balance sheet and statement of cash flows chapter 5

Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

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Balance Sheet and Statement of Cash Flows

Chapter 5


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Evaluating the capital structure.Assess risk and future cash flows.Analyze the company’s: Liquidity, Solvency, and Financial flexibility.

Balance SheetUsefulness of the Balance Sheet

LO 1 Explain the uses and limitations of a balance sheet.


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Most assets and liabilities are reported at historical cost.Use of judgments and estimates.Many items of financial value are omitted.

Limitations of the Balance Sheet

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

Balance Sheet


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Resources (Assets)

Claims against resources (Liabilities)

Remaining claims accruing to owners

(Owners’ Equity)

Balance Sheet


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Current AssetsCash

ReceivablesInventories

Prepayments

Will be converted to cash or

consumed within one year or the operating cycle,

whichever is longer.

Current Assets


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Current Assets - “Summary”

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet (in thousands)Current assetsCash 285,000$ ST I nvestments 140,000 Accounts receivable 777,000 I nventory 402,000 Prepaid expenses 170,000 Total current assets 1,774,000

Investments:I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980

Balance Sheet – “Current Assets”

Cash and other assets a company expects to convert into cash, sell, or consume

either in one year or in the operating cycle, whichever is longer.


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Claims held against customers and others for money, goods, or services.

Accounts receivable – oral promisesNotes receivable – written promises

Major categories of receivables should be shown in the balance sheet or the related notes.

Receivables




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Accounts Receivable – Presentation Options



Current Assets:Cash $ 346Accounts receivable 500 Less allowance for doubtful accounts 25 475Inventory 812Total current assets $1,633

Current Assets:Cash $ 346Accounts receivable, net of $25 allowance 475 Inventory 812Total current assets $1,633

1

2


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Non-Current AssetsInvestments and

FundsProperty, Plant, &

EquipmentIntangibles

OtherNot expected to be converted to cash

or consumed within one year or

the operating cycle, whichever is

longer

Noncurrent Assets


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Long-Term Investments

Securities I nvestments:

I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Cash surrender value 84,321 I nvestment in Uncon. Sub. 457,836

Total investments 2,696,592 Property, Plant, and Equip.

Building 1,375,778 Land 975,000


Balance Sheet – “Noncurrent Assets”

bonds, stock, and long-term notesFor marketable securities,

management’s intent determines current or noncurrent classification.

Balance Sheet (in thousands)Current assets

Cash 285,000$


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Fixed Assets I nvestments:



Building 1,375,778 Land 975,000



Land held for speculation

Long-Term Investments Balance Sheet (in thousands)Current assets

Cash 285,000$


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Special Funds I nvestments:



Building 1,375,778 Land 975,000



Sinking fundPensions fundCash surrender value of life insurance


Cash 285,000$


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Nonconsolidated Subsidiaries or Affiliated Companies

I nvestments:I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Cash surrender value 84,321 I nvestment in Uncon. Sub. 457,836


Building 1,375,778 Land 975,000




Cash 285,000$


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Property, Plant, and Equipment


Building 1,375,778 Land 975,000 Machinery and equipment 234,958 Capital leases 384,650 Leasehold improvements 175,000 Accumulated depreciation (975,000)

Total PP&E 2,170,386 I ntangibles

Goodwill 3,000,000 Patents 177,000 Trademarks 40,000



Assets of a durable nature used in the regular operations of the business.


Cash 285,000$


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Intangibles

Accumulated depreciation (975,000) Total PP&E 2,170,386

I ntangiblesGoodwill 2,000,000 Patents 177,000 Trademark 40,000 Franchises 125,000 Copyright 55,000

Total intangibles 2,397,000 Other assets

Prepaid pension costs 133,000 Def erred income tax 40,000

Total other 173,000



Lack physical substance and are not financial instruments.

Limited life intangibles amortized.Indefinite-life intangibles tested for impairment.


Cash 285,000$


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Other Assets

I ntangiblesGoodwill 2,000,000 Patents 177,000 Trademark 40,000 Franchises 125,000 Copyright 55,000

Total intangibles 2,397,000 Other assets

Prepaid pension costs 133,000 Def erred income tax 40,000

Total other 173,000 Total Assets 9,210,978$



This section should include only unusual items sufficiently different from assets in the other categories.


Cash 285,000$


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Current LiabilitiesAccounts Payable

Notes PayableAccrued Liabilities

Current Maturities of Long-Term Debt

Obligations expected to be

satisfied through current assets or creation of other current liabilities

Current Liabilities


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“Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”


Balance Sheet

Current Liabilities Balance Sheet (in thousands)Current liabilitiesAccounts payable 233,450$ Notes payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 I ncome tax payable 23,400 Current maturities LT debt 121,000 Total current liabilities 569,650

Long- term liabilitiesLong-term debt 979,500 Obligations capital lease 345,800 Def erred income taxes 77,909 Total long-term liabilities 1,403,209

Stockholders' equity


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Non-Current LiabilitiesCapital LeasesBonds Payable

Long-Term Notes Payable

Pension Liabilities

Obligations that will not be satisfied within one year or operating cycle,

whichever is longer

Long-Term Liabilities


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Balance Sheet

Balance Sheet (in thousands)Current liabilitiesAccounts payable 233,450$ Notes payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 I ncome tax payable 23,400 Current maturities LT debt 121,000 Total current liabilities 569,650

Long- term liabilitiesLong-term debt 979,500 Obligations capital lease 345,800 Def erred income taxes 77,909 Total long-term liabilities 1,403,209

Stockholders' equity

“Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.”

