Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

CHAPTER 4

527 views

Published on

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

CHAPTER 4

  1. 1. CHAPTER 4 Structure of the Balance Sheet and Statement of Cash Flow
  2. 2. Roadmap <ul><li>Measurement conventions of Balance Sheet Items </li></ul><ul><li>Cash Flow Statement </li></ul><ul><ul><li>Indirect approach </li></ul></ul><ul><ul><li>Direct approach </li></ul></ul>
  3. 3. I. Measurement Conventions for Balance Sheet Accounts <ul><li>1. Assets: a. Current assets. b. Long-term investments. c. Property, plant, and equipment d. Intangible assets. e. Other (long-term) assets. </li></ul>
  4. 4. I. Measurement Conventions for Balance Sheet Accounts <ul><li>2. Liabilities: a. Current liabilities. b. Long-term liabilities. </li></ul><ul><li>3. Owners’ equity: a. Capital stock. b. Additional paid-in capital. c. Retained earnings. </li></ul>
  5. 5. Ways to measure assets <ul><li>Historical cost </li></ul><ul><li>Present value </li></ul><ul><li>Current market value </li></ul><ul><li>Net realizable value </li></ul>
  6. 6. Cash: <ul><li>1. It reflects the amount of money or currency the firm has on hand or in bank accounts </li></ul><ul><li>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. </li></ul><ul><li>3. Cash is measured in current market price. </li></ul>
  7. 7. I. Measurement Conventions for Balance Sheet Accounts Short-term investments: <ul><li>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. </li></ul><ul><li>a. Debt securities that the company intends to hold to maturity is carried at amortized cost. </li></ul><ul><li>b. Debt and equity securities held for short-range investment purposes are carried at the market price. </li></ul>
  8. 8. I. Measurement Conventions for Balance Sheet Accounts Net accounts receivable: <ul><li>1. Gross accounts receivable equal the face amounts arising from past transactions. </li></ul><ul><li>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. </li></ul><ul><li>3. As a consequence, net accounts receivable are carried at net realizable value. </li></ul>
  9. 9. I. Measurement Conventions for Balance Sheet Accounts Property, plant, and equipment – net: <ul><li>1. All items in this category are carried on the balance sheet at historical cost minus accumulated depreciation . </li></ul><ul><li>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. </li></ul>
  10. 10. I. Measurement Conventions for Balance Sheet Accounts <ul><li>Accounts payable and accrued liabilities are reflected on the balance sheet at the amount of the original liability (i.e., historical cost). </li></ul>
  11. 11. I. Measurement Conventions for Balance Sheet Accounts Long-term debt: <ul><li>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. </li></ul><ul><li>2. For fixed rate debt, this carrying amount will differ from current market prices whenever interest rates have changed subsequent to issuance. </li></ul><ul><li>3. Deferred income taxes are reported at their undiscounted amount. </li></ul>
  12. 12. I. Measurement Conventions for Balance Sheet Accounts <ul><li>Common Stock is reported at historical par (or stated) value. </li></ul><ul><li>Additional paid-in capital is reported at historical cost as the excess of original issue price and par (or stated) value. </li></ul>
  13. 13. I. Measurement Conventions for Balance Sheet Accounts Retained Earnings : <ul><li>1. This account measures the net of the cumulative earnings less cumulative dividend distributions of the company since inception. </li></ul><ul><li>2. Since different measurement bases pervade the balance sheet, income (and retained earnings) is a mixture of historical costs, current values, and present values. </li></ul>
  14. 14. 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. <ul><li>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. </li></ul>
  15. 15. II. Statement of Cash Flows: B. The cash flow statement summarizes the cash inflows and outflows of a company broken down into three activities: <ul><li>1. Cash flows from operating activities result from the cash effects of transactions and events that affect operating income. </li></ul><ul><li>2. Cash flows from investing activities result from the cash effects of transactions and events that affect long-term assets. </li></ul><ul><li>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). </li></ul>
  16. 16. II. Statement of Cash Flows: C. Indirect approach <ul><li>Indirect approach arrives at net cash flows from operations by adjusting net income </li></ul><ul><li>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. </li></ul>
  17. 17. <ul><li>b. Investing section shows components of changes in long-term assets as inflows and outflows. </li></ul><ul><li>c. Financing section shows components of changes in long-term liabilities and owners’ equity as inflows and outflows. </li></ul>
  18. 18. II. Statement of Cash Flows: Direct Approach <ul><li>Direct approach shows the individual operating cash inflows and outflows directly. </li></ul>
  19. 19. Roadmap <ul><li>Measurement conventions of Balance Sheet Items </li></ul><ul><li>Cash Flow Statement </li></ul><ul><ul><li>Indirect approach </li></ul></ul><ul><ul><li>Direct approach </li></ul></ul>

×