Chapter Two - Wiley

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8956d_ch02.qxd 7/17/03 2:40 PM Page 58 mac34 Mac34: kec_420: 58 CHAPTER 2 A Further Look at Financial Statements Illustration 2-3 Standard balance sheet classifications Assets Current assets Long-term investments Property, plant, and equipment Intangible assets Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity These groupings help readers determine such things as (1) whether the company has enough assets to pay its debts as they come due, and (2) the claims of short- and long-term creditors on the company’s total assets. Many of these groupings can be seen in the balance sheet of Franklin Corporation shown in Illustration 2-4. Each of the groupings is explained next. Illustration 2-4 Classified balance sheet FRANKLIN CORPORATION Balance Sheet October 31, 2005 Assets Current assets Cash $ 6,600 Short-term investments 2,000 Accounts receivable 7,000 Inventories 4,000 Supplies 2,100 Prepaid insurance 400 Total current assets $22,100 Long-term investments Investment in stock of Walters Corp. 5,200 Investment in real estate 2,000 7,200 Property, plant, and equipment Land 10,000 Office equipment $24,000 Less: Accumulated depreciation 5,000 19,000 29,000 Intangible assets Patents 3,100 Total assets $61,400 Liabilities and Stockholders’ Equity Current liabilities Notes payable $11,000 Accounts payable 2,100 Salaries payable 1,600 Unearned revenue 900 Interest payable 450 Total current liabilities $16,050 Long-term liabilities Mortgage payable 10,000 Notes payable 1,300 Total long-term liabilities 11,300 Total liabilities 27,350 Stockholders’ equity Common stock 14,000 Retained earnings 20,050 Total stockholders’ equity 34,050 Total liabilities and stockholders’ equity $61,400
8956d_ch02.qxd 7/17/03 2:40 PM Page 59 mac34 Mac34: kec_420: CURRENT ASSETS Current assets are assets that are expected to be converted to cash or used up by the business within one year. In Illustration 2-4 Franklin Corporation had current assets of $22,100. For most businesses the cutoff for classification as current assets is one year from the balance sheet date. For example, accounts receivable are included in current assets because they will be converted to cash through collection within one year. Supplies is a current asset because we expect that it will be used up by the business within one year. Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. For most businesses this cycle takes less than a year, so they use a one-year cutoff. But, for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Except where noted, we will assume that one year is used to determine whether an asset or liability is current or long-term. Common types of current assets are (1) cash, (2) short-term investments, such as short-term U.S. government securities, (3) receivables (notes receivable, accounts receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (insurance and supplies). On the balance sheet, these items are listed in the order in which they are expected to be converted into cash. Illustration 2-5 presents the current assets of The Coca-Cola Company. The Classified Balance Sheet 59 THE COCA-COLA COMPANY Balance Sheet (partial) (in millions) Illustration 2-5 Current assets section Current assets Cash and cash equivalents $1,866 Short-term investments 68 Trade accounts receivable 1,882 Inventories 1,055 Prepaid expenses and other assets 2,300 Total current assets $7,171 A company’s current assets are important in assessing its short-term debtpaying ability, as explained later in the chapter. LONG-TERM INVESTMENTS Long-term investments are generally investments in stocks and bonds of other corporations that are normally held for many years. It also includes investments in long-term assets such as land or buildings that are not currently being used in the company’s operating activities. In Illustration 2-4 Franklin Corporation reported total long-term investments of $7,200 on its balance sheet. Yahoo! Inc. reported long-term investments in its balance sheet as shown in Illustration 2-6. Alternative Terminology Long-term investments are often referred to simply as investments.
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Chapter Two - Wiley

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