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CHAPTER 4
 

CHAPTER 4

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    CHAPTER 4 CHAPTER 4 Presentation Transcript

    • CHAPTER 4 Structure of the Balance Sheet and Statement of Cash Flow
    • Roadmap
      • Measurement conventions of Balance Sheet Items
      • Cash Flow Statement
        • Indirect approach
        • Direct approach
    • I. Measurement Conventions for Balance Sheet Accounts
      • 1. Assets: a. Current assets. b. Long-term investments. c. Property, plant, and equipment d. Intangible assets. e. Other (long-term) assets.
    • I. Measurement Conventions for Balance Sheet Accounts
      • 2. Liabilities: a. Current liabilities. b. Long-term liabilities.
      • 3. Owners’ equity: a. Capital stock. b. Additional paid-in capital. c. Retained earnings.
    • Ways to measure assets
      • Historical cost
      • Present value
      • Current market value
      • Net realizable value
    • Cash:
      • 1. It reflects the amount of money or currency the firm has on hand or in bank accounts
      • 2. Cash amounts denominated in foreign currency units is translated into U.S. dollar equivalents at the balance sheet date using the current rate of exchange.
      • 3. Cash is measured in current market price.
    • I. Measurement Conventions for Balance Sheet Accounts Short-term investments:
      • 1. The intended holding period of the company that owns the securities determines how the debt and equity securities are measured on the balance sheet.
      • a. Debt securities that the company intends to hold to maturity is carried at amortized cost.
      • b. Debt and equity securities held for short-range investment purposes are carried at the market price.
    • I. Measurement Conventions for Balance Sheet Accounts Net accounts receivable:
      • 1. Gross accounts receivable equal the face amounts arising from past transactions.
      • 2. Gross accounts receivable are reduced by an estimate of the proportion of existing accounts receivable that an entity believes will ultimately not be collected.
      • 3. As a consequence, net accounts receivable are carried at net realizable value.
    • I. Measurement Conventions for Balance Sheet Accounts Property, plant, and equipment – net:
      • 1. All items in this category are carried on the balance sheet at historical cost minus accumulated depreciation .
      • 2. However, when a long-lived asset becomes impaired—that is, when its carrying amount may no longer be recoverable—the fixed asset is reduced to its lower fair value.
    • I. Measurement Conventions for Balance Sheet Accounts
      • Accounts payable and accrued liabilities are reflected on the balance sheet at the amount of the original liability (i.e., historical cost).
    • I. Measurement Conventions for Balance Sheet Accounts Long-term debt:
      • 1. The initial balance sheet carrying amount is determined by computing the discounted present value of the sum of (1) the future principal repayment plus (2) the periodic interest payments.
      • 2. For fixed rate debt, this carrying amount will differ from current market prices whenever interest rates have changed subsequent to issuance.
      • 3. Deferred income taxes are reported at their undiscounted amount.
    • I. Measurement Conventions for Balance Sheet Accounts
      • Common Stock is reported at historical par (or stated) value.
      • Additional paid-in capital is reported at historical cost as the excess of original issue price and par (or stated) value.
    • I. Measurement Conventions for Balance Sheet Accounts Retained Earnings :
      • 1. This account measures the net of the cumulative earnings less cumulative dividend distributions of the company since inception.
      • 2. Since different measurement bases pervade the balance sheet, income (and retained earnings) is a mixture of historical costs, current values, and present values.
    • II. Statement of Cash Flows: A. The statement of cash flows shows the user why a firm’s investments and financial structure have changed between two periods.
      • The connection between successive balance sheet positions and the statement of cash flows can be demonstrated through manipulation of the simple accounting equation: a. Assets = Liabilities  Owners’ equity. b. Cash  Noncash assets = Liabilities  Owners’ equity. c. Cash = Liabilities  Noncash assets  Owners’ equity. d.  Cash =  Liabilities  Noncash assets  OE.
    • II. Statement of Cash Flows: B. The cash flow statement summarizes the cash inflows and outflows of a company broken down into three activities:
      • 1. Cash flows from operating activities result from the cash effects of transactions and events that affect operating income.
      • 2. Cash flows from investing activities result from the cash effects of transactions and events that affect long-term assets.
      • 3. Cash flows from financing activities result from the cash effects of transactions and events that affect long-term liabilities and owners’ equity (other than net income).
    • II. Statement of Cash Flows: C. Indirect approach
      • Indirect approach arrives at net cash flows from operations by adjusting net income
      • a. Operating section reconciles net income to cash provided by operations. i. Add noncash expenses (i.e., depreciation; amortization; losses on sales of property, plant, and equipment; amortization of bond discount; etc.) to net income. ii. Subtract (add) net increases (decreases) in current assets. iii. Add (subtract) net increases (decreases) in current liabilities.
      • b. Investing section shows components of changes in long-term assets as inflows and outflows.
      • c. Financing section shows components of changes in long-term liabilities and owners’ equity as inflows and outflows.
    • II. Statement of Cash Flows: Direct Approach
      • Direct approach shows the individual operating cash inflows and outflows directly.
    • Roadmap
      • Measurement conventions of Balance Sheet Items
      • Cash Flow Statement
        • Indirect approach
        • Direct approach