Principles of Managerial Finance

46 PART 1 Introduction to Managerial Finance

4. For convenience the term fixed assetsis used throughout this text to refer to what, in a strict accounting sense, is
   captioned “property, plant, and equipment.” This simplification of terminology permits certain financial concepts
   to be more easily developed.

long-term debt
Debts for which payment is not
due in the current year.

paid-in capital in excess of par
The amount of proceeds in
excess of the par value received
from the original sale of common
stock.

Hint Another interpretation
of the balance sheet is that on
one side are the assets that have
been purchased to be used to
increase the profit of the firm.
The other side indicates how
these assets were acquired,
either by borrowing or by
investing the owner’s money.

In Practice

To most of us, the events of Sep-

tember 11, 2001, would certainly

qualify as extraordinary. The plane

crashes that took thousands of

lives, destroyed the World Trade

Center Towers, and damaged part

of the Pentagon were circum-

stances well outside what we

consider “ordinary.” Yet, several

weeks after the tragedy the

Financial Accounting Standards

Board (FASB) announced that the

terrorist attack did not constitute

an extraordinary event—at least

not in accounting terms.

As a result, companies will

not be able to separate costs and

expenses related to the disaster as

extraordinary on their financial

statements. Those expenses will

show up as normal operating costs

in the continuing operations sec-

tion of the income statement.

Explained Tim Lucas, chair of the

FASB Emerging Issues Task Force,

“The task force understood that

this was an extraordinary event in

the English-language sense of the

word. But in the final analysis, we

decided it wasn’t going to improve

the financial reporting system to

show it [separately].”

The FASB task force had pre-

pared a draft document with

guidelines on accounting for dis-

aster-related costs as extraordi-

nary. As they considered how to

apply these recommendations,

they realized that the impact of the

attack was so far-ranging that it

was almost impossible to divide di-

rect financial and economic ef-

fects from the weakening eco-

nomic conditions prior to

September 11. Nor was it possible

to develop one set of guidelines

appropriate for all industries. FASB

members were concerned that

companies would blame negative

financial performance on the at-

tacks when in fact the costs were

unrelated. As one member pointed

out, almost every company was af-

fected in some way. Because the

whole business climate changed,

“it almost made it ordinary.”

Companies will, however, be

able to separate costs they believe

to be attributable to September 11

in the footnotes to financial state-

ments and in management’s dis-

cussion of financial results.

Sources: Jennifer Davies, “Will Attacks

Cover Up Weak Earnings?” San Diego

Union-Tribune(October 14, 2001), pp. H1, H6;

Steve Liesman, “Accountants, in a Reversal,

Say Costs from the Attack Aren’t ‘Extraordi-

nary,’ ” Wall Street Journal(October 1, 2001),

pp. C1-2; Keith Naughton, “Out of the Ordi-

nary,” Newsweek(October 15, 2001), p. 9.

FOCUS ONPRACTICE Extraordinary? Not to the FASB!

firm.^4 Net fixed assetsrepresent the difference between gross fixed assets and

accumulated depreciation—the total expense recorded for the depreciation of

fixed assets. (The net value of fixed assets is called their book value.)

Like assets, the liabilities and equity accounts are listed from short-term to

long-term. Current liabilities include accounts payable,amounts owed for credit

purchases by the firm; notes payable,outstanding short-term loans, typically

from commercial banks; and accruals,amounts owed for services for which a bill

may not or will not be received. (Examples of accruals include taxes due the gov-

ernment and wages due employees.) Long-term debtrepresents debt for which

payment is not due in the current year. Stockholders’ equityrepresents the own-

ers’ claims on the firm. The preferred stockentry shows the historical proceeds

from the sale of preferred stock ($200,000 for Bartlett Company).

Next, the amount paid by the original purchasers of common stock is shown

by two entries: common stock and paid-in capital in excess of par on common

stock. The common stockentry is the par valueof common stock. Paid-in capital

in excess of parrepresents the amount of proceeds in excess of the par value

received from the original sale of common stock. The sum of the common stock