balance sheetcash flow.ppt

CHAPTER 4

STRUCTURE OF THE BALANCE SHEET &

STATEMENT OF CASH FLOWS

Slides Authored by Slides Authored by Brian LeventhalBrian Leventhal

University of Illinois at University of Illinois at ChicagoChicago

FINANCIAL REPORTING & ANALYSISFINANCIAL REPORTING & ANALYSISBYBY

REVSINE – COLLINS – JOHNSON REVSINE – COLLINS – JOHNSON 22ndnd Edition Edition

Copyright © Prentice Hall 2002

Ch4-2

I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts

A. There are three basic elements of the balance sheet:

1. Assets are the probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

AssetsAssets = Liabilities + Owners’ = Liabilities + Owners’ EquityEquity

Ch4-3



2. Liabilities are probable future sacrifices arising from present obligations to transfer assets or provide services to other entities as a result of past transactions or events.

Assets = Assets = LiabilitiesLiabilities + Owners’ + Owners’ EquityEquity

Ch4-4



3. Equity is the residual interest in the assets of an entity that remains after deducting its liabilities.

Assets - Liabilities = Assets - Liabilities = Owners’ Owners’ EquityEquity

Ch4-5



Assets = Liabilities + Owners’ Assets = Liabilities + Owners’ EquityEquity

4. Generally accepted accounting principles (GAAP) balance sheet carrying amounts are a mixture of : - historical costs - current costs (also called fair value) - net realizable value, and - discounted present values.

Ch4-6

B. The balance sheet provides information for assessing:

- rates of return

- capital structure - liquidity - solvency, and -financial flexibility.


Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity

Ch4-7

1. Rates of return measures are used to evaluate operating efficiency and profitability.

a. Two common returns measures are return on assets (ROA) and return on common equity (ROCE).

b. By comparing ROA to ROCE, users can gain insight into whether leverage (e.g., debt financing) is enhancing the return earned by shareholders.




Ch4-8




2. Capital structure is the relative proportion of financing for assets that comes from debt or equity sources. An important decision in corporate finance is determining the optimal capital structure.

Ch4-9




3. The related footnotes provide information for evaluating liquidity, solvency, and capital structure.

Ch4-10


Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity3. The related footnotes & Balance Sheet provide information for evaluating liquidity, solvency, and capital structure.

a. Liquidity measures how readily assets can be converted to cash relative to how soon liabilities will have to be paid in cash.

Ch4-11


Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity3. The related footnotes & Balance Sheet provide information for evaluating liquidity, solvency, and capital structure.

b. Solvency refers to the ability of a company to generate sufficient cash flows to maintain its productive capacity and still meet interest and principal payments on long-term debt.

Ch4-12


Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity3. The related footnotes & Balance Sheet provide information for evaluating liquidity, solvency, and capital structure. c. Financial flexibility refers to a company’s

ability to adjust to unexpected downturns in the economic environment in which it operates or to take advantage ofinvestment

opportunities as they arise.

Ch4-13


C. A classified balance sheet groups similar items so that important relationshipsrelationships are revealed.

1. Assets:a. Current assets.b. Long-term investments.c. Property, plant, and equipment.d. Intangible assets.e. Other (long-term) assets.


Ch4-14



2. Liabilities:

a. Current liabilities.b. Long-term liabilities.


Ch4-15



3. Owners’ equity:

a. Capital stock.b. Additional paid-in capital.c. Retained earnings.


Ch4-16

Motorola Balance Sheet Dec 31 2001 2000

ASSETSCurrent Assets Cash & Cash EquivalentsCash & Cash Equivalents $3,345 $ 1,453$3,345 $ 1,453 Short-Term Investments 699

171 Accounts Receivable, net 5,125

5,057 Inventories 3,422

3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531


If cash consists exclusively of

U.S. dollar amounts, the balance sheet

account reflects the historical amount, which is identical to the current

market value of cash.

Ch4-17

Motorola Balance Sheet Dec 31 2001 2000

ASSETSCurrent Assets

Cash & cash EquivalentsCash & cash Equivalents $3,345 $ 1,453$3,345 $ 1,453 Short-Term Investments 699 171 Accounts Receivable, net 5,125 5,057 Inventories 3,422 3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531

I. Classification Criteria and Measurement Conventions for Balance Sheet AccountsCash amounts

denominated in foreign currency units is translated

into U.S. dollar equivalents at the

balance sheet date using the current rate of exchange. This

portion of cash is carried at its

current market current market priceprice.

