Learning Objectives
                                                                                                      ...
Balance Sheet
                            Balance Sheet                                                                   ...
Balance Sheet – “Current Assets”
            Balance Sheet – “Current Assets”                                             ...
Balance Sheet – “Current Assets”
            Balance Sheet – “Current Assets”                                             ...
Balance Sheet – “Noncurrent Assets”
          Balance Sheet – “Noncurrent Assets”                                         ...
Balance Sheet – “Noncurrent Assets”
          Balance Sheet – “Noncurrent Assets”                                         ...
Balance Sheet
                       Balance Sheet                                                                   Balan...
Balance Sheet - Format
                      Balance Sheet - Format                                                       ...
The Statement of Cash Flows
                The Statement of Cash Flows                                                   ...
The Statement of Cash Flows
               The Statement of Cash Flows                                                    ...
Usefulness of the Statement of Cash Flows
  Usefulness of the Statement of Cash Flows                                     ...
Balance Sheet
                              Balance Sheet                                                                 ...
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Chapter Chapter

  1. 1. Learning Objectives Learning Objectives Balance Sheet and Balance Sheet and Statement of Cash Flows Statement of Cash Flows 1. Explain the uses and limitations of a balance sheet. 2. Identify the major classifications of the balance sheet. 3. Prepare a classified balance sheet using the report and account formats. Chapter 4. Determine which balance sheet information requires supplemental disclosure. 5 5. Describe the major disclosure techniques for the balance sheet. 6. Indicate the purpose of the statement of cash flows. Intermediate Accounting 12th Edition 7. Identify the content of the statement of cash flows. Kieso, Weygandt, and Warfield 8. Prepare a statement of cash flows. 9. Understand the usefulness of the statement of cash flows. Chapter Chapter 5-1 Prepared by Coby Harmon, University of California, Santa Barbara 5-2 Balance Sheet and Statement of Cash Flows Balance Sheet and Statement of Cash Flows Balance Sheet Balance Sheet Usefulness of the Balance Sheet Balance Statement of Evaluating the capital structure. Sheet Cash Flows Assess risk and future cash flows. Usefulness Purpose Analyze the company’s: Limitations Content and Classification format Liquidity, Preparation Solvency, and Additional information Usefulness reported Techniques of Financial flexibility. disclosure Chapter Chapter 5-3 5-4 LO 1 Explain the uses and limitations of a balance sheet.
  2. 2. Balance Sheet Balance Sheet Balance Sheet Balance Sheet Limitations of the Balance Sheet Classification in the Balance Sheet Most assets and liabilities are reported at Three General Classifications historical cost. Assets, Liabilities, and Stockholders’ Equity Use of judgments and estimates. Companies further divide these classifications: Many items of financial value are omitted. Illustration 5-1 5- Balance Sheet Classification Chapter Chapter 5-5 LO 1 Understand the uses and limitations of an income statement. 5-6 LO 2 Identify the major classifications of the balance sheet. Balance Sheet Balance Sheet Balance Sheet Balance Sheet Current Assets Review Cash and other assets a company expects to The correct order to present current assets is convert into cash, sell, or consume either in one a. Cash, accounts receivable, prepaid items, year or in the operating cycle, whichever is longer. inventories. Illustration 5-2 5- b. Cash, accounts receivable, inventories, prepaid Accounts and basis of valuation items. c. Cash, inventories, accounts receivable, prepaid items. d. Cash, inventories, prepaid items, accounts receivable. Chapter Chapter 5-7 LO 2 Identify the major classifications of the balance sheet. 5-8 LO 8 Explain how to report other comprehensive income.
  3. 3. Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Cash Short-Term Investments Generally any monies available “on demand.” Portfolios Type Valuation Classification Cash equivalents are short-term highly liquid Held-to- Amortized Current or investments that will mature within three Debt Maturity Cost Noncurrent months or less. Debt or Any restrictions or commitments must be Trading Fair Value Current Equity disclosed. Illustration 5-3 5- Available- Debt or Current or Fair Value for-Sale Equity Noncurrent Chapter Chapter 5-9 LO 2 Identify the major classifications of the balance sheet. 5-10 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Receivables Accounts Receivable – Presentation Options Current Assets: Claims held against customers and others for 1 1 Cash $ 346 money, goods, or services. Accounts receivable 500 Accounts receivable – oral promises Less allowance for doubtful accounts 25 475 Inventory 812 Notes receivable – written promises Total current assets $1,673 Major categories of receivables should be shown in Current Assets: the balance sheet or the related notes. 2 2 Cash $ 346 Accounts receivable, net of $25 allowance 475 Inventory 812 Total current assets $1,673 Chapter Chapter 5-11 LO 2 Identify the major classifications of the balance sheet. 5-12 LO 2 Identify the major classifications of the balance sheet.
