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July 31, 200X
They consist of current assets of cash and accounts receivable (amounts due from customers) and property, plant, and equipment consisting of delivery equipment and office equipment. Current assets consist of cash and other short-lived assets reasonably expected to be converted into cash or to be consumed or used up in the operations of the business within a short period, usually one year. Property, plant, and equipment refers to relatively long-lived assets that are to be used in the production or sale of other assets or services rather than being sold.
Liabilities are the debts owed by a firm. Typically, they must be paid at certain known moments in time. The liabilities of the PROFF Company are both relatively short-lived current liabilities. They consist of accounts payable (amounts owed to suppliers) and notes payable (written promises to pay) totaling $3,600. Other firms may have long-term liabilities on their balance sheets. Such long-term liabilities could include mortgages or bonds due in periods beyond one year.
The PROFF Company is a corporation. It is customary to refer to the owners’ interest in a corporation as stockholders’ equity. The PROFF Company’s stockholders’ equity consists of $30,000 paid in for shares of capital stock and retained earnings (earnings not paid out to stockholders) of $2,070. The balance sheet heading includes the name of the organization, the title of the statement, and the date of the statement, also note that the claims upon or interests in assets equal the assets. Every transaction affects at least two items and preserves the fundamental equation: Assets = Liabilities + Owner’s equity. The dual-aspect concept is evident from the fact that the assets listed on the left-hand side of a balance sheet are equal in total to the liabilities and shareholders’ equity listed on the right-hand side.
Because of the dual-aspect concept, the two sides necessarily add up to the same total. This equality does not tell anything about the company’s financial health. The label “balance sheet” can give an impression that there is something significant about the fact that the two sides balance. This is not so; the two sides always balance.
An alternative practice is to list assets at the top of the page and to list liabilities and owner’s equity beneath them. The former format is called the account form, and the latter is called the report form of balance sheet.
b. Decide whether the following statements are true or false. Account for your decision:
1. Companies give information about their financial situation in financial statements. The balance sheet shows the company’s assets – the things it owns; its liabilities – the money it owes and its revenue at the end of the reporting period.
2. The balance sheet shows the financial position of the economic entity at the particular moment in time. So the balance sheet is a status report rather than a flow report.
3. Property, plant, equipment and cash are long-lived assets.
4. Accounts payable, notes payable, mortgages, bonds are the debts owned by a firm.
5. The dual-aspect concept means that the assets listed on the left-hand side of a balance sheet are equal in total to the liabilities and shareholders’ equity listed on the right-hand side.