Ch4-18

Motorola Balance Sheet Dec 312001 2000

ASSETSCurrent Assets Cash & cash Equivalents $3,345 $ 1,453 Short-Term InvestmentsShort-Term Investments 699 699 171 171 Accounts Receivable, net 5,125


3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750

743 Total Current Assets $16,503 $13,531


The intended holding period of the company that

owns the securities

determines how the debt and equity

securities are measured on the balance sheet.

Ch4-19


ASSETSCurrent Assets Cash & cash Equivalents $3,345 $ 1,453 Short-Term InvestmentsShort-Term Investments 699 699 171 171 Accounts Receivable, net 5,125


3,745 Deferred Income Taxes 3,162 2,362 Other current assets 750

743 Total Current Assets $16,503 $13,531


Some investments

will be carried at original

(historical) cost, some at amortized

cost, and others at current cost.

Ch4-20


ASSETSCurrent Assets Cash & cash Equivalents $3,345 $ 1,453 Short-Term Investments 699

171 Accounts Receivable, net 5,125Accounts Receivable, net 5,125

5,0575,057 Inventories 3,422



Gross accounts

receivable equal the face

amounts arising from

past transactions.

Ch4-21



171 Accounts Receivable, net 5,125Accounts Receivable, net 5,125

5,0575,057 Inventories 3,422


I. Classification Criteria and Measurement Conventions for Balance Sheet AccountsGross

accounts receivable are reduced

by an estimateestimate of the accounts

receivable that will

ultimately not be

collected.So, Net Accounts Receivable are carried at net net

realizable valuerealizable value.

Ch4-22




5,057 InventoriesInventories 3,422 3,422

3,7453,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531


The measurement of inventoryinventory

depends on the

relationship between

historical costs and current market prices.

When costs are lower than market price, the carrying

amount for inventory is historical costhistorical cost

Ch4-23




5,057 InventoriesInventories 3,422 3,422

3,7453,745 Deferred Income Taxes 3,162 2,362 Other current assets 750 743 Total Current Assets $16,503 $13,531


The measurement of inventoryinventory

depends on the

relationship between

historical costs and current market prices.

When cost exceeds market, InvInv. are carried

at current market price, market price is

defined as net realizable value.

Ch4-24

Historical Cost

- - Accum.Deprec.

Book Value(Net)

Motorola Balance Sheet

Dec 31

2001 2000

ASSETS Total Current Assets $16,503

$13,531 Property, Plant & Equipment,net 9,246 Property, Plant & Equipment,net 9,246

10,04910,049 Other Assets 11,578 5,148Total Assets $ 37,327 $

28,728


Property,Plant & Equipment

are on the balance sheet

at:

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.

Ch4-25


Dec 31

2001 2000

LIBILITIESCurrent Liabilities

Notes payable & current portion of long-term debt $2,504 $ 2,909

Accounts payableAccounts payable 3,015 3,015 2,305 2,305

Accrued liabilities 6,897Accrued liabilities 6,897 6,226 6,226

Total Current Liabilities 12,416 11,440

Long-term debt 3,089 2,633

Deferred Income Taxes 3,481 1,188

Other liabilities 1,513 1,245 Total Liabilities $16,503

$13,531

I. Classification Criteria and Measurement Conventions for Balance Sheet AccountsAccounts

payable &

accrued liabilities

are on the balance sheet at the amount of the original

liability

(historical cost).

Ch4-26


Dec 31

2001 2000



Accounts payable 3,015 2,305

Accrued liabilities 6,897 6,226


Long-term debt 3,089Long-term debt 3,089 2,633 2,633



$13,531

I. Classification Criteria and Measurement Conventions for Balance Sheet AccountsThe initial

balance sheet carrying

amount is the discounted

present value of the sum of

(1) the future principal

repayment plus

(2) the periodic interest

payments.

Ch4-27


Dec 31

2001 2000



Accounts payable 3,015 2,305

Accrued liabilities 6,897 6,226


Long-term debt 3,089Long-term debt 3,089 2,633 2,633



$13,531

I. Classification Criteria and Measurement Conventions for Balance Sheet AccountsFixed Rate

Debt, this carrying

amount will differ from current

market prices when

interest rates have changed subsequent to

issuance.

