Chapter 3 – Balance Sheet and Financial Disclosures

For many years, the income statement was the dominant financial statement for external decision making.  Earnings per share and revenue recognition were topics of great interest to the standard-setting bodies.  The financial press regularly reports on quarterly earnings and annual earnings of large corporations.  This, however, only tells part of the financial story of a company.  What is the company doing with its income?  How is the company being financed?  How far in debt is the company?  How liquid are a company’s assets?

To answer these, and other questions, the external user has to focus on the balance sheet.  Also known as the statement of financial position, the balance sheet reports on the resources of a company (assets), its obligations (liabilities) and the residual ownership claims against its resources (equity).  By analyzing the relationships among these items, investors, creditors and others can assess a firm’s liquidity, i.e., its ability to meet short-term obligations, and its solvency, i.e., its ability to pay all current and long-term obligations as they come due.

Chapter 3 focuses on the balance sheet, the manner in which the assets, liabilities and equity are presented, and the uses of this information.

The narrated PowerPoint lecture for this chapter has been broken into two parts.  Part 1 focuses on the actual statement and how it is prepared.  Part 2 looks at financial disclosures which are integral to understanding the balance sheet information.  The narrated PowerPoint lectures and solutions to selected exercises and problems can be found here.  This content can be viewed on both a computer and an IOS/Android device.

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