DISCUSSION 1: The Balance Sheet
What information is provided in the balance sheet? What is a common-sized balance sheet and how do you create one? For your final project company, does anything stand out on the balance sheet?
The Balance Sheet
A balance sheet offers a quick overview of an organization's financial status on a given day. A balance sheet is formed based on a key accounting equation:
Assets = Liabilities + Equity.
A balance has two sides, the debit side and the credit side. Transactions entered have to balance in order to account for all money going in and out. Preparation of a balance sheet is guided by basic rules that specify how such elements as dates, numbers and format have to be presented. Since a balance sheet shows a company's financial position on any particular day, the date appears on top of the balance sheet with such words as "as of", the year, the month and the day, and it is prepared on the last day of the period being presented. It is important to pay attention to numbers used in the preparation of a balance and the type of currency used. In addition, presentation of a balance sheet can take many formats, among them the report format, financial position format, and account format.
As depicted in the balance sheet equation earlier, a balance sheet is made up of assets, liabilities and equity. Assets can be grouped into current assets and long term assets. Current assets are those assets expected to be used within 12 months and they include cash and cash equivalents, marketable securities, accounts receivable, inventories, deferred taxes, prepaid expenses and other current assets. The fixed assets include property, plant, and equipment, prepaid pension, goodwill, intangible assets (patents, trademark, and copyrights), and other assets such as investment and sundry assets. Assets are recorded on the debit side of the balance sheet.
Liabilities, on the other hand, represent items the company is indebted; just as is the case with assets, they are grouped into two categories: current liabilities and long-term liabilities. Short term liabilities include taxes, short-term debt, accounts payable, accrued payroll, deferred income and other liabilities. Long-term liabilities are those payable within a period of more than 12 months and include retirement and post-retirement benefits, long-term debt and commitment and contingencies. Equity indicates the proportion of a company's assets that can be claimed by owners and can be in the form of stockholders' equity, common stock, preferred stock, retained earnings and treasury stock, and additional paid-in capital (Thermond, 2014).
Inventory valuation differs from company to company and the exercise can be accomplished through five common methods of valuation, such as LIFO, FIFO, average cost, specific identification and lower of cost. A common-sized balance sheet is used by managers and executives in comparing competing companies whose size is different.
Forbes School of Business Faculty
Reference:
Thermond, J. (2014). Mastering the balance sheet can make or break a startup.
DISCUSSION 2: Understanding the Notes to the Balance Sheet
Your friend, Liz, loves to shop at Target and is now interested in investing in the company. Tom, another friend, has told her that Target's debt structure is risky with obligations of nearly 74% of total assets. Liz sees that debt on the balance sheet is 65% of total assets and is confused by Tom's comment. Write an explanation to Liz discussing the debt structure of Target and why Tom thinks Target is risky. Be sure to explain clearly what information appears on financial statements, as well as what information does not appear directly on the financial statements. Use the information below in your discussion.
At fiscal year-end February 2, 2008, Target Corporation had the following assets and liabilities on its balance sheet (in millions):
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Current liabilities
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$11,782
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Long-term debt
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15,126
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Other liabilities
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2,345
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Total assets
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44,560
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Target reported the following information on leases in the notes to the financial statements:
Total rent expense was $165 million in 2007, $158 million in 2006, and $154 million in 2005, including percentage rent expense of $5 million in 2007, 2006, and 2005. Most long-term leases include one or more options to renew, with renewal terms that can extend the lease term to more than 50 years. Certain leases also include options to purchase the leased property.
Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were:
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Future Minimum Lease Payments (in Millions)
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Operating Leases
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Capital Leases
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2008
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$ 239
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$ 12
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2009
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187
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16
|
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2010
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173
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16
|
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2011
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129
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16
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2010
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123
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17
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After 2010
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2, 843
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155
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Total future minimum lease payments
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$3694 (a)
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$232
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Less: Interest (b)
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(105)
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Present value of minimum capital lease payments
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$127 (c)
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(a) Total contractual lease payments include $1,721 million related to options to extend lease terms that are reasonably assured of being exercised, and also include $98 million of legally binding minimum lease payments for stores that will open in 2008 or later.
(b) Calculated using the interest rate at inception of each lease.
(c) Includes current portion of $4 million.