Ch4-28


Dec 31

2001 2000

STOCKHOLDERS’ EQUITY Preferred stock, $100 PV Authorized shares: .5 (non issued) ----

---- Common Stock, $3 PVCommon Stock, $3 PV

Authorizes shares: Authorizes shares: 2001&2000, 1,4002001&2000, 1,400

Issued & outstanding:Issued & outstanding:

2001,612.8;2000;601.12001,612.8;2000;601.1 1,838 1,838 1,804 1,804 Additional paid-in capital 2,572 1,894 Retained earnings 8,780

8,254Non-owner changes to equity 3,154

270Total Stockholders’ Eq. $16,344

$12,222

Common Stock

is reported at historical

par value.

Ch4-29


Dec 31

2001 2000


---- Common Stock, $3 PV Authorizes shares:

2001&2000, 1,400 Issued & outstanding:

2001,612.8;2000;601.1 1,838 1,804 Additional paid-in capital 2,572Additional paid-in capital 2,572 1,894 1,894 Retained earnings 8,780

8,254Non-owner changes to equity 3,154


$12,222

Additional paid-in capital is reported at

historical cost as the

excess of original issue

price and

par value.

Ch4-30


Dec 31

2001 2000




2001,612.8;2000;601.1 1,838 1,804 Additional paid-in capital 2,572 1,894 Retained earnings 8,780Retained earnings 8,780

8,2548,254Non-owner changes to equity 3,154


$12,222

This measures the net of the cumulative earnings

less cumulative dividend

distributions of the

company since

inception.

This is reinvestment

to grow!

Ch4-31


Dec 31

2001 2000




2001,612.8;2000;601.1 1,838 1,804 Additional paid-in capital 2,572 1,894 Retained earnings 8,780Retained earnings 8,780

8,2548,254Non-owner changes to equity 3,154


$12,222

Since different

measurement bases

pervade the balance sheet,

&income

statement so

retained earnings

is a mixture of historical costs, current values,

and present values.

Ch4-32


Dec 31

2001 2000




2001,612.8;2000;601.1 1,838 1,804 Additional paid-in capital 2,572 1,894 Retained earnings 8,780

8,254

Non-owner Non-owner changes to equitychanges to equity 3,154 3,154 270270

Total Stockholders’ Eq. $16,344 $12,222

This measures the net of the cumulative

unrealizable gains and losses

from other

comprehensive income

components recognized in

current and prior years

Ch4-33


Dec 31

2001 2000




2001,612.8;2000;601.1 1,838 1,804 Additional paid-in capital 2,572 1,894 Retained earnings 8,780

8,254

Non-owner Non-owner changes to equitychanges to equity 3,154 3,154 270270

Total Stockholders’ Eq. $16,344 $12,222

This account is debited for unrealized

losses and

credited for unrealized

gains.

All amounts are shown

net of tax effects.

Ch4-34


1. One tool for gaining insights into the company’s operations and for

analyzing its assets and financial structures is to prepare a common-size balance sheet.

Q. Extracting Analytical Insights

Ch4-35



2. The account titles and formats for balance sheets prepared in other countries can sometimes differ from those prepared in the U.S.

In the U.S. assets are presented in decreasing order of liquidity.

In the U.K., Germany, Netherlands, and other European countries, fixed assets are presented first followed by current assets displayed in an increasing order of liquidity.

Ch4-36



3. Analysts must pay attention to the differences in accounts and valuation techniques that are allowed by different countries’ GAAP procedures.

Ch4-37

II. Statement of Cash Flows:

A. The statement of cash flows shows the user why a firm’s investments and financial structure have changedchanged between two periods.

1. The critical issue then becomes the timing of income recognitionincome recognition.

Ch4-38


2. The connection between successive balance sheet positions and the statement of cash flows can be shown:

a. Assets = Liabilities Owners’ equity

b. Cash Noncash assets = Liabilities Owners’ equity

c. Cash = Liabilities Noncash assets Owners’ equity

d. Cash = Liab Noncash assets Owners’ equity

Ch4-39


2. The connection between successive balance sheet positions and the statement of cash flows can be shown:

Cash = Liab – Noncash assets Owners’ equity

e. The cash flow statement simultaneously provides an explanation of why a firm’s cash position has changed between successive balance sheet dates and explains changes that have taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over the same time period.

Ch4-40


3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period.

Ch4-41



a. Reported net income will not equal cash flow from operating activities because of differences between accrual-based and cash-based accounting.

Ch4-42



b. Changes in cash may be caused by nonoperating investing activities like the purchase or sale of property, plant,

and equipment.

Ch4-43



c. Changes in cash may be caused by nonoperating financing

activities like the issuance of stock or bonds or the repayment of a bank loan.

