Abstract
This chapter on the balance sheet and the following one on the income statement are designed to serve two modest purposes: to acquaint the student with accounting and financial terminology and concepts used throughout the book and to explain the two important accounting statements on an uncomplicated level so that the student can appreciate and use some of the information presented by the accountants. It is not the purpose of these chapters to review all the procedures of accounting.
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Notes
- 1.
Essentially unrealized profits are ignored but unrealized losses affect the accounting results.
- 2.
White, Sondhi, and Fried (1997), pp. 274–275.
- 3.
White et al. (1997), pp. 289–290.
- 4.
This constitutes “historical cost depreciation” in contrast to, say, “replacement cost depreciation,” where allowance might be made for changes in current costs.
- 5.
On the other hand, a fall in price levels would enable a firm to increase its physical capacity through the reinvestment of depreciation allowances.
- 6.
Sloan (1996) and Richardson, Sloan, Soliman, and Tuna (2001) have shown that accrual’s provide information about earnings’ quality. Inventory accruals, the primary source of asset accruals, and accounts payables, the primary source of liability accruals, convey information. Richardson et al. (2001) showed that the setting of accruals, asset accruals less liability accruals, is an important source of financial information. Nondiscretionary accruals, accruals associated with sales growth and the level of firm operating activities, convey information regarding earnings quality. Accrual information influences information attributable to efficiency. Sloan uses FASB 95 to define accruals as the difference between net income and cash flows from operating activities. Sloan (1996) found that stocks with extreme accruals have less persistent earnings and experience mean reversion in the next year’s earnings.
- 7.
This matter is taken up again in chapter “Long-Term Debt” on Bonds.
- 8.
They may be called the proprietorship account in a single proprietorship or the partner’s equity in a partnership.
- 9.
In bank balance sheets, the equivalent to the unappropriated earned surplus account is entitled undivided profits. The bank’s surplus account consists of capital surplus plus the retained earnings that are considered permanently committed to the business.
- 10.
To add to the beginner’s confusion, current operating losses are often called operating deficits, or just deficits.
- 11.
Because we use current liabilities and long-term debt in the TDTA calculation, and not total liabilities, the TDTA and SEQTA may not sum to 100%. Current liabilities and long-term debt represent the vast majority of total liabilities.
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Guerard, J.B., Saxena, A., Gultekin, M. (2021). The Corporation Balance Sheet. In: Quantitative Corporate Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-43547-9_3
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