balance sheet and statement of cash flows

5/25/2018 Balance Sheet and Statement of Cash Flows

1/46

Chapter5-1

Balance Sheet andBalance Sheet and

Statement of Cash FlowsStatement of Cash Flows

Balance Sheet andBalance Sheet and

Statement of Cash FlowsStatement of Cash Flows

ChapterChapter55

Intermediate Accounting12th Edition

Kieso, Weygandt, and Warfield

Prepared by Coby Harmon, University of California, Santa Barbara


2/46

Chapter5-2

1.1. Explain the uses and limitations of a balance sheet.Explain the uses and limitations of a balance sheet... !dentify the ma"or classifications of the balance sheet.!dentify the ma"or classifications of the balance sheet.

#.#. Prepare a classified balance sheet usin$ the report andPrepare a classified balance sheet usin$ the report andaccount formats.account formats.

%.%. &etermine 'hich balance sheet information re(uires&etermine 'hich balance sheet information re(uiressupplemental disclosure.supplemental disclosure.

).). &escribe the ma"or disclosure techni(ues for the balance&escribe the ma"or disclosure techni(ues for the balancesheet.sheet.

*.*. !ndicate the purpose of the statement of cash flo's.!ndicate the purpose of the statement of cash flo's.

+.+. !dentify the content of the statement of cash flo's.!dentify the content of the statement of cash flo's.

.. Prepare a statement of cash flo's.Prepare a statement of cash flo's.

-.-. Understand the usefulness of the statement of cashUnderstand the usefulness of the statement of cashflo's.flo's.

Learning ObjectivesLearning Objectives

Learning ObjectivesLearning Objectives


3/46

Chapter5-3

BalanceBalance

SheetSheet

Statement ofStatement of

Cash FlowsCash Flows

PurposePurpose

Content andContent and

formatformat

PreparationPreparation

UsefulnessUsefulness

Balance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash Flows

Balance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash Flows

UsefulnessUsefulness

LimitationsLimitations

ClassificationClassification

AdditionalAdditional

informationinformation

reportedreportedTechniques ofTechniques of

disclosuredisclosure


4/46

Chapter5-4

Evaluatin$ the capital structure.

ssess ris/ and future cash flo's.

naly0e the companys2

3i(uidity,

Solvency, and

4inancial flexibility.

Balance SheetBalance Sheet


Usefulness of the Balance Sheet

LO 1 !plain the uses and limitations of a balance sheet"LO 1 !plain the uses and limitations of a balance sheet"


5/46

Chapter5-5

5ost assets and liabilities are reported athistorical cost.

Use of "ud$ments and estimates.

5any items of financial value are omitted.

Limitations of the Balance Sheet

LO 1 Understand the uses and limitations of an income statement"LO 1 Understand the uses and limitations of an income statement"




6/46

Chapter5-6

6hree 7eneral Classifications

ssets, 3iabilities, and Stoc/holders E(uity

Companies further divide these classifications2

Classification in the Balance Sheet

LO # $dentif% the major classifications of the balance sheet"LO # $dentif% the major classifications of the balance sheet"



!llustration )81!llustration )81

Balance SheetClassification


7/46

Chapter5-7

Cash and other assets a company expects toconvert into cash, sell, or consume either in one

year or in the operatin$ cycle, 'hichever is lon$er.

Current &ssets


Balance SheetBalance SheetBalance SheetBalance Sheet

!llustration )8!llustration )8ccounts andbasis of valuation


8/46

Chapter5-8

'eview'eview

6he correct order to present current assets is6he correct order to present current assets is

a.a. Cash, accounts receivable, prepaid items,Cash, accounts receivable, prepaid items,

inventories.inventories. b.b. Cash, accounts receivable, inventories, prepaidCash, accounts receivable, inventories, prepaid

items.items.

c.c. Cash, inventories, accounts receivable, prepaidCash, inventories, accounts receivable, prepaid

items.items. d.d. Cash, inventories, prepaid items, accountsCash, inventories, prepaid items, accountsreceivable.receivable.

LO ( !plain how to report other comprehensive income"LO ( !plain how to report other comprehensive income"



9/46

Chapter5-9

7enerally any monies available 9on demand.:

Cash e)uivalentsare short8term hi$hly li(uid

investments that 'ill mature 'ithin threemonths or less.

ny restrictions or commitments must bedisclosed.