Ch4-44


B. The cash flow statement summarizes the cash inflows and outflows of a company broken down into three activities:

1. Cash flows from operating activities result from the cash effects of transactions and events that affect operating income.

2. Cash flows from investing activities result from the cash effects of transactions and events that affect long-term assets.

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).

Ch4-45


Let’s Look at an

Example of Cash & Accrual

Accounting

Ch4-46

HRB Advertising Company

HRB Advertising opened on April 1, 2001.The corp.’s for the remainder of 2001 are as follows:

1. Each of the 3 partners contributed $3500 cash on April 1 for shares of the company’s stock.

Accrual Basis Income StatementOperating Activities

Net Income

Cash Flow StatementOperating Activities

Total Operating Cash Flow

Investing Activities

Financing Activities

Change in CashStock Issuance $10,500

Ch4-47


HRB Advertising opened on April 1, 2001.The corp.’s for the remainder of 2001 are as follows:

2. HRB rented office space Beg. April 1, and paid the full year’s rental of $2000 per month or $24,000 in advance.Accrual Basis Income StatementOperating Activities

Net Income






Rent Expense ($24,000)

Ch4-48


3. The Company borrowed $10,000 from a bank on April 1. The loan and accrued interest is payable Jan. 1, 2002 w/ interest at 12% per year.


Net Income







Bank borrowing $10,000

Ch4-49


4. HRB purchased office eq. With a 5 year life for $15,000 cash on April 1. Equipment is depreciated straight-line no salvage value.


Net Income








Equipment purchase ($15,000)

Ch4-50


5. HRB sold and billed customer for $65,000 of advertising services rendered between April 1 and Dec 31. Of this amount, $20,000 was still uncollected by year-end.Accrual Basis Income StatementOperating Activities

Net Income









Adverting Rev.(Accrual Actg.) = Revenue EarnedServices Performed = $65,000

Advertising Revenue $45,000Advertising Revenue $65,000

Ch4-51


6. By year-end, the company used and paid the following operating costs: (a) utilities $650, (b) salaries, $36,250 and (c) supplies $800.


Net Income


Total Operating Cash FlowInvesting Activities







Salary Expense ($36,250)

Utilities Expense (650)



Supplies Expense (800)Supplies Expense (800)

Ch4-52


7. The company had accrued (unpaid) expenses at year-end as follows: (a) utilities $75; (b) salaries $2,400; and (c) interest $900.


Net Income




Change in Cash

Stock Issuance $10,500




Advertising Revenue $45,000

Advertising Revenue $65,000

Salary Expense ($36,250)Utilities Expense (650)



Supplies Expense (800)Supplies Expense (800)

Utilities Expense(Used) = $650 + $75 =$725

(725)

Salary Expense(Used) = $36,250 + $2,400 =$ 38,650

(38,650)Interest Expense(Used) = $10,000*.12*9/12= $900Interest Expense (900)

Ch4-53


8. Supplies purchased on account and unpaid at year-end is $50. Supplies on hand at year-end is $100.


Net Income






Bank borrowing $10,000Interest Expense (900)





Supplies Expense (800)Supplies Expense


Salary Expense (38,650)

Supplies Expense(Used) = $$ Purchased – End. Supplies

$750 = ($800 + $50) - $100

(750)

Ch4-54


9. Annual Depr. Exp. On office Eq. Is $3000. Since the Eq. Was acquired on April 1, the Dep Exp for 2001 is $3,000 * 9/12 = $2,250.


Net Income







Interest Expense (900)Equipment purchase ($15,000)

Depreciation Exp. (2,250)




Supplies Expense (800)


Salary Expense) (38,650)Supplies (750)

Ch4-55


10. The office space was used for 9 months $18,000.


Net Income








Interest Expense (900)Equipment purchase ($15,000)

Depreciation Exp. (2,250)





Salary Expense ($36,250)(38,650)Supplies Expense

(800)(750)

Rent Used(Accrual Actg.) = Cost per Month * Months Used $18,000 = $2,000 * 9


LET’S GET THE FINAL RESULTS !!!!


Net Income





Rent Expense ($24,000)Rent Expense ($18,000)


Equipment purchase ($15,000)Depreciation Exp. (2,250)





Utilities Expense (725)Salary Expense (38,650

)Interest Expense (900)Supplies Expense (750)

$ 3725

($16,700)

$20,500($11,200)

Ch4-57




Rent Expense ($24,000)Advertising Revenue $45,000



($16,700)

Direct approach shows the individual

operating cash inflows and outflows

directly.

