Lesson: 67

Topic: Preparing the Classified Balance Sheet

Objectives:

By the end of this class, the student should understand the process involved in using the six-column worksheet to create a formal Income Statement and it's related Balance Sheet.

Finally, students will examine the following concepts related to formal financial statements:

• account form balance sheet,
• report form balance sheet,
• classified balance sheet,
• current asset,
• fixed asset,
• cost principle,
• cost price,
• current liabilities, and
• long-term liabilities.

Example of a Classified Balance Sheet (Acrobat)

Method of Instruction and Evaluation:

After a Socratic lecture on the above topics, students will complete one of the following exercises:

• Complete exercise #2 on page 277.
• Alternate exercise: Online Worksheet and Classified Balance Sheet

Expectations Addressed:

The "Internal Control, Financial Analysis, and Decision Making" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• Internal Control Procedures:

  • describe the basic elements of an internal control system (e.g., separation of duties, pre-numbered documents, rotation of staff);

  • apply appropriate control measures used in accounting for assets (e.g., petty cash procedures, bank reconciliation procedures);

  • describe the role of budgeted financial statements in planning, controlling, and evaluating business results (e.g., difference between budgeted and actual income statements);

  • describe the role and work of an auditor.

• Financial Analysis:

  • explain the importance of current assets and current liabilities when interpreting a balance sheet;

  • analyse a company’s liquidity and solvency by using simple financial ratios (e.g., current ratio, debt ratio) and other financial analysis tools (e.g., comparative statements, trend analysis, common size statements);

  • analyse a company’s profitability by using simple financial ratios (e.g., gross profit percentage, return on equity) and other financial analysis tools (e.g., comparative statements, trend analysis, common size statements).

• Decision Making:

  • describe how accounting information is used by company personnel (e.g., department managers, owners) in making decisions;

  • explain the role of financial analysis in decision making from the standpoint of potential investors (e.g., mutual fund managers, institutional investors, individual investors);

  • describe how accounting information is used by individuals or organizations outside the company (e.g., governments, Ontario Securities Commission, police, forensic accountants) in making decisions.

References:

• Understanding the Classified Balance Sheet (PowerPoint)
• Text, chapter #8; pages 269 - 271