Cash


Balance Sheet * +Current &ssets,Balance Sheet * +Current &ssets,Balance Sheet * +Current &ssets,Balance Sheet * +Current &ssets,

!llustration )8#!llustration )8#


10/46

Chapter5-10

-ortfolios

Short./erm $nvestments


/%pe 0aluation Classification

Held8to85aturity &ebt

morti0edCost

Current or;oncurrent

6radin$ &ebt or E(uity 4air


11/46

Chapter5-11

Claims held a$ainst customers and others formoney, $oods, or services.

ccounts receivable = oral promises;otes receivable = 'ritten promises

5a"or cate$ories of receivables should be sho'n in

the balance sheet or the related notes.

'eceivables




12/46

Chapter5-12

&ccounts 'eceivable * -resentation Options


Current ssets2Current ssets2

CashCash > #%*> #%*

ccounts receivableccounts receivable )??)??

3ess allo'ance for doubtful accounts3ess allo'ance for doubtful accounts )) %+) %+)!nventory!nventory 11

6otal current assets6otal current assets >1,*##>1,*##

Current ssets2Current ssets2

CashCash > #%*> #%*ccounts receivable,ccounts receivable, net of >) allo'ancenet of >) allo'ance %+)%+)

!nventory!nventory 11

6otal current assets6otal current assets >1,*##>1,*##

11

22



13/46

Chapter5-13

Company discloses2

basis of valuation @e.$., lo'er8of8cost8or8

mar/etA andthe method of pricin$ @e.$., 4!4 or 3!4A.

$nventories




14/46

Chapter5-14

Payment of cash, that is recorded as an asset becausePayment of cash, that is recorded as an asset becauseservice or benefit 'ill be received in the future.service or benefit 'ill be received in the future.

insuranceinsurance

suppliessupplies

advertisin$advertisin$

Cash PaymentCash Payment Expense ecordedExpense ecordedBFO'

rentrent

maintenance on e(uipmentmaintenance on e(uipment

Prepayments often occur in re$ard to2Prepayments often occur in re$ard to2

-repaid !penses




15/46

Chapter5-15

enerall% consists of four t%pes2

SecuritiesSecurities

Fi!ed assetsFi!ed assets

Special fundsSpecial funds

3onconsolidated subsidiaries3onconsolidated subsidiariesor

affiliated companies.

Long./erm $nvestments


Balance Sheet * +3oncurrent &ssets,Balance Sheet * +3oncurrent &ssets,Balance Sheet * +3oncurrent &ssets,Balance Sheet * +3oncurrent &ssets,


16/46

Chapter5-16

Long./erm$nvestments

SecuritiesSecuritiesSecuritiesSecurities$nvestments2

!nvesment in BC bonds #1,*)+

!nvestment in UC !nc. )#,-?;otes receivable 1)?,???

3and held for speculation ))?,???

Sin/in$ fund ),???

Pension fund *)#,+-

Cash surrender value %,#1

!nvestment in Uncon. Sub. %)+,#*6otal investments ,*-*,)-

-ropert%4 -lant4 and )uip"

Buildin$ 1,#+),++

3and -+),???



bonds,stoc/, and

lon$8term notes

4or mar/etable securities,mana$ements intentdetermines current ornoncurrent classification.

Balance Sheet @in thousandsA

Current assets

Cash ),???>


17/46

Chapter5-17

Fi!ed &ssetsFi!ed &ssetsFi!ed &ssetsFi!ed &ssets

$nvestments2




Sin/in$ fund ),???

Pension fund *)#,+-




Buildin$ 1,#+),++

3and -+),???



3and held forspeculation



Current assets

Cash ),???>


18/46

Chapter5-18

Special FundsSpecial FundsSpecial FundsSpecial Funds

$nvestments2




Sin/in$ fund ),???

Pension fund *)#,+-




Buildin$ 1,#+),++

3and -+),???



Sin/in$ fund

Pensions fund

Cash surrendervalue of lifeinsurance



Current assets

Cash ),???>


19/46

Chapter5-19

3onconsolidated3onconsolidated

Subsidiaries orSubsidiaries or&ffiliated&ffiliated

CompaniesCompanies

3onconsolidated3onconsolidated

Subsidiaries orSubsidiaries or&ffiliated&ffiliated

CompaniesCompanies

$nvestments2




Sin/in$ fund ),???

Pension fund *)#,+-




Buildin$ 1,#+),++

3and -+),???