  4. 4. Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Balance Sheet – “Current Assets” Inventories Prepaid Expenses Company discloses: Payment of cash, that is recorded as an asset because basis of valuation (e.g., lower-of-cost-or- service or benefit will be received in the future. market) and the method of pricing (e.g., FIFO or LIFO). Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to: insurance rent supplies maintenance on equipment advertising fixed assets Chapter Chapter 5-13 LO 2 Identify the major classifications of the balance sheet. 5-14 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet (in thousands) Long-Term Investments Long-Term Current assets Investments Cash $ 285,000 Generally consists of four types: Investments: Securities Securities Invesment in ABC bonds 321,657 Investment in UC Inc. 253,980 Fixed assets bonds, Notes receivable 150,000 Land held for speculation 550,000 Special funds stock, and Sinking fund 225,000 long-term notes Pension fund 653,798 Nonconsolidated subsidiaries or Cash surrender value 84,321 affiliated companies. For marketable securities, Investment in Uncon. Sub. 457,836 management’s intent Total investments 2,696,592 determines current or Property, Plant, and Equip. Building 1,375,778 noncurrent classification. Land 975,000 Chapter Chapter 5-15 LO 2 Identify the major classifications of the balance sheet. 5-16 LO 2 Identify the major classifications of the balance sheet.
  5. 5. Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet (in thousands) Balance Sheet (in thousands) Long-Term Current assets Long-Term Current assets Investments Cash $ 285,000 Investments Cash $ 285,000 Investments: Investments: Invesment in ABC bonds 321,657 Invesment in ABC bonds 321,657 Fixed Assets Investment in UC Inc. 253,980 Special Funds Investment in UC Inc. 253,980 Notes receivable 150,000 Notes receivable 150,000 Land held for Land held for speculation 550,000 Sinking fund Land held for speculation 550,000 Sinking fund 225,000 Sinking fund 225,000 speculation Pensions fund Pension fund 653,798 Pension fund 653,798 Cash surrender value 84,321 Cash surrender Cash surrender value 84,321 Investment in Uncon. Sub. 457,836 Investment in Uncon. Sub. 457,836 Total investments 2,696,592 value of life Total investments 2,696,592 Property, Plant, and Equip. insurance Property, Plant, and Equip. Building 1,375,778 Building 1,375,778 Land 975,000 Land 975,000 Chapter Chapter 5-17 LO 2 Identify the major classifications of the balance sheet. 5-18 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet (in thousands) Balance Sheet (in thousands) Long-Term Current assets Property, Plant, and Current assets Investments Cash $ 285,000 Equipment Cash $ 285,000 Investments: Total investments 2,696,592 Invesment in ABC bonds 321,657 Property, Plant, and Equip. Investment in UC Inc. 253,980 Assets of a durable Building 1,375,778 Notes receivable 150,000 nature used in the Land 975,000 Land held for speculation 550,000 Machinery and equipment 234,958 Sinking fund 225,000 regular operations Capital leases 384,650 Nonconsolidated Pension fund 653,798 of the business. Leasehold improvements 175,000 Cash surrender value 84,321 Accumulated depreciation (975,000) Subsidiaries or Investment in Uncon. Sub. 457,836 Total PP&E 2,170,386 Affiliated Total investments 2,696,592 Intangibles Property, Plant, and Equip. Goodwill 3,000,000 Companies Building 1,375,778 Patents 177,000 Land 975,000 Trademarks 40,000 Chapter Chapter 5-19 LO 2 Identify the major classifications of the balance sheet. 5-20 LO 2 Identify the major classifications of the balance sheet.
