Balance Sheet, Statement of Cash Flow

Balance Sheet aka Statement of Financial Position

 

It is the summary of the financial position of a company at a particular date.

 

Format:

 

Joon Kang, Inc.

Balance Sheet

December 31, XXXX

 

Note: It doesn't always have to be year-end, it can be done monthly, quarterly, twice a year, etc. Balance sheet is always of a specific date because cash position can change daily depending on how much money is taken out or deposited.

 

This statement reports three of the following: Assets, Liabilities, Owner's Equity.

 

1. Asset: Cash, Accounts Receivables (A/R), Inventory, Land, Buildings, Equipment, and Intangible Items (such as company good will, brand name value, trademark.
   
   1. Liquidity – How fast you can turn an asset into cash (current assets). Examples are cash (most liquid), always listed first, and followed by marketable securities, short term investments, A/R & inventory. This is the order current assets should be listed on the Balance Sheet.
      
   2. Plant, property and equipment aka Long Term Assets: In place to help company generate revenues.
      
      1. Equipment – For example, I need a printing press to print books, and need this asset for more than a year. Not a current asset, not looking to sell it right away, need it to generate revenue.
         
   3. Other assets aka intangible assets, copyrights, patents, trademarks, goodwill, items you can't touch physically.
      
2. Liabilities aka Company's obligations. Accounts Payable (A/P), Salaries payable, taxes payable, unearned sales revenue, notes payable and mortgage payable (you can omit payable for most of these): Liabilities/Obligations are broken up into two terms, current (paid off in a year or less) and long term (paid off in over a year). Can be listed by amount or alphabetically, none the less they are separated by 2 sections.
   
3. Current Liabilities vs. Long Term Liabilities:
   
   1. Unearned sales revenue vs. Sales revenue.
      
      1. Unearned sales revenue: Anything with the word "Unearned" will always be a liability. Will show up on balance sheet as an obligation to perform a future service or provide a product for sale, in other words you already received money for a product or service you offer and you haven't performed the service yet, until that obligation is fulfilled you can't claim the revenue.
         
      2. Sales Revenue will show up on the income statement. Obligation has been fulfilled, so the income/revenue can be claimed.
         
   2. Salaries (payable): Current liabilities, people want their paycheck ASAP, monthly (very common in Asia), bi-weekly (most common in the USA), or weekly (common in most union shops in the USA).
      
   3. Accounts Payable (A/P): Normally a 30 day promise to pay the supplier (in most cases) for services/products offered. Very informal.
      
   4. Notes (Payable): It can be long term liability or a current liability (short term), It can be a 90 day note (current) or a 3 year note (long term), more formal, will have interest attached to it
      
   5. Mortgage (Payable): Mostly long term, 15 to 30 years. For example:
      
      1. Year 1: Current Liability
         
      2. Years 2 and more = Long Term Liability.
         

      So, it's possible to see Mortgage payable to be split, what's due this year may be posted in current liabilities and years 2 and on to be listed on long term liabilities.
      

4. Net Assets = Total Assets – Total Liabilities = Net Assets (aka Owner's Equity).
   
   1. Owner's Equity = The net assets after all obligations have been satisfied.
      

 

1. The Accounting Equation:
   

   Assets = Liabilities + Owner's Equity
   

   This is also known as Double Entry Accounting
   

        It is a system of recording transactions in a way that maintains the equality of the accounting equation. (Precursor to Debits & Credits).
   

    In other words, the left side should equal the right side.

Statement of Cash Flow: Reports the amount of cash collected and paid out by a company in operating, investing, and financing activities. In other words Cash inflow and cash outflow.

1. Cash Inflow: How did the company receive cash?
   
   1. Sell goods or services.
      
   2. Sell other assets or by borrowing. Sell old equipment or assets no longer needed.
      
   3. Receive cash from investments by owners. Selling of securities.
      

1. Cash Outflow: How does the company utilize its cash.
   
   1. Pay operating expenses. Rent, utilities, etc.
      
   2. Expand operations, repay loans. Building a new factory or upgrading.
      
   3. Pay owners a return on investment. Dividends.
      

It's the attempt of quantifying Cash flow.

1. Types of Activities:
   
   1. Operating Activities: Day to day activities. (Inventory, taxes, loan interest, rent, utilities, sales)
      
   2. Investing Activities: Buying and selling long-term assets. (Property and equipment, long term assets from Balance Sheet)
      
   3. Financing Activities: Cash is obtained from or repaid to owners and creditors. (Payment of principles of loan, dividends, selling securities).
      

 

Hope this helps you out, happy studying and if you have any questions please feel free to email me.

 

 

Joon