Statement of cash flows systems ppt @ bec doms bagalkot mba finance
Balance Sheet and Statement of Cash Flows Systems
Chapter 5: Balance Sheet and Statement of Cash Flows Systems1. Identify the uses and limitations of a balance sheet.After studying this chapter, you should be2. Identify the major classifications of theable to: sheet. balance3. Prepare a classified balance sheet using the report and account formats.4. Identify balance sheet information requiring supplemental disclosure.
Chapter 5: Balance Sheet and Statement of Cash Flows Systems1. Identify major disclosure techniques for the balance sheet.2. Indicate the purpose of the statement of cash flows.3. Identify the content of the statement of cash flows.4. Prepare a statement of cash flows.5. Understand the usefulness of the statement of cash flows.
Balance Sheet: UsefulnessThe balance sheet provides information for evaluating: Capital structure Rates of return Analyzing an enterprise’s: Liquidity Solvency Financial flexibility
Balance Sheet: Limitations• Most assets and liabilities are stated at historical cost.• Judgments and estimates are used in determining many of the items.• The balance sheet does not report items that can not be objectively determined.• It does not report information regarding off-balance sheet financing.
Balance Sheet: Classification Guidelines for reporting assets and liabilities separately:• Type or expected function in the central operations• Implications for the enterprise’s financial flexibility• Liquidity characteristics
Balance Sheet: Classification Current Assets Current liabilities Assets Long-term Long-term debt Equity Liabilities and investments Owners’ equity Property, plant, and Capital stock equipment Additional paid-in Intangible assets capital Other assets Retained earnings
Current Assets Current assets are expected to be consumed, sold, or converted into cash: either in one year or in the operating cycle, whichever is longer. Current assets are presented in order of liquidity. The following valuation principles are used:1 Short-term investments at fair value2 Accounts receivable at net realizable value
Long-Term InvestmentsLong-term investments may be:1 Investments in securities (bonds, stock)2 Investments in fixed assets (land not used in operations)3 Investments set aside in special funds (e.g., sinking fund)4 Investments in non-consolidated subsidiaries or affiliated companies
Current Liabilities Current liabilities are liquidated:1 Either through the use of current assets, or2 By creation of other current liabilities Examples of current liabilities include:• Payables resulting from acquisitions of goods and services• Collections received in advance of services• Other liabilities which will be paid in the short term
Long-Term Liabilities Long-term obligations are those not expected to be paid within the operating cycle. Examples are:• obligations arising from specific financing situations (issuance of bonds)• obligations arising from ordinary business operations (pension obligations)• obligations that are contingent (product warranties)
Balance Sheet: Additional Information ReportedAdditional information may be:1 Information not presented elsewhere, or2 Information that qualifies items in the balance sheetSupplemental information examples:• Material events having an uncertain outcome• Explanations regarding accounting policies• Covenant restrictions
Balance Sheet: Techniques of Disclosure• Parenthetical explanations• Notes• Cross references and contra items• Supporting schedules
The Cash Flow Statement The cash flow statement provides information about: cash receipts (cash inflows) uses of cash (cash outflows) during a period of timeInflows and outflows are reported for:• operating• investing• financing activities
Preparing a Statement of Cash Flows There are two methods of preparing the statement of cash flows:• Indirect method: derives cash flows from accrual based statements• Direct method: derives cash flows directly for each source or use of cash
The Statement of Cash Flows: Indirect MethodAccrual Based Statements Cash Flow Statement Income Statement Operating activities: items & Changes in Adjust net income for accruals Current Assets and and non-cash charges to get Current Liabilities cash flows Investing activities:Balance Sheet: Changes in Inflows from sale of assets andNon-Current Assets Outflows from purchases of assets Balance Sheet: Changes in Financing activities: Non-Current Liabilities Inflows and outflows and from loan and equity Equity transactions
Ratio Analysis Ratio analysis expresses the relationship between selected financial data. These relationships can be expressed as: percentages rates, or proportions
Types of Ratios Type What is measured Examples Short-term ability to Current ratioLiquidity ratios pay maturing Quick assets ratio obligationsActivity ratios Effectiveness in using Receivables turnover assets employed Inventory turnover Degree of success or Rate of return on assets Profitability failure for a given Earnings per share ratios period Degree of protection for Debt to total assetsCoverage ratios long-term creditors and Times interest earned investors