Financial Reporting – 3rd Marking Period The Balance Sheet

Financial Reporting – 3rd Marking Period The Balance Sheet (200 pts .)

This assignment focuses on your company’s balance sheet. It will be broken into two sections: Current Assets & Current Liabilities and Long-term Assets. Upon completion, you should understand your company’s holdings of current assets and current liabilities and how well your company manages them.

Briefly describe the properties of current assets and current liabilities. Identify the changes in current asset and current liability accounts during the most recent accounting period, including additional items on your company's balance sheet. Discuss significant changes, whether any are troubling, and implications if you were an owner or creditor.

Provide detailed information regarding sales, accounts receivables, allowance for bad debts, and analyze whether changes in receivables and bad debts are similar to changes in sales. Discuss the implications of any differences observed.

Provide detailed information regarding cost of goods sold and inventories, including categories like raw materials, work in process, and finished goods. Analyze whether inventory changes align with changes in cost of goods sold and discuss implications. Also, list inventory valuation methods used and explain whether inventories are reported using lower-of-cost-or-market.

Calculate and compare four ratios (current ratio, quick ratio, receivables turnover, and inventory turnover) for the most recent year and the prior year. Discuss trends and conclusions. Compare these to ratios of a key competitor.

Identify significant changes in your company’s long-term asset accounts during the most recent year, referencing the notes to financial statements as needed. Summarize these changes and analyze depreciation valuation methods used, the estimated useful lives, and policies for intangible assets and natural resource assets. Describe whether your company has acquired or disposed of long-term assets recently.

Paper For Above instruction

The balance sheet is a fundamental financial statement that provides a snapshot of a company's financial position at a specific point in time. It details the company’s assets, liabilities, and shareholders’ equity, offering insights into its liquidity, solvency, and overall financial health. Analyzing these components allows investors, creditors, and management to assess operational effectiveness and financial stability.

Properties of Current Assets and Liabilities

Current assets consist of assets expected to be converted into cash, sold, or consumed within one year or within the operating cycle—whichever is longer. These typically include cash and cash equivalents, accounts receivable, inventories, and short-term investments. The primary property of current assets is liquidity, enabling the company to meet short-term obligations efficiently. Conversely, current liabilities are obligations due within the same period, such as accounts payable, accrued expenses, and short-term debt. The essential property of current liabilities is their short-term nature, which requires diligent management to prevent liquidity crises.

Changes in Current Asset and Liability Accounts

During the most recent accounting period, companies often experience fluctuations in their current assets and liabilities reflective of operational activities. For example, an increase in accounts receivable suggests higher sales or possible collection challenges, while a rise in inventories could indicate overproduction or lower sales. Similarly, a rise in accounts payable may imply extended credit terms or delayed payments, whereas an increase in accrued expenses indicates accumulating obligations. Observing these changes helps determine if the company is managing its working capital effectively. Troubling trends, such as declining cash or rising short-term debt, could prelude liquidity issues, warranting further investigation.

Management of Receivables

The management of accounts receivable directly impacts cash flow. An increase in receivables that does not match sales growth may signal issues in collection efficiency. Comparing the percentage change in receivables and allowance for bad debts with sales growth reveals whether receivables are being collected timely or if there's an increase in credit risk. For instance, a disproportionate rise in allowance for doubtful accounts compared to receivables could indicate deteriorating credit quality or potential collection problems, which might compromise liquidity and profitability.

Inventory Management

Effective inventory management aligns inventory levels with sales and cost of goods sold. An increase in inventory without a proportionate increase in COGS may suggest overstocking or reduced sales, potentially leading to obsolescence or increased holding costs. Conversely, declining inventories could signal efficient sales or stockouts, affecting revenue. Various inventory valuation methods—such as FIFO, LIFO, or weighted average—impact reported inventory values and cost of goods sold. Using lower-of-cost-or-market ensures conservative reporting, safeguarding against overstated inventory values.

Ratios Assessing Liquidity and Efficiency

The current ratio measures liquidity by dividing current assets by current liabilities; a ratio above 1 indicates short-term solvency. The quick ratio refines this by excluding inventories and prepaid expenses, focusing on the most liquid assets. Accounts receivable turnover shows how efficiently receivables are collected; higher turnover indicates prompt collection. Inventory turnover measures how often inventory is sold and replaced; higher ratios suggest efficient inventory management.

Trend analysis of these ratios over two periods reveals whether the firm’s liquidity and operational efficiency are improving or deteriorating. Comparing these ratios to a main competitor provides context—highlighting strengths or vulnerabilities in asset management practices.

Long-term Assets Analysis

Long-term assets include property, plant, equipment, intangible assets, investments, and natural resources. Changes in these assets may reflect acquisitions, disposals, or depreciation. Notably, accumulated depreciation accounts for declines in value over time, based on depreciation methods such as straight-line, declining balance, or units of production.

Financial statements disclosures often specify useful lives, depreciation policies, amortization methods for intangible assets, and depletion policies for natural resources. For example, a firm might use straight-line depreciation over 10 years for machinery and amortize patents over their estimated useful lives. Understanding these policies provides insight into how asset values are reported and how depreciation affects net income. Recent acquisitions or disposals indicate strategic growth or divestiture activities, which can significantly impact the company's future prospects.

Conclusion

Maintaining a well-balanced mix of current and long-term assets, along with effective management of liabilities, is essential for financial health. Analyzing the balance sheet and related ratios provides valuable insights into operational performance, liquidity, and investment strategies. Continuous monitoring and strategic decision-making based on these analyses enable companies to sustain growth and withstand financial challenges effectively.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
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• Lev, B., & Zarowin, P. (1999). The Boundaries of Financial Reporting and How to Extend Them. Journal of Accounting Research, 37(2), 353-385.