The Mathematics of Money

500 Chapter 12 Financial Statements

Since the totals of each side should match, it is customary to call attention to these totals

by doubly underlining them.

While it illustrates the basic set-up of a balance sheet, this example is far too simple to

be of much use to anyone. To give a better picture of a company’s situation, it is necessary

to give more detail of just what sorts of assets and liabilities the company has. Just as with

income statements, the degree of detail will vary, depending on the type of business and

the audience for whom the financial statement is intended, but there are certain general

categories that are commonly used.

Current assets are assets that the business expects to use or convert to cash within one

year. Examples of current assets might include cash on hand, bank accounts, short-term

notes (these three are all usually listed simple as “cash”), supplies used by in running the

business (such as a bakery’s supply of flour or a roofing contractor’s inventory of shingles),

or merchandise. Current assets also include accounts receivable, monies owed to the busi-

ness for sales made on credit.

Long-term assets are things owned by the business that are not intended to be used up or

converted to cash in the near term. This category includes real estate, equipment, and other

durable assets. The term property, plant, and equipment is sometimes used for long-term

assets; “plant and equipment” refers to assets like machinery, fixtures, and so on that are

used in the operation of the business.

A similar distinction between current and long-term is made for liabilities. Current

liabilities are debts that the business must pay within one year. This category includes

accounts payable, monies that the business owes to suppliers or others for goods or ser-

vices obtained on credit. Long-term liabilities are liabilities that do not meet the 1-year

criterion to be considered current. This would include debts such as mortgages or other

notes that do not come due within the next year.

Equity is usually broken into the subcategories of contributed capital (funds provided

to the business by its owners’ investment) and retained earnings (profits earned by the

business that have not yet been paid out to its owners as dividends).

The following is an example of a balance sheet with a bit more detail than the first:

Hilbert Hotel Company

Balance Sheet as of December 31, 2007

Assets Liabilities
Current Assets: Current liabilities:
Cash $527,500 Accounts payable $404,029
Accounts receivable $245,904 Note due May 1, 2008 $300,000
Prepaid expenses $425,000 Salaries payable $125,055
To tal current assets $1,198,404 Total current liabilities $829,084
Property, plant, and
equipment:

Long-term liabilities:

Buildings $4,505,075 Mortgage notes: $3,725,000
Land $725,000 Other long-term debt $525,000
Other plant and
equipment

$2,750,000 Total long-term

liabilities

$4,250,000

To tal P, P, and E $7,980,075 Total liabilities $5,079,084

Equity

Contributed capital $750,000

Retained earnings $3,349,395

To tal equity $4,099,395

Total assets $9,178,479 Total liabilities and equity $9,178,479