Ch4-58


Cash Flow StatementOperating ActivitiesNet Income $ 3,725Plus: Depreciation $2,250 Increase in S/P 2,400 Increase in A/P 50 Increase in Util/P 75Increase in Int/P 900 5,675Minus: Increase in A/R (20,000) Increase in Prpd Rent (6,000)Increase in Supplies (100) (26,100)Cash Flow from operations ($16,700)

Indirect approach

arrives at net cash flows

from operations by adjusting net income for the

differences between

accrual-basis earnings and cash-basis earnings.

Ch4-59


Cash Flow StatementOperating ActivitiesNet Income $ 3,725Plus:1) Add noncash expenses (i.e.,

depreciation; amortization; bond discount; losses on sales of property, plant, and equipment.) to net income.

Cash Flow from operations ($16,700)

Indirect approach



differences between


Ch4-60


Cash Flow StatementOperating ActivitiesNet Income $ 3,725Plus:2) Add net decreases in current assets.

3) Add net increases in current liabilities.


Indirect approach



differences between


Ch4-61


Cash Flow StatementOperating ActivitiesNet Income $

3,725Plus:Minus:4) Subtract net decreases in current

liabilities.

5) Subtract net increases in current assets.

6) Subtract noncash gains (amortization; bond premium; gains on sales of property, plant, and equipment.) to net income.


Indirect approach



differences between


Ch4-62

Let’s Look at an Example of Making

a Statement

of Cash Flows


Ch4-63

HRB Comparative Balance Sheets2001 2002

ChangeAssets Cash ($11,200) $ 500 + $ 11,700 A/R 20,000 15,775 - 4225 Supplies Inventory 100 225 + 125 Prepaid Rent 6,000 6,000 --- Office Equipment 15,000 16,500 + 1,500 Less: A/D (2,250 (5,500) - 3,250Total Assets $ 27,650 $ 33,500 + $ 5,850

Putting together a Statement of Cash Flows

#1Calculate

Change in Balance Sheet

Accounts

Ch4-64

HRB Comparative Balance Sheets2001 2002

ChangeAssets Cash ($11,200) $ 500 Cash ($11,200) $ 500 + $ 11,700+ $ 11,700 A/R 20,000 15,775 - 4225 Supplies Inventory 100 225 + 125 Prepaid Rent 6,000 6,000 --- Office Equipment 15,000 16,500 + 1,500 Less: A/D (2,250 (5,500) - 3,250Total Assets $ 27,650 $ 33,500 + $ 5,850


Answer to:

Increase in

Cashfor the period

onStatemen

t

Ch4-65

HRB Comparative Balance Sheets 2001 2002 Change

Assets Cash ($11,200) $ 500 + $ 11,700 A/R 20,000 15,775 - 4225 Supplies Inventory 100 225 + 125 Prepaid Rent 6,000 6,000 --- Office Equipment 15,000 16,500 + 1,500 Less: A/D (2,250) (5,500) - 3,250Total Assets $ 27,650 $ 33,500 + $ 5,850


#2Classify what part of SCF the

Balance Sheet Items

relate to.OperatingFinancing

or Investing

OP

OPOP

INV

OP (Dep. Exp) and/or INV(Asset Sales)

Ch4-66

HRB Comparative Balance Sheets2001 2002 Change

Assets Cash ($11,200) $ 500 + $ 11,700 A/R 20,000 15,775 - 4225 Supplies Inventory 100 225 + 125 Prepaid Rent 6,000 6,000 --- Office Equipment 15,000 16,500 + 1,500 Less: A/D (2,250 (5,500) - 3,250Total Assets $ 27,650 $ 33,500 + $ 5,850

Putting together a Statement of Cash Flows #3

Analyze changes

and determine Cash Flow

effect along with info from Income

Statement and other

data as needed

Ch4-67

HRB Comparative Balance Sheets 2001 2002

ChangeBalance Sheet A/R 20,000 15,775 -

4225Income St.


Analyze changes



Statement and other

data as needed

A/R relates to what Income Statement item?

Revenues $92,000

RevenuesA/R

Beg. Bal $20,000

End. Bal $15,775

$92,000

????Credit Sales

????

Cash Collections$92,00096,225

Operating activity

Now, let’s see how it looks on the SCF!

Cash Cash Effect!!Effect!!

