Intermediate Accounting, 11th ed.Kieso, Weygandt, and Warfield

Prepared by Jep Robertson

New Mexico State University

Chapter 5: Balance Sheet Chapter 5: Balance Sheet and Statement of Cash and Statement of Cash

Flows SystemsFlows Systems

1. Identify 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.

4. Identify balance sheet information requiring supplemental disclosure.

After studying this chapter, you should be able to:

Chapter 5: Balance Sheet Chapter 5: Balance Sheet and Statement of Cash and Statement of Cash

Flows SystemsFlows Systems

5. Identify major disclosure techniques for the balance sheet.

6. Indicate the purpose of the statement of cash flows.

7. Identify the content of the statement of cash flows.

8. Prepare a statement of cash flows.9. Understand the usefulness of the statement

of cash flows.

Chapter 5: Balance Sheet Chapter 5: Balance Sheet and Statement of Cash and Statement of Cash

Flows SystemsFlows Systems

Part 1: The Balance SheetPart 1: The Balance Sheet

The balance sheet provides information for evaluating:

Capital structureRates of returnAnalyzing an enterprise’s:

LiquiditySolvency Financial flexibility

Balance Sheet: UsefulnessBalance Sheet: Usefulness

• 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: LimitationsBalance Sheet: Limitations

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: Balance Sheet: ClassificationClassification

• Current Assets• Long-term

investments• Property, plant,

and equipment• Intangible assets• Other assets

• Current liabilities• Long-term debt• Owners’ equity

Capital stock• Additional paid-in

capital• Retained earnings

Assets Liabilities and Equity

Balance Sheet: Balance Sheet: ClassificationClassification

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

Current AssetsCurrent Assets

Long-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

Long-Term InvestmentsLong-Term Investments

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

Current LiabilitiesCurrent Liabilities

Long-term obligations are those not expected to be paid within the operating cycle.Examples are:

• obligations arising from specific financingsituations (issuance of bonds)

• obligations arising from ordinary businessoperations (pension obligations)

• obligations that are contingent (productwarranties)

Long-Term LiabilitiesLong-Term Liabilities

Additional 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: Additional Balance Sheet: Additional Information ReportedInformation Reported

• Parenthetical explanations• Notes• Cross references and contra items • Supporting schedules

Balance Sheet: Techniques Balance Sheet: Techniques of Disclosureof Disclosure

Part 1: The Statement of Part 1: The Statement of Cash FlowsCash Flows

The cash flow statement provides information about:

• cash receipts (cash inflows)• uses of cash (cash outflows) • during a period of time

Inflows and outflows are reported for:• operating• investing • financing activities

The Cash Flow StatementThe Cash Flow Statement

Cash Inflows and OutflowsCash Inflows and Outflows

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

Preparing a Statement of Preparing a Statement of Cash FlowsCash Flows

Accrual Based Statements Cash Flow Statement

Income Statementitems & Changes inCurrent Assets andCurrent Liabilities

Operating activities:Adjust net income for accrualsand non-cash charges to get cash flows

Balance Sheet: Changes inNon-Current Assets

Investing activities:Inflows from sale of assets and Outflows from purchases of assets

Balance Sheet: Changes inNon-Current Liabilities

andEquity

Financing activities:Inflows and outflowsfrom loan and equitytransactions

The Statement of Cash The Statement of Cash Flows: Indirect MethodFlows: Indirect Method

Ratio analysis expresses the relationship between selected financial data.

These relationships can be expressed as:• percentages • rates, or• proportions

Ratio AnalysisRatio Analysis

21Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

04/08/23Coverage ratiosDegree of protection forlong-term creditors andinvestors

Debt to total assetsTimes interest earned

Type What is measured Examples

Liquidity ratiosShort-term ability to pay maturing obligations

Current ratioQuick assets ratio

Profitability ratios

Degree of success orfailure for a given period

Rate of return on assetsEarnings per share

Activity ratios Effectiveness in using assets employed

Receivables turnoverInventory turnover

Types of RatiosTypes of Ratios

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