The Balance Sheet

FUNDING A BUSINESS AND DOCUMENTING CAPITAL STRUCTURE

The Balance Sheet
▪ Accounting communicates financial information and aids in decision making for:
▪ Users inside of the firm→ Managerial Accounting
▪ Users outside of the firm → Financial Accounting

▪ If you are outside of the firm, and want to know what is happening inside of the firm,
you need to read the financial statements:
▪ Balance Sheet aka The Statement of Financial Position
▪ Income Statement
▪ Statement of Cash Flows
▪ Statement of Stockholders’ Equity
 An expanded look at
The Accounting Equation
Balance Stockholders
Sheet Assets = Liabilities
Equity

Contributed Capital Earned Capital

(Stock) (Retained Earnings)

Statement of Statement
Stockholders’ of Retained Beginning
Retained Earnings
Net Income Dividends
Equity Earnings

Income Revenues Expenses

Statement
The Balance Sheet Balances:
The Accounting Equation

Stockholders
Assets = Liabilities +
Equity

What we
= How we paid for it
Have
Technical Definitions:
The Elements of Financial Reporting

Stockholders
Assets = Liabilities +
Equity

Probable future sacrifices of

Probable future economic economic benefits arising The residual interest in
benefits controlled by a from present obligations of a the assets of an entity
particular entity as a particular entity to transfer that remains after
result of past transactions assets or provide services in deducting its liabilities
the future as a result of past
transactions
A Quick Example
How they paid for it
▪ Two Main Types of Financing (methods with which to fund a business):
▪ Debt→ also known as liabilities
▪ Ownership Funding→ also known as equity
How should we finance our business?
Option 1: Debt
▪ Debt – a loan, must be paid back with interest
▪ A company can borrow money from:
▪ A bank
▪ The public bond market
▪ An individual lender

▪ Cost of debt: ▪ Benefits of debt:

▪ Interest- accrues over time ▪ Generally cheaper- interest rates are high but
still cheaper than a % of future profits forever
▪ Inflexible - Must pay interest and the loan
itself on a fixed schedule ▪ Pay back a fixed amount rather than
infinite
▪ Interest is tax deductible
How should we finance our business?
Option 2: Equity
▪ Equity – ownership funding
▪ A company can raise money from:
▪ The entrepreneur- the original owners
▪ The public stock market or individual investors- acquire new owners
▪ Running its business- owners forgo their return and instead choose to reinvest their earnings

▪ Cost of equity: ▪ Benefits of equity:

▪ Ownership- in exchange for funding an ▪ 100% Flexible-
investors gets:
▪ do not ever have to pay back investors
▪ A share of all future profits
▪ can reinvest all profits earned into the
▪ May receive voting rights company
Financing Choices at Atlanta’s Largest
Public Companies
1
Percentage of Total Funding

0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
COCA-COLA CO DELTA AIR NEWELL PULTEGROUP SOUTHERN CO UPS ICE
LINES BRANDS INC INC
Debt Equity
Choice between risk and
reward
Financing Choices at Top Technology
Companies
0.8
0.7
Percentage of Funding

0.6
0.5
0.4
0.3
0.2
0.1
0
APPLE INC MICROSOFT CORP AMAZON.COM ALPHABET INC FACEBOOK INC SNAP INC
INC
Debt Equity
 Facebook's Capital Structure
100%
81%
80% 75%
67% 68%
60%
40% 33% 32%
25%
19%
20%
0%
2023 2022 2021 2020