Ch4-68



ChangeBalance Sheet A/R 20,000 15,775 - 4225

Cash Collections $96,225Income St. Revenues $92,000 Net Income ($1,725)

Operating activity

SCFDirect Method

Operating Activities

SCFIndirect MethodOperating ActivitiesNet Income ($1,725)Plus:

Cash Revenues $96,225

Decrease in A/R 4225

Ch4-69



ChangeBalance Sheet A/R 20,000 15,775 - 4225

Cash Collections $96,225Income St. Revenues $92,000 Net Income ($1,725)

Operating activity

SCFDirect Method



Cash Revenues $96,225

Decrease in A/R 4225

Revenues $ 92,000-Expenses (93,725) Net Loss ($1,725)

Revenues $92,000+ dec. in A/R 4,225 Cash Revenues$96,225It’s there but it’s hidden!It’s there but it’s hidden!

Ch4-70

????????

End. Bal $75

Purchases on Account

HRB Comparative Balance SheetsBalance Sheet 2001 2002 ChangeSupplies Inv. 100 225 + 125A/P (Supplies) 50 75 + 25Income St.


Supplies relates to what Income Statement item?

Supplies Exp. $1,200

Supplies Exp.

Supplies Inv.

Beg. Bal $100

End. Bal $225

$1,200

????

????

Supplies Used

$1,2001,325

Operating activity

Beg. Bal $501,3251,300

Supplies

Paid

A/P (Supplies)


Pur on Acc

Ch4-71

SCFDirect Method



Minus:

HRB Comparative Balance SheetsBalance Sheet 2001 2002 ChangeSupplies Inv. 100 225 + 125A/P (Supplies) 50 75 + 25Cash Paid (Supplies) 1,300Income St. Supplies Exp.$1,200


Operating activity

Supplies ($1,300)

Increase in Supplies (125)

Increase in A/P Sup. 25

Ch4-72

SCFDirect Method



Minus:

HRB Comparative Balance SheetsBalance Sheet 2001 2002 ChangeSupplies Inv. 100 225 + 125A/P (Supplies) 50 75 + 25Cash Paid (Supplies) 1,300Income St. Supplies Exp.$1,200


Operating activity

Supplies ($1,300)

Increase in Supplies (125)

Increase in A/P Sup. 25


Supplies Exp. ($1,200)+ inc. in Sup. (125)- dec.in A/P 25Cash Supplies ($1,300)It’s there but it’s hidden!It’s there but it’s hidden!

Ch4-73

????Rent Paid in Advance this yr.

HRB Comparative Balance Sheets

Balance Sheet 2001 2002 ChangePrepaid Rent 6,000 6,000 + 0Income St.


Rent relates to what Income Statement item?

Rent Exp. $24,000

Rent Exp.Prepaid Rent

Beg. Bal $6,000

End. Bal $6,000

$24,000

????

????

Rent Used 4/1-12/31

18,000

24,000

Operating activity

Rent Used 1/1-3/31

6,000Cash Cash Effect!!Effect!!

Ch4-74

SCFDirect Method



Minus:

Rent ($24,000)Prepaid Rent +/- 0

HRB Comparative Balance SheetsBalance Sheet 2001 2002 ChangePrepaid Rent 6,000 6,000 + 0Cash Paid Rent $24,000Income St. Rent Exp. $24,000



Rent Exp. ($24,000)+/- Prepaid Rent. 0Cash Rent ($24,000)Cash & Accrual are Cash & Accrual are

equal , no adj. equal , no adj. neededneeded

Ch4-75

????

Deprecation Exp.

HRB Comparative Balance Sheets - No Sales of

Equipment

Balance Sheet 2001 2002 Change

Acc. Depr. (2,250) (5,500) ($3,250)Income St.


Depreciation relates to what Income Statement item?

Depr. Exp. $3,250

Depr. Exp.Acc Depr.

$2,250 Beg. Bal

$5,500 End. Bal

$ 3,250

????Assets Sold

0

Operating activity

3,250 NO Cash NO Cash Effect!!Effect!!

Ch4-76

HRB Comparative Balance Sheets

Balance Sheet 2001 2002 Change

Acc. Depr. (2,250) (5,500) ($3,250)Income St. Depr. Exp. $3,250 (Non-Cash

Item)

SCFDirect Method



Minus:

Depreciation 0

Depr. Expense 3,250

Putting together a Statement of Cash Flows Revenues $ 92,000

-Expenses (93,725) Net Loss ($1,725)

Depr. Exp. ($3,250)+non cash exp $3,250 Cash Depr. 0

Ch4-77


Balance Sheet Off.Eq. 15,000 16,500 +1,500

Purchased Office Equipment for Cash. - No Sales of Equipment


Analyze changes



Statement and other

data as needed

CashOffice Equip.

