Question

Your friend, Martinez, and you are thinking about investing in a company and are discussing the company’s balance sheet.  You are both very knowledgeable about the different formats of the balance sheet. You are convinced that the best format is the Unclassified Balance Sheet, but Martinez strongly believes that it is the Classified Balance Sheet.

Given what you have read and our discussions in class of Chapter 5 and your prior accounting classes knowledge, give a well-reasoned and detailed argument of which format of the Balance Sheet would be best for both of you to analyze in order to make your investment. And why? Provide specific examples to validate yours or Martinez’s argument.

Requirement:

1. Post an original response to the question/situation above. Once you post your response, you will be able to view your classmates’ responses.  (14 Points)
2. After completing requirement #1, you need to respond with some detail to at least TWO of your classmates’ postings.  Answering “Yes, I agree, or No, I disagree, etc. is not enough to earn you credit. You need to discuss why you agree or disagree.  (6 Points)

Answer 1

To decide on which type of balance sheet is best, let us have a brief knowledge about these two types of balance sheet

Unclassified Balance Sheet : Under this type, there are three main categories in a balance sheet.

1. Assets : This will be on one side of balance sheet and it contains all the assets of the balance sheet. This lists the assets on the basis on liquidity (Cash first and so on)

2. Liabilities : This part contains all the debt or payables the company as to fulfill to outsiders

3. Equity : This is the owners capital in the business. It is placed on the end of the balance sheet. Equity and Liability form other side of balance sheet (opposite to Assets)

Classified Balance Sheet : Under this type also there are three categories in balance sheet and also each category contains some sub categories.

1. Assets : This contains two Subcategories

A. Current Assets : This contains the assets which will be cashed (liquidated or realised) in the coming year or 12 months. E.g. Cash, Accounts Receivable etc

B. Non Current Assets : These assets are other than Current assets. This also have sub categories within itself

(i) Long term investment : This part contains investments held by organization for a period of more than 12 months

(ii) Plant, Property & Equipment : This part contains the Tangible fixed assets

(iii) Intangible Assets : This part contains all the assets that lack physical substance like patents etc

(iv) Other Assets : This contains the asset that doesn't fall in any of the remaining categories. E.g., Deferred tax assets etc

2. Liabilities : This contains the debt and payable that the company owe to outsiders. This has two sub categories

A. Current Liabilities : These are the liabilities that are to be paid within the next year. E.g., Accounts payables, taxes payable etc

B. Non Current Libailities : These are the liabilites which are not required to be paid in next 12 months. Thesw contain accounts like Note payable, Bonds payable etc

3. Equity : This contains all the shareholders equity. It also have various accounts in it like "Common Stock", "Preferred Stock", "Retained Earnings", Treasury Stock" etc

After going through all the above classification details, we suggest that using Classified balance sheet is better when compared to using unclassified balance sheet for analysing the company's financial position inorder to decide on investment.

Classified balance sheet gives the correct view on the liquidity position of the entity and also more detailed view as it has separate classification of assets. This helps in better understanding of the financial position. Classified balance sheet also helps in understanding the nature of the assets and liabilities. We can also find and analyse the trends better using a classified balance sheet across years. This is not possible in unclassified balance sheet as there are no asset classifications.

Example :

If some part of accounts receivable are to be received after a year. Classified balance sheet will show this in Non current assets (in Other assets) whereas under Unclassified Balance Sheet this is not separately shown and is included in accounts receivable total. This will give wrong picture about the company's liquidity.

So I prefer Classified Balance Sheet as the best for decision making by helping in detailed analysis.