of publishing written  material for a specific period of time. And leaseholds are rights to use rented  properties, usually for several years. Accumulated amortization is a contra asset account to intangible assets. This account shows the total amortization taken on  the intangible assets for your current liabilities, there are debts due within one  year or one operating cycle, whichever is longer, the payment of current  liabilities normally require the use of current assets. Balance Sheets list current  liabilities in the order they must be paid. The sooner a liability must be paid, the  earlier it is listed. Examples of current liabilities are accounts payable, which are  amounts owed to suppliers for goods or services purchased on credit. Accounts  Payable are generally due in 30 or 60 days and do not bear interest in the  balance sheet, the accounts payable amount is the sum of the individual  accounts payable to suppliers shown in a subsidiary ledger or file. Notes  payable are unconditional written promises by the company to pay a specific  sum of money at a certain future date. The notes may arise from borrowing  money from a bank, from a purchase of an asset, or from the giving of a note  and settlement of an account payable. Generally, only notes, payables due in  one year or less are included as current liabilities. Salary payables are amounts  owed to employees for services rendered the company has not paid these  salaries by the balance sheet date, because they are not due until later. Sales  Tax Payable are the taxes a company has collected from customers but not yet  remitted to the taxing authority, usually, the state. Other accrued expenses might include taxes withheld from employees, income taxes payable and interest  payable. Taxes withheld from employees include federal income tax, state  income tax, Social Security withheld from employees, paychecks. The company  plans to pay these amounts to the proper governmental agencies within a short  period. Income taxes payable are the taxes paid to the state and federal  governments by a corporation on its income interest payable is interest that the  company has accumulated on notes or bonds but has not paid by the balance  sheet date because it is not due until. Later, dividends payable or amounts the  company has declared payable to stockholders represent a distribution of  income since the corporation has not paid these declared dividends by the  balance sheet date, they are a liability unearned revenues. These are revenues  received in advance result when a company receives payment for goods or  services before before earning the revenue, such as payments for subscriptions  to a magazine, these unearned revenues represent a liability to perform their  agreed service or other contractual requirements or to return the assets  received. Companies report any current installments on long term debt that is  due within one year under current liabilities, the remaining portion continues to 

be reported as long, long term liability. Long term liabilities are debts such as a  mortgage payable and bonds payable that are not due for more than one year.  Companies should show maturity dates in the balance sheet for long term  liabilities, normally, the liabilities with the earliest due dates are listed first notes  payable with maturity dates at least one year beyond the balance sheet. Date  are long term liabilities. Bonds payable are long term liabilities and are  evidenced by formal, printed certificates, sometimes secured by liens on  property, such as mortgages. Maturity dates should appear on the balance sheet for all major long term liabilities. The deferred income tax on the Home Depot's  balance sheet results from a difference between income tax expense and the  accounting records and the income tax payable on the company's tax return.  Stockholders equity shows the owner's interest in the business. This interest is  equal to the amount contributed plus the income left in the business. The items  under stockholders equity in the Home Depot's balance sheet are paid in capital, which includes common stock and retained earnings. Paid in capital shows the  capital paid into the company as the owner's investments, retained earnings  show the cumulative income of the company, less the amounts distributed to the owners in the form of dividends. Cumulative translation adjustments result from  translating foreign currencies into US dollars. That topic is discussed in advance accounting.