Current assets

Cash ),???>


20/46

Chapter5-20

-ropert%4 -lant4 and)uipment

6otal investments ,*-*,)-


Buildin$ 1,#+),++3and -+),???

5achinery and e(uipment #%,-)

Capital leases #%,*)?

3easehold improvements 1+),???

ccumulated depreciation @-+),???A

6otal PPDE ,1+?,#*$ntangibles

7ood'ill #,???,???

Patents 1++,???

6rademar/s %?,???



&ssets of a durablenature used in theregular operationsof the business"


Current assets

Cash ),???>


21/46

Chapter5-21

$ntangibles

ccumulated depreciation @-+),???A

6otal PPDE ,1+?,#*

$ntangibles

7ood'ill ,???,???

Patents 1++,???

6rademar/ %?,???

4ranchises 1),???

Copyri$ht )),???

6otal intan$ibles ,#-+,???Other assets

Prepaid pension costs 1##,???

&eferred income tax %?,???

6otal other 1+#,???



Lac ph%sicalsubstance and are not

financial instruments"Limited lifeintangibles amorti6ed"

$ndefinite.lifeintangibles tested forimpairment"


Current assets

Cash ),???>


22/46

Chapter5-22 LO # $dentif% the major classifications of the balance sheet"LO # $dentif% the major classifications of the balance sheet"

Balance Sheet * +!ercise,Balance Sheet * +!ercise,Balance Sheet * +!ercise,Balance Sheet * +!ercise,

B5.75ic/ey Snyder Corporations ad"usted trial balancecontained the follo'in$ asset accounts at &ecember #1, ??+2Prepaid ent >1,??? 7ood'ill >%?,??? 4ranchise 4eeseceivable >,??? 4ranchises >%+,??? Patents >##,???6rademar/s >1?,???. Prepare the intan$ible assets sectionof the

balance sheet.$ntangibles

7ood'ill > %?,???

4ranchises %+,???

Patents ##,???6rademar/s 1?,???

6otal >1#?,???


23/46

Chapter5-23

Other &ssets

$ntangibles

7ood'ill ,???,???

Patents 1++,???

6rademar/ %?,???

4ranchises 1),???

Copyri$ht )),???

6otal intan$ibles ,#-+,???

Other assets

Prepaid pension costs 1##,???&eferred income tax %?,???

6otal other 1+#,???

/otal &ssets -,1?,-+>



/his section shouldinclude onl% unusual

items sufficientl%different from assetsin the othercategories"


Current assetsCash ),???>


24/46

Chapter5-24

+Obligations that acompan% reasonabl%

e!pects to li)uidateeither through the useof current assets or thecreation of other

current liabilities",



Current Liabilities Balance Sheet @in thousandsACurrent liabilities;otes payable ##,%)?>

.ccounts payable 1#1,??

.ccrued compensation %#,???

Unearned revenue 1+,???

!ncome tax payable #,%??Current maturities 36 debt 11,???

6otal current liabilities )*-,*)?

Long.term liabilities

3on$8term debt -+-,)??

Bbli$ations capital lease #%),??&eferred income taxes ++,-?-

6otal lon$8term liabilities ,?-#,)-

Stoc5holders8 e)uit%


25/46

Chapter5-25

+Obligations that acompan% does not

reasonabl% e!pect toli)uidate within thenormal operating c%cle",

&ll covenants andrestrictions must bedisclosed"



Balance Sheet @in thousandsACurrent liabilities

;otes payable ##,%)?>

.ccounts payable 1#1,??

.ccrued compensation %#,???

Unearned revenue 1+,???

!ncome tax payable #,%??Current maturities 36 debt 11,???

6otal current liabilities )*-,*)?


3on$8term debt -+-,)??

Bbli$ations capital lease #%),??&eferred income taxes ++,-?-

6otal lon$8term liabilities ,?-#,)-

Stoc5holders8 e)uit%

Long./erm Liabilities


26/46

Chapter5-26 LO # $dentif% the major classifications of the balance sheet"LO # $dentif% the major classifications of the balance sheet"

Balance Sheet * +!ercise,Balance Sheet * +!ercise,Balance Sheet * +!ercise,Balance Sheet * +!ercise,

B5.9!ncluded in E'in$ Companys &ecember #1, ??+, trialbalance are the follo'in$ accounts2 ccounts Payable >%?,???Pension 3iability >#+),??? &iscount on Bonds Payable >%,???dvances from Customers >%1,??? Bonds Payable >%??,???Fa$es Payable >+,??? !nterest Payable >1,??? !ncome 6axes

Payable >-,???. Prepare the lon$8term liabilitiessection of thebalance sheet.


