PArT 1: INTrODuCTION
TABLE 2.1 BALANCE SHEET FOR GLOBAL PETROLEUM CORPORATION
Global Petroleum Corporation balance sheets for the years ended 30 June 2015 and 2016 ($ in millions)Assets 2016 2015 Liabilities and shareholders’
equity2016 2015
Current assets Current liabilities
Cash and cash equivalents $ 440 $ 213 Accounts payable $ 697 $1,304
Marketable securities 35 28 Notes payable 477 587
Accounts receivable 1,619 1,203 Accrued expenses 440 379
Inventories 615 530 Total current liabilities $2,614 $2,270
Other (mostly prepaid expenses) 170 176 Long-term liabilities
Total current assets $2,879 $2,150 Deferred taxes $ 907 $ 793
Fixed assets Long-term debt 1,760 1,474
Gross property, plant and equipment $9,920 $9,024 Total long-term liabilities $2,667 $2,267
Total liabilities $5,281 $4,537
Less: Accumulated depreciation 3,968 3,335 Shareholders’ equity
Preferred shares $ 30 $ 30
Net property, plant and equipment $5,952 $5,689 Ordinary shares ($1 par value) 179 185
Intangible assets and others^758 471 Paid-in capital in excess of par 442 386
Net fixed assets $6,710 $6,160 Retained earnings 4,271 3,670
Total assets $9,589 $8,310 Less: Treasury shares 614 498
Total shareholders’ equity $4,308 $3,773
Total liabilities and shareholders’
equity$9,589 $8,310
The entry for gross property, plant and equipment is the original cost of all real property, structures and long-
lived equipment owned by the company. Net property, plant and equipment represents the difference between
their original value and accumulated depreciation – the cumulative expense recorded for the depreciation of
fixed assets since their purchase. This represents a measure of how the assets are ‘used up’ in the operations of
the company. On their financial statements, companies do not deduct the full cost of fixed assets when these
assets are purchased. Instead, they deduct a portion of the cost, called depreciation, over several years. The
only fixed asset that is not regularly depreciated is land, because it seldom declines in value. Finally, intangible
assets include items such as patents, trademarks, copyrights or, in the case of petroleum companies, mineral
rights entitling the company to extract oil and gas on specific properties. Although intangible assets are usually
nothing more than legal rights, they are often extremely valuable – as demonstrated by our discussion of the
market value of global brands in the ‘Finance in practice’ feature in this chapter.
Now turn your attention to the right-hand side of the balance sheet. Current liabilities include
accounts payable, amounts owed for credit purchases by the company; notes payable, outstanding short-
term loans, typically from commercial banks; and accrued expenses, costs incurred by the company that
have not yet been paid. Examples of accruals include taxes owed to the government and wages due to
employees. Accounts payable and accruals are often called ‘spontaneous liabilities’ because they tend to
change directly with changes in sales.
In many countries, laws permit companies to construct two sets of financial statements, one for
reporting to the public and one for tax purposes. For example, when a company purchases a long-lived