  6. 6. Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet – “Exercise” Balance Sheet – “Exercise” Balance Sheet (in thousands) BE5-6 Mickey Snyder Corporation’s adjusted trial balance Intangibles Current assets contained the following asset accounts at December 31, 2007: Cash $ 285,000 Prepaid Rent $12,000; Goodwill $40,000; Franchise Fees Lack physical Accumulated depreciation (975,000) Receivable $2,000; Franchises $47,000; Patents $33,000; substance and are not Total PP&E 2,170,386 Trademarks $10,000. Prepare the intangible assets section of the financial instruments. Intangibles balance sheet. Goodwill 2,000,000 Limited life Patents 177,000 intangibles amortized. Trademark 40,000 Franchises 125,000 Indefinite-life Copyright 55,000 intangibles tested for Total intangibles 2,397,000 Other assets impairment. Prepaid pension costs 133,000 Deferred income tax 40,000 Total other 173,000 Chapter Chapter 5-21 LO 2 Identify the major classifications of the balance sheet. 5-22 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Balance Sheet – “Noncurrent Assets” Balance Sheet Balance Sheet Balance Sheet (in thousands) Other Assets Current assets Current Liabilities Balance Sheet (in thousands) Cash $ 285,000 Current liabilities Notes payable $ 233,450 This section should Intangibles “Obligations that a Accounts payable 131,800 include only unusual Goodwill 2,000,000 company reasonably Accrued compensation 43,000 Unearned revenue 17,000 items sufficiently Patents 177,000 expects to liquidate Income tax payable 23,400 Trademark 40,000 different from assets Franchises 125,000 either through the use Current maturities LT debt 121,000 Total current liabilities 569,650 in the other Copyright 55,000 of current assets or the Total intangibles 2,397,000 Long-term liabilities categories. Other assets creation of other Long-term debt 979,500 Prepaid pension costs 133,000 current liabilities.” Obligations capital lease 345,800 Deferred income taxes 77,909 Deferred income tax 40,000 Total long-term liabilities 2,093,859 Total other 173,000 Stockholders' equity Total Assets $ 9,210,978 Chapter Chapter 5-23 LO 2 Identify the major classifications of the balance sheet. 5-24 LO 2 Identify the major classifications of the balance sheet.
  7. 7. Balance Sheet Balance Sheet Balance Sheet – “Exercise” Balance Sheet – “Exercise” BE5-8 Included in Ewing Company’s December 31, 2007, trial Long-Term Liabilities Balance Sheet (in thousands) balance are the following accounts: Accounts Payable $240,000; Current liabilities Notes payable $ 233,450 Pension Liability $375,000; Discount on Bonds Payable $24,000; “Obligations that a Accounts payable 131,800 Advances from Customers $41,000; Bonds Payable $400,000; company does not Accrued compensation 43,000 Wages Payable $27,000; Interest Payable $12,000; Income Taxes Unearned revenue 17,000 reasonably expect to Income tax payable 23,400 Payable $29,000. Prepare the long-term liabilities section of the liquidate within the Current maturities LT debt 121,000 balance sheet. Total current liabilities 569,650 normal operating cycle.” Long-term liabilities Long-term debt 979,500 All covenants and Obligations capital lease 345,800 Deferred income taxes 77,909 restrictions must be Total long-term liabilities 2,093,859 disclosed. Stockholders' equity Chapter Chapter 5-25 LO 2 Identify the major classifications of the balance sheet. 5-26 LO 2 Identify the major classifications of the balance sheet. Balance Sheet Balance Sheet Balance Sheet Classification Exercise Balance Sheet Classification Exercise Owners’ Equity Account Classification (a) Investment in preferred stock Companies usually divide equity into three parts, (b) Treasury stock (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings. (c) Common stock Illustration 5-15 5- (d) Cash dividends payable (e) Accumulated depreciation (f) Interest payable (g) Deficit (h) Trading securities (i) Unearned revenue Chapter Chapter 5-27 LO 2 Identify the major classifications of the balance sheet. 5-28 LO 2 Identify the major classifications of the balance sheet.
  8. 8. Balance Sheet - Format Balance Sheet - Format Additional Information Reported Additional Information Reported Classified Balance Sheet There are normally four types of Account form information that are supplemental to account titles and amounts presented in Report form the balance sheet: Contingencies Accounting Trends and Techniques—2004 (New York: Accounting Policies AICPA) indicates that all of the 600 companies surveyed use either the “report form” (506) or the “account Contractual Situations form” (94), sometimes collectively referred to as the Fair Values “customary form.” Chapter Chapter LO 4 Determine which balance sheet information 5-29 LO 3 Prepare a classified balance sheet using the report and account formats. account 5-30 requires supplemental disclosure. Techniques of Disclosure Techniques of Disclosure The Statement of Cash Flows The Statement of Cash Flows Parenthetical Explanations One of the three basic objectives of financial reporting is Notes Cross-Reference and Contra Items “assessing the amounts, timing, and Supporting Schedules uncertainty of cash flows.” Terminology Chapter Chapter 5-31 LO 5 Describe the major disclosure techniques for the balance sheet. sheet. 5-32 LO 6 Indicate the purpose of the statement of cash flows.