Pension liability >#+),???

Bonds payable %??,???

&iscount on bonds payable @%,???A

6otal +)1,???


27/46

Chapter5-27

Companies usuall% divide e)uit% into three parts4:1;Capital Stoc4 :#;&dditional -aid.$n Capital4

and :


28/46

Chapter5-28

@aA !nvestment in preferred stoc/


Balance Sheet Classification !erciseBalance Sheet Classification !erciseBalance Sheet Classification !erciseBalance Sheet Classification !ercise

&ccount

@bA 6reasury stoc/

@cA Common stoc/

@dA Cash dividends payable

@eA ccumulated depreciation

@fA !nterest payable

@$A &eficit@hA 6radin$ securities

@iA Unearned revenue

@aA Current assetG!nvestment

@bA E(uity

@cA E(uity

@dA Current liability

@eA Contra8asset

@fA Current liability

@$A E(uity@hA Current asset

@iA Current liability

Classification


29/46

Chapter5-29

Classified Balance Sheet

&ccount form&ccount form

'eport form'eport form

Balance Sheet . FormatBalance Sheet . FormatBalance Sheet . FormatBalance Sheet . Format

&ccounting /rends and /echni)uesH??% @;e' Ior/2!CPA indicates that all of the *?? companies surveyed

use either the 9report form: @)?*A or the 9accountform: @-%A, sometimes collectively referred to as the9customary form.:

LO < -repare a classified balance sheet using the report and account formats"LO < -repare a classified balance sheet using the report and account formats"


30/46

Chapter

5-30

Contingencies

&ccounting -olicies

Contractual Situations

Fair 0alues

&dditional $nformation 'eported&dditional $nformation 'eported&dditional $nformation 'eported&dditional $nformation 'eported

/here are normall% four t%pes ofinformation that are supplemental toaccount titles and amounts presented inthe balance sheet2

LO > ?etermine which balance sheet informationLO > ?etermine which balance sheet informationre)uires supplemental disclosure"re)uires supplemental disclosure"


31/46

Chapter

5-31

-arenthetical !planations

3otes

Cross.'eference and Contra $tems

Supporting Schedules/erminolog%

/echni)ues of ?isclosure/echni)ues of ?isclosure/echni)ues of ?isclosure/echni)ues of ?isclosure

LO 5 ?escribe the major disclosure techni)ues for the balance sheet"LO 5 ?escribe the major disclosure techni)ues for the balance sheet"


32/46

Chapter

5-32

/he Statement of Cash Flows/he Statement of Cash Flows/he Statement of Cash Flows/he Statement of Cash Flows

LO 7 $ndicate the purpose of the statement of cash flows"LO 7 $ndicate the purpose of the statement of cash flows"

ne of the three basic ob"ectives of financialreportin$ is

+assessing the amounts4 timing4 and

uncertaint% of cash flows",


33/46

Chapter

5-33

6o provide relevant information about the cashreceipts and cash payments of an enterprise durin$a period.

6he statement provides ans'ers to the follo'in$(uestions2

1. Fhere did the cash come fromJ

. Fhat 'as the cash used forJ

#. Fhat 'as the chan$e in the cash balanceJ

-urpose of the Statement


LO 7 $ndicate the purpose of the statement of cash flows"LO 7 $ndicate the purpose of the statement of cash flows"


34/46

Chapter

5-34

6hree different activities2

peratin$,

Content and Format


LO @ $dentif% the content of the statement of cash flows"LO @ $dentif% the content of the statement of cash flows"

!nvestin$, 4inancin$

!llustration )8%!llustration )8%


35/46

Chapter

5-35

Content and Format


OperatingOperatingOperatingOperating

Cash inflo's

and outflo'sfromoperations.

$nvesting$nvesting$nvesting$nvesting

Cash inflo's

and outflo'sfromnon8currentassets.

FinancingFinancingFinancingFinancing

Cash inflo's

and outflo'sfromnon8currentliabilities and

e(uity.6he statements value is that it helps users evaluateli(uidity, solvency, and financial flexibility.6he statements value is that it helps users evaluateli(uidity, solvency, and financial flexibility.

