Balance Sheet & Income Statement Preparation

Balance sheet

• Current = realized or settled within 1 year or the operating cycle, whichever is longer.
• Deferred tax assets and liabilities: always noncurrent.
• Short-term debt → noncurrent only if refinanced, or a non-cancelable refinancing agreement exists, before the statements are issued.
• Covenant violation making debt callable → current, unless waived for more than 1 year.
• No offsetting: customer credit balances are liabilities.

Income statement order

Net sales − Cost of goods sold (COGS) = Gross profit − Operating expenses = Operating income ± Other items = Pretax income from continuing operations − Tax = Income from continuing operations ± Discontinued operations (net of tax) = Net income.

Discontinued operations

• Test: strategic shift + major effect, and disposed of or held for sale.
• Includes full-year operating results + disposal gain/loss or impairment.
• Reported net of tax; prior periods restated.
• Held for sale: lower of carrying amount or fair value less costs to sell; no depreciation.

Unusual or infrequent items

Separate line in continuing operations, pretax, no earnings per share (EPS) on the face. Extraordinary items no longer exist.

Formula

Working capital = current assets − current liabilities · Current ratio = current assets ÷ current liabilities.

Exam traps

• Cash restricted for repaying long-term debt is noncurrent, even though it is cash.
• Dividends declared in cash are a current liability; a stock dividend distributable is equity, not a liability.
• Treasury stock is a deduction from equity, never an asset.