Fundamentals of Financial Management (Concise 6th Edition)

Chapter 3 Financial Statements, Cash Flow, and Taxes 57

3-2 THE BALANCE SHEET

The balance sheet is a “snapshot” of a! rm’s position at a speci! c point in time.
Figure 3-1 shows the layout of a typical balance sheet. The left side of the state-
ment shows the assets that the company owns, while the right side shows the! rm’s
liabilities and stockholders’ equity, which are claims against the! rm’s assets.
As Figure 3-1 indicates, assets are divided into two major categories: current
assets and! xed, or long-term, assets. Current assets consist of assets that should be
converted to cash within one year; and they include cash and cash equivalents,
accounts receivable, and inventory.^3 Long-term assets are assets expected to be used
for more than one year; they include plant and equipment in addition to intellectual
property such as patents and copyrights. Plant and equipment is generally reported
net of accumulated depreciation. Allied’s long-term assets consist entirely of net
plant and equipment, and we often refer to them as “net! xed assets.”

Balance Sheet

A statement of a firm’s

financial position at a

specific point in time.

Balance Sheet

A statement of a firm’s

financial position at a

specific point in time.

A Typical Balance Sheet

F I G U R E 3! 1

Note: This is the typical layout of a balance sheet for one year. When balance sheets for two or more years are shown, assets are listed in the top
section; liabilities and equity, in the bottom section. See Table 3-1.

Total Assets Total Liabilities andEquity

Current Assets Current Liabilities

Long-Term (Fixed)

Assets Long-Term

Debt

Cash and equivalents

Accounts receivable

Inventory

Net plant and equipment

Other long-term assets

Stockholders’ Equity

Common stock + Retained earnings

must equal

Total Assets – Total Liabilities

Accrued wages and taxes

Accounts payable

Notes payable

(^3) Allied and most other companies hold some currency in addition to a bank checking account. They may also
hold short-term interest-bearing securities that can be sold and thus converted to cash immediately with a
simple telephone call. These securities are called “cash equivalents,” and they are generally included with
checking account balances for! nancial reporting purposes. If a company owns stocks or other marketable
securities that it regards as short-term investments, these items will be shown separately on the balance sheet.
Allied does not hold any marketable securities other than cash equivalents.