LO @ $dentif% the content of the statement of cash flows"LO @ $dentif% the content of the statement of cash flows"


36/46

Chapter

5-36

!nformation obtained from several sources2

:1;comparative balance sheets,

:#;the current income statement, and

:


37/46

Chapter

5-37

-reparation


LO ( -repare a statement of cash flows"LO ( -repare a statement of cash flows"

BE )815id'est Bevera$e Company reported thefollo'in$ items in the most recent year.

ctivity

OperatingFinancing

Operating

Operating

$nvestingOperating

Financing

'e)uired2 Prepare a Statement of Cash 4lo's


38/46

Chapter

5-38

-reparationStatement of Cash Flow @in thousandsAOperating activities

;et income %?,???>

!ncrease in accounts receivable @1?,???A

!ncrease in accounts payable ),???

&epreciation expense %?,???

Cash flo' from operations +),???

$nvesting activities

Purchase of e(uipment @,???A

Financing activities

Proceeds from notes payable ?,???&ividends paid @),???A

Cash flo' from financin$ 1),???

$ncrease in cash ,???>



;oncash credit torevenues.

;oncash char$e toexpenses.


39/46

Chapter

5-39

'eview'eview

!n preparin$ a statement of cash flo's, 'hich of the!n preparin$ a statement of cash flo's, 'hich of thefollo'in$ transactions 'ould be considered an investin$follo'in$ transactions 'ould be considered an investin$activityJactivityJ

a.a. Sale of e(uipment at boo/ valueSale of e(uipment at boo/ value

b.b. Sale of merchandise on creditSale of merchandise on credit

c.c. &eclaration of a cash dividend&eclaration of a cash dividend

d.d. !ssuance of bonds payable at a discount!ssuance of bonds payable at a discountreceivable.receivable.




40/46

Chapter

5-40

!ssuance of common stoc/ to purchase assets.Conversion of bonds into common stoc/.

!ssuance of debt to purchase assets.Exchan$es on lon$8lived assets.

&dditional $nformation 'eported&dditional $nformation 'eported&dditional $nformation 'eported&dditional $nformation 'eported

Si$nificant financin$ and investin$ activitiesthat do not affect cash are reported in either aseparate schedule at the bottom of thestatement of cash flo's or in the notes.

Examples include2



41/46

Chapter

5-41

Aigh amount8 company able to $enerate

sufficient cash to pay its bills.Low amount8 company may have to borro' orissue e(uity securities to pay bills.

Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash Flows

Fithout cash, a company 'ill not survive.

Cash flo' from perations2

LO 9 Understand the usefulness of the statement of cash flows"LO 9 Understand the usefulness of the statement of cash flows"


42/46

Chapter

5-42


atio indicates 'hether the company can pay off its

current liabilities from its operations. ratio near121 is $ood.


Financial Li)uidit%

;et Cash Provided byperatin$ ctivities

vera$e Current 3iabilities

Current Cash

?ebt Coverage'atio K


43/46

Chapter

5-43


6his ratio indicates a companys ability to repay its

liabilities from net cash provided by operatin$activities, 'ithout havin$ to li(uidate the assetsemployed in its operations.


Financial Fle!ibilit%

;et Cash Provided byperatin$ ctivities

vera$e 6otal 3iabilities

Cash ?ebt

Coverage'atio K


44/46

Chapter

5-44


6he amount of discretionary cash flo' a company hasfor purchasin$ additional investments, retirin$ itsdebt, purchasin$ treasury stoc/, or simply addin$ toits li(uidity.


Free Cash Flow!llustration )8#%!llustration )8#%


45/46

Chapter

5-45

'eview'eview

6he current cash debt covera$e ratio is often used to6he current cash debt covera$e ratio is often used toassessassess

a. financial flexibility.a. financial flexibility. b. li(uidity.b. li(uidity.

c. profitability.c. profitability.

d. solvency.d. solvency.




46/46

Chapter

Copyri$ht L ??* Mohn Filey D Sons, !nc. ll ri$hts reserved.eproduction or translation of this 'or/ beyond that permittedin Section 11+ of the 1-+* United States Copyri$ht ct'ithout the express 'ritten permission of the copyri$ht o'neris unla'ful. e(uest for further information should be

addressed to the Permissions &epartment, Mohn Filey D Sons,!nc. 6he purchaser may ma/e bac/8up copies for hisGher o'nuse only and not for distribution or resale. 6he Publisherassumes no responsibility for errors, omissions, or dama$es,caused by the use of these pro$rams or from the use of theinformation contained herein.

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