Beg. Bal $15,000

End. Bal $16,500

$1,500

????

Purchases ????

Eqip. Sold $1,500 0

Investing activity



Ch4-78

SCFDirect Method


SCFIndirect Method



Balance Sheet Off.Eq. 15,000 16,500 +1,500Cash Paid for Office Eq. ($1,500)Purchased Office Equipment for Cash. -

No Sales of Equipment

Investing activity


Equipment Purchase($1,500) Equipment Purchase($1,500)

Ch4-79


Liabilities Utilities Payable $75 $ 50 - 25 Interest Payable 900 675 - 225 A/P (Supplies) 50 75 + 25 Salaries Payable 2,400 4,200 +

1,800 Bank Loan Payable 10,000 0 -

10,000 Note Payable 0 10,000 +10,000Total Liabilities$ 13,425 $15,000 + $ 1,575


#2Classify what part of SCF the

Balance Sheet Items


or Investing

OP

FIN

OPOPOP

FIN

Ch4-80


ChangeBalance Sheet Util/Pay 75 50 -

25Income St.


Analyze changes



Statement and other

data as needed

Utilities relates to what Income Statement item?

Utilities Exp. $1,050

Utility Exp.Utility Pay.

$75 Beg. Bal

$50 End. Bal

$1,050

????UtilitiesPaid

????

Utilities Used$1,0751,050

Operating activity



Ch4-81

SCFDirect Method


SCFIndirect MethodOperating ActivitiesNet Income ($1,725)

Minus:

Utilities ($1,075)

Decrease in Util/Pay (25)


ChangeBalance Sheet Util/Pay 75 50 -

25Utilities Paid 1,075Income St. Utilities Exp. $1,050


Operating activity


Utilities Exp. ($1,050)+decr.in Util/Pay (25)Cash Utilities ($1,075)It’s there but it’s hidden!It’s there but it’s hidden!

Ch4-82

Interest Exp.


ChangeBalance Sheet Int/Pay 900 675 -

225Income St.


Analyze changes



Statement and other

data as needed

Interest relates to what Income Statement item?

Interest Exp. $1,350

Interest Pay.

$900 Beg. Bal

$675 End. Bal

$1,350 ????Interest

Paid????

Interest Used$1,5751,350

Operating activity



Ch4-83

SCFDirect Method


SCFIndirect MethodOperating ActivitiesNet Income ($1,725)Minus:

Interest ($1,575)

Decrease in Intl/Pay (225)



ChangeBalance Sheet Int/Pay 900 675 -

225Cash Interest Paid 1,575Income St. Interest Exp. $1,350


Int. Exp. ($1,350)+decr.in Int/Pay (225)Cash Interest ($1,575)It’s there but it’s hidden!It’s there but it’s hidden!

Ch4-84


ChangeBalance Sheet Sal/Pay 2,400 4,200

+1,800Income St.


Analyze changes



Statement and other

data as needed

Salary relates to what Income Statement item?

Salary Exp. $62,875

Salary Exp.Salary Pay.

$2,400 Beg. Bal

$4,200 End. Bal

$ 62,875 ????

SalaryPaid

????

Salary Used$61,07562,875

Operating activity



Ch4-85

SCFDirect Method





ChangeBalance Sheet Sal/Pay 2,400 4,200

+1,800Cash Salary Paid $61,075Income St. Salary Exp. $62,875


Sal. Exp. ($ 62,875 )+incr. Sal/Pay 1,800Cash Salary ($61,075)It’s there but it’s hidden!It’s there but it’s hidden!

Salary ($ 61,075)

Increase in Sal/Pay 1,800

Operating activity

Ch4-86


ChangeBalance Sheet Bank Loan 10,000 0 -

10,000Company paid off bank loan.


Analyze changes



Statement and other

data as needed

CashBk Loan/Pay

Beg. Bal $10,000

End. Bal $0

$10,000

????

Payments ????

New Loans $10,000 0

Financing activity



Ch4-87

SCFDirect Method


SCFIndirect Method

Financiang Activities


Bank Loan Repayment ($10,000)


Balance Sheet Bank Loan 10,000 0 -10,000

Bank Loan Paid 10,000Company paid off bank loan.

Bank Loan Repayment ($10,000)

Financing activity

Ch4-88


ChangeBalance Sheet N/P 0 10,000

+10,000Company issued a Note Payable for cash.


Analyze changes



Statement and other

data as needed

CashNote Payable

Beg. Bal $0

End. Bal $10,000

$10,000 ????

