Post on 29-May-2015
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Balance Sheet and Statement of Cash Flows
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 and Statement of Cash
Flows 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 and Statement of Cash
Flows Systems
Part 1: The Balance Sheet
The balance sheet provides information for evaluating:
Capital structure Rates of return Analyzing an enterprise’s:
Liquidity Solvency Financial flexibility
Balance 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: 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: Classification
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: Classification
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 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 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 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 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 Information Reported
• Parenthetical explanations• Notes• Cross references and contra items • Supporting schedules
Balance Sheet: Techniques of Disclosure
Part 1: The Statement of Cash 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 Statement
Cash 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 Cash 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 Flows: Indirect Method
Ratio analysis expresses the relationship between selected financial data.
These relationships can be expressed as:
percentages rates, or proportions
Ratio Analysis
Coverage 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 Ratios