slp week 2 assist

Module 2 - Case

The Balance Sheet

Assignment Overview

The background material for this module explains and shows examples of balance sheets. Pay attention to the layout and definitions before reviewing the balance sheet the for ABC Company shown below.

This assignment has two parts. 

1. An essay

2. Answer 10 questions relating to ABC’s balance sheet.

Case Assignment

Part 1

Write a minimum of 300 words about the role of the balance sheet as one of the four required financial statements.

· Comment on some significant characteristics of the balance sheet.

· Who is interested in the information?

· What kind of information does the balance sheet convey to users?

Part 2

Review the background material for the second module before attempting the case below in order to answer a series of questions about the balance sheet for ABC Company shown below. Start with the accounting equation and pay attention to definitions of assets, liabilities, and equity.

The background information for the module includes the basic concepts, but for more ideas, go to the optional background source principlesofaccounting.com . The site also offers multiple videos that you may find relevant. You may also use other sites for ideas to complete the table. Do not forget to reference the sources used.

Find the balance sheet for ABC Company below. The data is to be used for part 2 of the current case assignment and the SLP for this module.

The Balance Sheet

Part 1

The balance sheet is one of the financial statements that shows the financial position of the company. The balance sheet reports the assets, liabilities, and shareholder’s equity of the company (Bobryshev et al., 2014). This is at a certain period of time. The transactions recorded in the balance sheet are recorded in two sides, one sides consists of assets while the other side consists of liabilities. The two sides have to be equal for the statement to show the true financial position of the company. The balance sheet is a perioding statement which is prepared at the end of a particular period. Therefore, it shows the financial position of the company at that specific period of time. The balance sheet is usually prepared after the income statement making it a complementary statement to the income statement.

There are common users of the balance sheet who include the management of the company and others. The management of the company are the first to use the balance sheet. The management decisions are made based on the data on the balance sheet. The management has to refer to the balance sheet when looking at the progress of the company (Warren, 2012). The investors of the company also use the balance sheet for investment decisions. The balance sheet will determine whether they continue investing in the company or move out of the company. The customers are among the users of the balance sheet. The customers would want to transact with companies that are financially stable. They are aware that financially stable companies would be able to provide the customers with credit. Competitors also look at the balance sheet of the competition to know the financial health of their competitors.

The balance sheet shows the assets, liabilities, and the owner’s equity net worth. The assets are items of value for the company capable of meeting their obligations. The balance sheet shows whether the company is able to meet its debt obligations. The balance sheet also shows the liquidity position of the company.

Part 2

   Answer each question below and explain your answer with numbers, computations, and 3 to 5 sentences. 

1. Determine total assets and total liabilities for ABC Company. Add some thoughts about the significance of the classifications.

Total assets = $ 292,000

Total Liabilities = $ 136,000

The total assets are a representation of the company’s worth. This is based on the definition of an asset which is what is owned by the company. ABC has tow parts f liabilities, long-term and current liabilities. Current liabilities are short-term obligations of the company while long-term liabilities are long-term obligations like debentures.

2. Complete the accounting equation below using numbers from ABC’s balance sheet instead of words. In addition, explain how this equation is significant for the creation and understanding of the financial statements. Assets = Liabilities + Equity

$ 292,000 = $ 136,000 + $ 156,000

This is the basic accounting formula used to determine the financial health of a business. The formula gives an understanding of the balance sheet. Equity is the net worth of the business while the liabilities is what the business owes. The two should equal the total assets.

3. Are short-term payables or receivables larger? Show the computation. Explain the significance of the difference.

The short-term payables (48,000+8,000) are larger than the receivables (21,000+1,000). The significance of the financial health of the company. The financial health of ABC is not good as the short-term payables exceed the receivables. The payables show what the company owes while the receivables what the company should receive. The funds coming to the business are lower than what the business owes.

4.  Is the order in which assets and liabilities are listed on the balance sheet significant? Explain.

The assets and liabilities are usually listed in the balance sheet according to permanence and liquidity. This is the amount it would take to convert the assets into cash. Liabilities are usually listed according to maturity.

5. Determine the total amount owed by ABC at the end of the year. How could this information be useful to a reader of the balance sheet?

The amount owed by ABC at the end of the year is (48,000+8000+80000) $ 136,000. This information allows the user of the balance sheet to know the liabilities of the company. The understanding helps in determining the financial stability of the company.

6. Does the company have more assets or liabilities? What is the significance of determining the difference between net assets and net liabilities? What happens to a company if the total liabilities exceed the total assets?

ABC has more assets than liabilities. Determining the difference will show the net worth of the company. ABC has a positive net worth because their assets exceed their liabilities. If the liabilities exceeded the assets, then the net worth, I negative which means the company is having financial problems.

7. If the company borrows an additional $15,000, which two balance sheet accounts will be affected? The new totals for total assets and total liabilities are?

The two accounts that will be affected are cash and loans for either long-term liabilities or short-term liability depending on the duration of the loan. The new total assets will be $307,000 and the total liabilities will be $ 151,000.

8. Explain retained earnings. How is this accounting computed? Is retained earnings an asset, a liability, or an equity account?

Retained earnings are historic profits of a business that have not been paid out as dividends (Ball et al., 2020). It is calculated by adding net income to (or subtracting in case of loss) the previous year’s retained earnings and subtracting any dividend paid to shareholders. Retained earnings is an equity account.

9. What is the “total wealth” of the company according to the balance sheet? What are some other accounting terms for “wealth” in connection with corporate entities? For example, retained earnings account fits this category, but it is not the only account.

The “total wealth” of the company is calculated by subtracting the total assets from the total liabilities.

Total assets (92,000 + 21,000 + 1,000 + 50,000 +128,000) = 292,000

Total liabilities (48,000 + 8,000 + 80,000) = 136,000

Total wealth = 292,000-136,000 = $ 156,000

Net worth can also be used in measuring the wealth of the company. It also represents the value of assets less the liabilities.

10. Assume that the company paid $20,000 in dividends to the shareholders. Which balance sheet accounts (items) would have been affected by the payment? Use numbers and be specific.

The two accounts that will be affected are cash and retained earnings. The cash and retained earnings account will be reduced by $ 20,000. The cash account on the asset side will reduce by $ 20,000 and the retained earnings on the equity side will also reduce by $ 20,000.

References

Bobryshev, A. N., Uryadova, T. N., Lyubenkova, E. P., Yakovenko, V. S., & Alekseeva, O. A. (2014). Analytical and management approaches to modeling of the accounting balance sheet. Life Science Journal, 11(8), 502-506.

Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2020). Earnings, retained earnings, and book-to-market in the cross section of expected returns. Journal of Financial Economics, 135(1), 231-254.

Warren, K. (2012). Developing a government's balance sheet—does it improve performance? Public Money & Management, 32(1), 9-14.