Payments ????

New Loans

$10,000

0

Financing activity



Ch4-89

SCFDirect Method


SCFIndirect Method



Note Payable Issued $10,000


ChangeBalance Sheet N/P 0 10,000

+10,000Company issued a Note Payable for cash

$10,000.

Note Payable Issued $10,000

Financing activity

Ch4-90


ChangeStockholders’ Equity Common Stock $10,500 $16,500 +

6,000 Retained Earnings 3,725 2,000 -

1,725 Total Stockholders’Equity $ 13,425 $15,000 + $

1,575


#2Classify what part

of SCF the

Balance Sheet Items


or Investing

FIN

FIN OP&

Ch4-91


ChangeStockholders’ Equity Common Stock $10,500 $16,500 +

6,000 Retained Earnings 3,725 2,000 - 1,725


#2Classify what part

of SCF the

Balance Sheet Items


or Investing

FIN

FIN

OP Net Income ($ 1,725)Dividends 0 R/E ($ 1,725)

Ch4-92


Balance Sheet Common Stock 10,500 16,500 +6,000

Company issued a Common Stock for cash $6,000.


Analyze changes



Statement and other

data as needed

CashCommon Stk

Beg. Bal $ 10,500

End. Bal $ 16,500

$6,000 ????

Stock Retired ????Stock Issued $6,000

0

Financing activity



Ch4-93

SCFDirect Method


SCFIndirect Method



Common Stock Issued $6,000

Common StockIssued $6,000


Balance Sheet Common Stock 10,500 16,500 +6,000

Company issued a Common Stock for cash $6,000.

Financing activity

HRB AdvertisingStatement of Cash Flows

2001 2002Operating Activities Advertising Services $45,000 $96,225 Salaries (36,250) (61,075) Rent (24,000) (24,000) Utilities (650) (1,075) Supplies (800) (1,300) Interest –- (1,575) Total Op. Cash Flow ($16,700) $7,200Investing Activities Equipment Purchase ($15,000) ($ 1,500) Total Inv. Cash Flow($15,000) ($1,500)Financing Activities Bank borrowing $10,000 ($10,000) Note issuance – 10,000 Stock issuance 10,500 6,000 Total Fin. Cash Flow $20,500 $6000Change in Cash ($11,200) $11,700Change in Cash ($11,200) $11,700

The statement

of cash flows is useful

because it:

1. Shows the entity’s

ability to generate future cash

flows.


2001 2002Operating Activities Advertising Services $45,000 $96,225 Salaries (36,250) (61,075) Rent (24,000) (24,000) Utilities (650) (1,075) Supplies (800) (1,300) Interest –- (1,575) Total Op. Cash Flow ($16,700) $7,200Investing Activities Equipment Purchase ($15,000) ($ 1,500) Total Inv. Cash Flow($15,000) ($1,500)Financing Activities Bank borrowing $10,000 ($10,000) Note issuance – 10,000 Stock issuance 10,500 6,000 Total Fin. Cash Flow $20,500 $6000Change in Cash ($11,200) $11,700Change in Cash ($11,200) $11,700

The statement


because it:

2. Shows the entity’s ability to

pay dividends and meet

obligations.


2001 2002Operating Activities Net Income $3,725

($1,725) Depreciation 2,250 3,250Adjustments: A/R dec (inc) (20,000) 4,225 Supplies dec (inc) (100) ( 125) Prepaid Rent dec (inc) (6,000) -- Utilities Pay inc (dec) 75 (25) A/P Supplies inc (dec) 50 25 Int/Pay inc (dec) 900 (225) Sal/Pay inc (dec) 2,400 1,800

Total Op. Cash Flow ($16,700) $7,200Total Op. Cash Flow ($16,700) $7,200

The statement


because it:

3. Details differences between net income and

cash provided

by operations.


2001 2002Operating ActivitiesTotal Op. Cash Flow ($16,700) $7,200Investing Activities Total Inv. Cash Flow ($15,000) ($1,500)Financing ActivitiesTotal Fin. Cash Flow $20,500 $6000Change in Cash ($11,200) $11,700Change in Cash ($11,200) $11,700

Significant Non-Cash Investing & Financing Activities

Exchanged Land $15,000 -- for Stock

Purchased Building -- $25,000 with Note Payable

The statement


because it:

4. Details cash and noncash

investing and

financing activities.

balance sheetcash flow.ppt

Economy & Finance

indirect approach

related footnotes

balance sheet

current market

firms cash

current market

adjusting

hrb advertising