debt equity

A maturing company
Another way to think about Equity

=
Assets - Liabilities Stockholders Equity

Net Assets Ownership

 Consolidated Balance Sheets - USD ($)
Dec. 31, 2021 Dec. 31, 2020
$ in Millions
Current Assets:
Cash and cash equivalents $ 7,933 $ 8,307
Short-term investments 3,386 5,789
Accounts receivable, net of an allowance for uncollectible accounts of $50 and $89 2,404 1,396
Fuel inventory 694 377
Expendable parts and supplies inventories, net of an allowance for obsolescence of $176
404 355
and $188
Prepaid expenses and other 1,119 1,180
Total current assets 15,940 17,404
Noncurrent Assets:
Property and equipment, net of accumulated depreciation and amortization of $18,671
28,749 26,529
and $17,511
Operating lease right-of-use assets 7,237 5,733
Goodwill 9,753 9,753
Identifiable intangibles, net of accumulated amortization of $893 and $883 6,001 6,011
Cash restricted for airport construction 473 1,556
Equity investments 1,712 1,665
Deferred income taxes, net 1,294 1,988
Other noncurrent assets 1,300 1,357
Total noncurrent assets 56,519 54,592
Total assets 72,459 71,996
Current Liabilities: Dec. 31, 2021 Dec. 31, 2020
Current maturities of debt and finance leases 1,782 1,732
Current maturities of operating leases 703 678
Accounts payable 4,240 2,840
Accrued salaries and related benefits 2,457 2,086
Fuel card obligation 1,100 1,100
Other accrued liabilities 1,746 1,670
Total current liabilities 20,966 15,927
Noncurrent Liabilities:
Debt and finance leases 25,138 27,425
Pension, postretirement and related benefits 6,035 10,630
Noncurrent operating leases 7,056 5,713
Other noncurrent liabilities 4,398 4,862
Total noncurrent liabilities 47,606 54,535
Commitments and Contingencies
Stockholders' Equity:
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 649,720,387 and 647,352,203 shares issued 0 0
Additional paid-in capital 11,447 11,259
Accumulated deficit (148) (428)
Accumulated other comprehensive loss (7,130) (9,038)
Treasury stock, at cost, 9,752,872 and 9,169,683 (282) (259)
Total stockholders' equity 3,887 1,534
Total liabilities and stockholders' equity 72,459 71,996
The Balance Sheet has a specific order:
Liquidity
▪ Assets are stated in order of liquidity from most to least liquid
▪ Liquidity- how easily an item can be converted to cash

▪ Liabilities are stated in order of liquidation preference

▪ Liquidation Preference- Who gets paid back first if the Company defaults
The Balance Sheet has a specific order:
Liquidity
▪ Within each section, assets and liabilities are classified as current or noncurrent
▪ Current- asset or liability will be converted to cash or used within the next year
▪ Current Asset- cash or other assets that are used in day to day operations and reasonably
expected to be converted to cash (sold/used up) within a year
▪ Cash, Inventory, Accounts Receivable, Supplies

▪ Current Liabilities- short term debt that funds everyday operations and is reasonably expected to
be paid back or settled within a year
▪ Accounts Payable, Salaries Payable, Taxes Payable, etc.
Why do we separate current from
noncurrent?
Working Capital = Current Assets – Current Liabilities
◦ Do we have sufficient funds to pay short term obligations?

◦ i.e. Do we have the right kind of assets to pay off our short term debt?
◦ Cannot pay off your credit card bill with your car
Common sized balance sheet
▪ Balance Sheets are easier to interpret and compare if we common size them
▪ Common Size – present each item as a percentage of size
▪ Income Statement- measure size with Revenue
▪ Balance Sheet- measure size with Assets
▪ Assets = total value of what the company has
▪ Assets = total value of company’s funding
▪ Can compare common sized balance sheets over time or between companies
What is an Intangible Asset?
▪ An asset that has no physical substance and is not a financial asset (stock or
bond)
▪ Examples- customer loyalty, patents, copyrights, employee creativity, employee
loyalty and hard work

▪ Intangibles are only recorded on the balance sheet if they were purchased and
have a purchase price
▪ Often times, intangibles are internally generated
▪ If there is no purchase price, the asset is not on the balance sheet
▪ Internally generated intangibles are vastly understated on company’s balance sheet
▪ Years of hard work that has no purchase price but generates customer loyalty has
value
The Intangible of all Intangibles:
Goodwill
▪ Goodwill- value of all favorable attributes that relate to a company but not to any
specific asset
▪ Goodwill is only recorded on a balance sheet if one company buys another
company
▪ Accounting Value of Goodwill = Purchase Price – Market Value of All Identifiable Net Assets
▪ Perhaps overpaid?
▪ We give the benefit of the doubt, assume the acquiring company paid for something of value

▪ Goodwill does not include the value of any identifiable intangibles  those are
separately stated