Balance Sheet - Presentation of Assets
Assets
presented in decreasing order of liquidity
most liquid assets are shown first
least liquid assets are shown last
Cash
reconciled cash in bank
where the company has reconciled its cash records with the bank's cash records
In a perfect world, how would the financial analyst want everything valued on the balance sheet?
at the fair market value as of the balance sheet date
Domestically, what depreciation method is being used to depreciate PP&E for financial reporting purposes?
most U.S. companies use straight-line depreciation for financial reporting purposes
Formula for Average Depreciable Life
Average Depreciable Assets (Gross Amount) / Depreciation Expense
Liabilities
presented in increasing order of maturity
current liabilities shown first
long-term liabilities shown after
Marketable securities
short-term investments in stocks and bonds
shown on balance sheet at the fair market value on the balance sheet date
Long-term Investments in Stocks and Bonds
shown at fair market value as of the balance sheet date
management's intent at the time the investment was made is the difference between short-term and long-term
Domestically, what depreciation method is being used to depreciate PP&E for tax purposes?
most U.S. companies use a very accelerated depreciation method for tax purposes
Formula for Age of Depreciable Assets
Accumulated Depreciation at Year End / Depreciation Expense
Stockholders' Equity
presented in decreasing order of permanence
more permanent accounts shown first
less permanent accounts shown last
Accounts receivable
shown on balance sheet at net realizable value
Long-term Investment in Real Estate
shown at historical cost
not the property where HQ or manufacturing or inventory storage is located
this is about real estate acquired purely for speculative reasons
Internationally, how is depreciation typically recorded?
they typically use an accelerated depreciation method for financial reporting and tax purposes
Formula for Depreciation Expense Difference
Change in the Deferred Tax Liability related to PP&E / Tax Rate
What are typically the more permanent accounts in stockholders' equity?
common stock
additional paid in capital
Inventory
shown at lower of cost or market
typically cost (the cost of inventory is less than the fair market value of inventory at the balance sheet date)
Property, Plant & Equipment
these are our current operating assets
- this is the land and the buildings where HQ and manufacturing and inventory are located
shown at historical cost
- this is a PROBLEM
- reliable, but not very relevant number
What are the factors that can impact the depreciable life chosen by a company?
Composition of Assets
Impact of Leasing Transactions
Reporting Tendencies
What is the difference between PP&E and depreciable assets?
LAND
Land is included in PP&E
Land is not a depreciable asset (not depreciable because it has an indefinite life)
What are typically the less permanent accounts in stockholders' equity?
last item listed is typically retained earnings
due to the fact that if/when a company declared dividends, those dividends are reductions in retained earnings
Prepaid Expenses
shown at their unexpired balance
most financial analysts don't care - it's usually an immaterial amount
Intangible Assets
shown at fair market value
When considering how old the PP&E is, how would you determine if the historical cost information is reflective of fair market value or a decent surrogate for market value?
If the number (age of depreciable assets/age of historical cost information) is 2-4 years or less and the rate of inflation during that time period has been very low, then it is probably a decent surrogate for fair market value
If that's not the case, you would say you would have a number for PP&E on the balance sheet that is very reliable, but not relevant
What information does the age of the PP&E provide to the financial analyst?
the age of the PP&E can provide information to the financial analyst about the timeline for replacing existing PP&E
- not growing, but maintaining
- key words: REPLACING EXISTING PP&E