  9. 9. The Statement of Cash Flows The Statement of Cash Flows The Statement of Cash Flows The Statement of Cash Flows Purpose of the Statement Content and Format To provide relevant information about the cash Three different activities: receipts and cash payments of an enterprise during Operating, Investing, Financing a period. Illustration 5-24 5- The statement provides answers to the following questions: 1. Where did the cash come from? 2. What was the cash used for? 3. What was the change in the cash balance? Chapter Chapter 5-33 LO 6 Indicate the purpose of the statement of cash flows. 5-34 LO 7 Identify the content of the statement of cash flows. The Statement of Cash Flows The Statement of Cash Flows The Statement of Cash Flows The Statement of Cash Flows Content and Format Preparation Operating Investing Financing Information obtained from several sources: (1) comparative balance sheets, Cash inflows Cash inflows Cash inflows and outflows and outflows and outflows (2) the current income statement, and from from from (3) selected transaction data. operations. non-current non-current assets. liabilities and equity. The statement’s value is that it helps users evaluate liquidity, solvency, and financial flexibility. Chapter Chapter 5-35 LO 7 Identify the content of the statement of cash flows. 5-36 LO 8 Prepare a statement of cash flows.
  10. 10. The Statement of Cash Flows The Statement of Cash Flows The Statement of Cash Flows The Statement of Cash Flows Preparation Preparation Statement of Cash Flow (in thousands) BE 5-12 Midwest Beverage Company reported the Operating activities Noncash credit to following items in the most recent year. Net income $ 40,000 revenues. Activity Increase in accounts receivable (10,000) Increase in accounts payable 5,000 Noncash charge to Depreciation expense 40,000 expenses. Cash flow from operations 75,000 Investing activities Purchase of equipment (8,000) Financing activities Proceeds from notes payable 20,000 Dividends paid (5,000) Cash flow from financing 15,000 Increase in cash $ 82,000 Required: Prepare a Statement of Cash Flows Chapter Chapter 5-37 LO 8 Prepare a statement of cash flows. 5-38 LO 8 Prepare a statement of cash flows. Balance Sheet Balance Sheet Additional Information Reported Additional Information Reported Review Significant financing and investing activities that do not affect cash are reported in either a In preparing a statement of cash flows, which of the separate schedule at the bottom of the following transactions would be considered an investing activity? statement of cash flows or in the notes. a. Sale of equipment at book value Examples include: b. Sale of merchandise on credit Issuance of common stock to purchase assets. c. Declaration of a cash dividend Conversion of bonds into common stock. d. Issuance of bonds payable at a discount Issuance of debt to purchase assets. receivable. Exchanges on long-lived assets. Chapter Chapter 5-39 LO 8 Prepare a statement of cash flows. 5-40 LO 8 Prepare a statement of cash flows.
  11. 11. Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Without cash, a company will not survive. Financial Liquidity Cash flow from Operations: Net Cash Provided by Current Cash Operating Activities High amount - company able to generate Debt Coverage = sufficient cash to pay its bills. Ratio Average Current Liabilities Low amount - company may have to borrow or issue equity securities to pay bills. Ratio indicates whether the company can pay off its current liabilities from its operations. A ratio near 1:1 is good. Chapter Chapter 5-41 LO 9 Understand the usefulness of the statement of cash flows. 5-42 LO 9 Understand the usefulness of the statement of cash flows. Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Financial Flexibility Free Cash Flow Illustration 5-34 5- Net Cash Provided by Cash Debt Operating Activities Coverage = Ratio Average Total Liabilities This ratio indicates a company’s ability to repay its liabilities from net cash provided by operating The amount of discretionary cash flow a company has activities, without having to liquidate the assets for purchasing additional investments, retiring its employed in its operations. debt, purchasing treasury stock, or simply adding to its liquidity. Chapter Chapter 5-43 LO 9 Understand the usefulness of the statement of cash flows. 5-44 LO 9 Understand the usefulness of the statement of cash flows.
  12. 12. Balance Sheet Balance Sheet Copyright Copyright Review Copyright © 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted The current cash debt coverage ratio is often used to in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is assess unlawful. Request for further information should be addressed a. financial flexibility. to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only b. liquidity. and not for distribution or resale. The Publisher assumes no c. profitability. responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information d. solvency. contained herein. Chapter Chapter 5-45 LO 9 Understand the usefulness of the statement of cash flows. 5-46

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