All covenants and restrictions must be disclosed.

Long-Term Liabilities


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Shareholders’ Equity

Capital Stock

Retained Earnings

Treasury Stock

Other Contributed

Capital

Accumulated Other Comprehensive Income


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Now, let’s look at some ratios!


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2012 2011Assets

Cash and Cash Equivalents 191,889$ 303,960$ Short-Term Investments 1,131,213 442,320Accounts Receivable 196,503 175,310Merchandise Inventory 374,269 336,799Deferred Taxes 132,246 121,176Prepaid Expenses 76,511 73,579Total Current Assets 2,102,631 1,453,144

Property and Equipment (Net) 2,192,683 1,997,212Long-Term Investments 221,426 52,815Goodwill 662,938 662,938Other 114,538 125,966Total Assets 5,294,216 4,292,075

Whole Foods Market, Inc.Balance Sheet

For the Fiscal Year Ended September 30In Thousands


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2012 2011Liabilities

Accounts Payable 247,089 236,913Other Accrued Liabilities 729,087 641,982Current Portion of Long Term Debt 1,012 466Total Current Liabilities 977,188 879,361

Long-Term Debt 23,110 17,439Deferred Lease Liabilities 440,822 353,776Other Liabilities 50,627 50,194Total Liabilities 1,491,747 1,300,770

EquityCommon Stock 2,592,369 2,120,972Additional Paid in Capital 0 0Treasury Stock (28,599) 0Retained Earnings 1,233,433 870,497Accumulated Other Comprehensive Income/(Loss) 5,266 (164)Total Stockholders' Equity 3,802,469 2,991,305Total Liabilities and Stockholders' Equity 5,294,216$ 4,292,075$

Balance SheetFor the Fiscal Year Ended September 30

In Thousands

Whole Foods Market, Inc.


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2012 2011

Net Sales 11,698,828$ 10,107,787$ Cost of Goods Sold 7,543,054 6,571,238Gross Profit 4,155,774 3,536,549

Direct Store Expenses 2,983,419 2,628,811General and Administrative Expenses 372,065 310,920Pre-Opening Expenses 46,899 40,852Restructuring Costs 9,885 8,346Operating Income/(Loss) 743,506 547,620

Interest Expense (354) (3,882)Interest Revenue 8,892 7,974Income/(Loss) before Income Taxes 752,044 551,712

Income Tax Expense/(Benefit) 286,471 209,100Net Income/(Loss) 465,573$ 342,612$

Whole Foods Market, Inc.Income Statement

For the Fiscal Year Ended September 30In Thousands


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Liquidity Ratios

=Current ratioCurrent assets

Current liabilitiesMeasures a company’s ability to satisfy its short-

term liabilities

=2.15$2,102,631$977,188

Current ratio

=1.65$1,453,144$879,361

2012 2011


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Liquidity Ratios

=1.56 $1,519,605$977,188

Acid-test ratio

=Acid-test ratioQuick assets

Current liabilitiesProvides a more stringent indication of a company’s

ability to pay its current liabilities

=1.05$921,590$879,361

2012 2011


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Financing Ratios

=Debt to equity ratio

Total liabilitiesShareholders’ equity

Indicates the extent of reliance on creditors, rather than owners, in providing resources

=.39$1,491,747$3,802,469

Debt to equity ratio

=.43$1,300,770$2,991,305

2012 2011


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Financing Ratios

=2,125$752,398

$354

Times interest earned ratio

=Times interest earned ratio

Net income + Interest expense + TaxesInterest expense

Indicates the margin of safety provided to creditors

=143$555,594$3,882

2012 2011


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Now, let’s move on to a new topic.


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Statement of Cash Flows

The Statement of Cash Flows provides relevant information about the cash receipts and cash payments of an enterprise during a period. It provides answers to questions:

1. Where did the cash come from during the period?2. What was the cash used for during the period?3. What was the change in the cash balance during the

period?


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Three different activities:Operating,

Content and Format

The Statement of Cash Flows

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

Investing, Financing

Illustration 5-24


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Cash Flows from Operating ActivitiesReports the cash effects of transactions that enter into

the determination of net income.The direct method and indirect method are two different approaches to report cash flows from operations. Each has its advantages and disadvantages, but each reconciles to the same number for total cash flows from operating activities.


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Cash Flows from Investing Activities

Reports cash effects of transactions that result in a change in long-term assets. For example:

Buying or selling property, plant, or equipment

Buying or selling financial investment instruments


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Cash Flows from Financing Activities

Reports cash effects of transactions that result in a change in long-term liabilities and stockholder’s equity. For example:

Acquiring or paying down borrowingsIssuing capital stockPaying dividends to stockholders


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Cash flows from operating activities: $$

Cash flows from investing activities: $$

Cash flows from financing activities: $$

Net increase in cash $$Cash at beginning of year $$Cash at end of year $$

Basic Format for theStatement of Cash Flows

Involve the purchase and sale of products or services

Involve the acquisition and saleof long-term assets

Involve the issuance and paymentof long-term liabilities and stock


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ReviewIn preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable at a discountreceivable.

The Statement of Cash Flows

LO 8 Prepare a statement of cash flows.

balance sheet and statement of cash flows chapter 5

Documents

mcgrawhill companies

major classifications

total current assets

current assets summary

affiliated companies

fixed assets

noncurrent assetsinvestments

doubtful accounts