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Economics While the Accountingbase.com website provides wide ranging information on Accounting and related topics, we're also quite knowledgable in the field of Economics. Micro and macro economics is simplified and clearly explained on a one-on-one basis.
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The Balance Sheet (An Example)

The Balance Sheet shows the company's value at a specific time. The Balance Sheet (as shown below) itemize the major Current Assets, Fixed Assets and Shareholders' Equity. Because of the historical nature of accounting, the value of the company's assets shown on the balance sheet is usually under-estimated.

Balance Sheet extract
Consolidated Balance Sheet Company ABC, Inc.
Year-ended December 31, 2001

Current and Fixed Assets
Current Assets: Dec. 31
Cash and cash equivalents    3,725    The most liquid of assets
Short-term investments    319    Cert. of deposits etc.
Accounts receivable, net    2,590    Amount due from customers
Inventories    291    Goods for sale/raw materials
Prepaid expenses/other assets    1,358    Advance payments
   Total Current Assets    8,283    Working capital
Fixed Assets:
Property, plant and equipment, net    872    Usually the largest asset group
Leasehold Improvement    4,589    Expend. on leased property
Investments    318    Long-term investments
Goodwill    200,000    Intangible assets
Other non-current assets    200,000    Deferred tax etc.
   Total Assets    200,000    Book value of the business
Liabilities & Shareholder's Equity
Current liabilities:
Accounts payable    5,621    Amount owed to suppliers
Accrued expenses    2,424    anticipated obligation
Current portion of long-term debts    200,000    debt due in under 12 months
Income Tax Payable    200,000    Tax obligation
Other current liabilities    200,000    Customer deposits etc.
   Total current liabilities    200,000    
Long-term liabilities:
Long-term debt    200,000    Due after 12 months
Deferred Tax    200,000    Long-term tax obligation
Other long-term liabilities    200,000    Leases etc.
   Total Liabilities    200,000    Current plus long-term
Shareholder's equity:
Preferred stock    200,000    Learn more about this
Common Stock    200,000    Learn more about this
Treasury stock    200,000    Learn more about this
Additional-paid-in-capital    200,000    Learn more about this
Retained Earnings    200,000    Undistributed earnings
Other comprehensive income/(loss)    200,000    
Adjustments/others    200,000    Forex gains/losses etc.
   Total stockholders' equity    200,000    Learn more about this
Total liabilities & Equity    200,000    Book value of the business
Go to: Balance Sheet - part 1
Go To: Balance Sheet - part II

Balance Sheet "Stocks"

Common Stock: Common Stock represents total ownership of the company and gives the holders extensive control over the operations of the company. Significant risk is involved in being a common stockholder, allowing such individuals to sometimes make very high returns or very large losses.

Unlike Debt holders, Stockholders are not guaranteed any returns and are the last to be considered in the event of complete company failure.

Common Stockholders maintains four basic rights:

  • Voting Rights: Votes on membership of the board of directors and major corporate policies.
  • Pre-emptive Rights: This provides the stockholders with the right to subscribe to any new issue of shares that might reduce their ownership in the company.
  • Earnings Distribution Rights: The right to dividends when paid.
  • Residual Asset Distribution Rights: The right to the assets remaining after liquidation and the payment of all other claims.
Preferred Stock: This is a hybrid between Debt and Common Stock and is created at the approval of the Common Stockholders.

Like creditors, preferred stockholders are not given the rights (see above) of the common stockholders and like creditors, preferred stockholders are aware of the rate of dividend payment (interest payment for the creditor). Instead, preferred stockholders are guaranteed dividends, and first claim on the company's assets at liquidation. The fundamental difference between a preferred stock and a debt is that the debt will be repaid, but the amount paid for the preferred stock will not be.

Preferred Stock comes in many forms, however "Cumulative" preferred stock are the most popular and will probability be on the next balance sheet you review. The cumulative feature provides the stockholder with dividend guarantee in future years if the company is unable to pay the dividend this year.

Preferred stock may also be convertible; that is the stock may be converted to common stock based on the stock agreement and a pre-determined conversion ratio. The balance sheet may show the preferred stock as follows:

10% cumulative convertible preferred stock $20,000

This indicates that dividends will be paid at a 10% rate and will be cumulative. It also shows that the preferred stock agreement calls for convertibility. Treasury Stock: Treasury stock is negative equity, which would make it an asset, right? Nope! A company cannot invest in itself by repurchasing its stock. Treasury stock arises when a company repurchases its own stock, and is reflected on the balance as negative equity.

The company can do a number of things with these stocks. It may reissue them, retire them or just hold onto them indefinitely.

Treasury stocks are not included in outstanding shares and hold none of the typical rights accompanying common stock.

The anti-dilution effect of treasury stock means that remaining shareholders will have even a bigger share of the company.

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