FA Module 4: The balance sheet (statement of financial position) – overview

(The attached PDF file has better formatting.)

Reading: chapter 5, “Understanding Balance Sheets,” excluding

●    Example 2 (analysis of inventory)
●    Example 3 (analysis of deferred revenue)
●    Example 5 (goodwill impairment)
●    Exhibit 16 (Apple’s statement of changes in shareholders’ equity)
●    Exhibit 18 (common-size balance sheet statistics for the S&P 500 by S&P / MSCI GICS sector)
●    Example 7 (cross-sectional common-size analysis)

The measurement base of assets and liabilities – historical cost vs fair value – affects most modules. GAAP uses historical cost (or depreciated cost or amortized cost) for fixed assets; IFRS allows fair value for some fixed assets. Both GAAP and IFRS use a mix of historical cost and fair value for financial asset and liabilities.

This chapter uses the GAAP terms to classify financial assets. The IFRS 9 classification is somewhat different and is covered in a later module.

For some items, the balance sheet uses fair value and the income statement uses historical cost, with the difference reported in other comprehensive income.

●    Unrealized capital gains and losses are on the balance sheet and other comprehensive income, but not on the income statement.
●    Foreign currency translation causes a translation adjustment on the balance sheet (other comprehensive income) with the current rate method, but a remeasurement gain or loss on the income statement (flowing to retained earnings on the balance sheet) with the temporal method.

Know the classification of the components of equity in §6.1. These six components are discussed in several modules.

Know the balance sheet ratios in §7.2. Final exam problems often require you to compute financial ratios.

Final exam questions also deal with

●    Classification of assets and liabilities: current vs non-current
●    Tangible vs intangible assets: trademarks, patents, copyrights, goodwill
●    Statement of changes in shareholders’ equity
●    Common-size analysis
●    Simple versus complex capital structures; financial leverage (explained in the income statement module)