Introduction
Analysis of financial statement components is vital in the decision-making process. It aids the users of the financial statements in understanding various business operations and transactions, how they were treated, and also what accounting principles were applied when recording and reporting in the financial statement (Sembiring et al., 2019). This analysis is for a company known as Batter Up. It involves a detailed description and understanding of the company’s financial statement, especially the balance sheet statement.
Components of current assets and current liabilities in the balance sheet
The current assets section of the Batter Up balance sheet contains the following elements: cash ($5209), merchandise inventory ($1675), prepaid rent ($2000), prepaid insurance ($1600), and accounts receivable ($3070.50). The current liabilities section in the balance sheet includes the following: accounts payables ($1750), wages payable ($270), and interest payables ($166.58).
Difference between current assets and liabilities
The main reason for arranging the current assets and liabilities separately in the balance sheet is to enable the analysts, investors, and any other user of the financial statement to understand the liquidity and solvency levels of the company. This involves calculating the working capital, which is the difference between current assets and liabilities. Arranging the current assets and liabilities helps the users understand whether the company is well-equipped to take care of short-term responsibilities. In Batter Up’s case, it is more than equipped to handle any short-term liabilities as current assets are more than current liabilities (Delloite n.d).
The current liabilities can have both long-term and short-term components. A great example to showcase this involves the loan component. A loan can be converted into either a short-term or long-term component depending on how long it takes to clear; if it can be paid before the end of a financial year, then it is categorized as a short-term term, while if it takes more than a year to clear it, then it categorized as a long term. As for the current assets, depending on their capability to be converted to cash in the shortest time possible, they can be classified as either long-term if it takes time to convert to cash or short-term if it takes a lot less time to convert to cash. An example of short-term components is trade receivables.
Current ratio analysis is a tool that is majorly used to measure the variances between the current assets and liabilities to determine whether the company has enough current assets to cater to current liabilities (Town, n.d). This ratio analysis tool helps indicate whether the company is capable of handling its short-term obligations. If the ratio is more than 1, it indicates that the company can handle all of its short-term obligations, while less than one indicates that the company may struggle to handle its short-term obligations. In Batter Up’s case, the current ratio is 6.19, indicating a financially healthy company.
Importance of footnotes
Footnotes are vital to the users of the financial statements as they boost the understanding of the statement and, hence, quality decision-making. While the amounts in the balance sheet are the main event in the financial statements, they may be rendered useless if they cannot be used to make decisions, the reason they have not been understood, or, even worse, the users have misinterpreted them. That is where the footnotes step in as they give details concerning the various policies and principles that have been applied, the various contingencies that existed as the financial statements were being prepared, and the accounting standards applied. This helps give a defined description of areas such as the formula of depreciation followed and, in Batter Up’s case, the reason for the recording of some rent as prepaid and also understand the method of payment for the wages, that is, which wage qualifies to be an expense and a liability.
Importance of FIFO
The FIFO method involves an assumption that the first inventory purchased is usually the first to be sold. In Batter Up, their major merchandise involves bicycles and golf club sets. The importance of adapting is that it helps to get rid of perishable goods. In this case, the bicycles and golf sets may need to be more durable due to their tendency to rust. Selling the first batch that comes in helps avoid this kind of wastage through the disposal of bikes that are unusable (Sembiring et al., 2019).
FASB codification
ASC 305 deals with cash and cash equivalent classification on the balance sheet. This involves the recognition and recording of petty cash. ASC 330 provides guidelines on the accounting for inventory and the method of valuation of that inventory, which in this case involves the use of FIFO as a valuation method (Town, n.d). ASC 310 provides guidelines for the accounting of receivables, which involves the recognition, measurement, and presentation of receivables in a balance sheet (Delloite n.d). In this case, Batter Up assigned various percentages for every sale made to show the recognition of credit sales.
Conclusion
In conclusion, understanding the contents of a financial statement is critical in quality decision-making for investors and users. In order to enhance understandability, the accountant needs to make all available information material available to the users. This involves the footnotes. The balance sheet is a significant financial statement as it provides information on the financial position and health of the company.
REFERENCES
Delloite. (n.d.). 310 Receivables | DART – Deloitte Accounting Research Tool. Dart.deloitte.com. https://dart.deloitte.com/USDART/home/codification/assets/asc310
Sembiring, A. C., Tampubolon, J., Sitanggang, D., & Turnip, M. (2019, November). Improvement of inventory system using the first in, first out (FIFO) method. In Journal of Physics: Conference Series (Vol. 1361, No. 1, p. 012070). IOP Publishing.
Town, A. (n.d.). Assets – Cash and Cash Equivalents – ASC 305 | Accountant Town. Accountant Town. https://www.accountanttown.com/fasb/assets/
write