CH_05_Balance Sheet and Statement of Cash Flows
Transcript of CH_05_Balance Sheet and Statement of Cash Flows
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Chapter5-1
Balance Sheet and
Statement of Cash Flows
Chapter5
Intermediate Accounting12th Edition
Kieso, Weygandt, and Warfield
Prepared by Coby Harmon, University of California, Santa Barbara
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Chapter5-2
1. Explain 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 andaccount formats.
4. Determine which balance sheet information requiressupplemental disclosure.
5. Describe the major disclosure techniques for the balancesheet.
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 cashflows.
Learning Objectives
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Chapter5-3
Balance
Sheet
Statement of
Cash Flows
Purpose
Content and
format
Preparation
Usefulness
Balance Sheet and Statement of Cash Flows
Usefulness
Limitations
Classification
Additional
information
reportedTechniques of
disclosure
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Chapter5-4
Evaluating the capital structure.
Assess risk and future cash flows.
Analyze the companys:
Liquidity,
Solvency, and
Financial flexibility.
Balance Sheet
Usefulness of the Balance Sheet
LO 1 Explain the uses and limitations of a balance sheet.
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Chapter5-5
Most assets and liabilities are reported athistorical 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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Chapter5-6
Three General Classifications
Assets, Liabilities, and Stockholders Equity
Companies further divide these classifications:
Classification in the Balance Sheet
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet
Illustration 5-1
Balance SheetClassification
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Chapter5-7
Cash and other assets a company expects toconvert into cash, sell, or consume either in one
year or in the operating cycle, whichever is longer.
Current Assets
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet
Illustration 5-2Accounts andbasis of valuation
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Chapter5-8
ReviewThe correct order to present current assets is
a. Cash, accounts receivable, prepaid items,
inventories.b. Cash, accounts receivable, inventories, prepaid
items.
c. Cash, inventories, accounts receivable, prepaid
items.d. Cash, inventories, prepaid items, accounts
receivable.
LO 8 Explain how to report other comprehensive income.
Balance Sheet
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Chapter5-9
Generally any monies available on demand.
Cash equivalentsare short-term highly liquid
investments that will mature within threemonths or less.
Any restrictions or commitments must bedisclosed.
Cash
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Current Assets
Illustration 5-3
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Chapter5-10
Portfolios
Short-Term Investments
LO 2 Identify the major classifications of the balance sheet.
Type Valuation Classification
Held-to-Maturity Debt
AmortizedCost
Current orNoncurrent
Trading Debt or Equity Fair Value Current
Available-for-Sale
Debt or Equity Fair ValueCurrent orNoncurrent
Balance Sheet Current Assets
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Chapter5-11
Claims held against customers and others formoney, 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
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Current Assets
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Chapter5-12
Accounts Receivable Presentation Options
LO 2 Identify the major classifications of the balance sheet.
Current Assets:
Cash $ 346
Accounts receivable 500
Less allowance for doubtful accounts 25 475Inventory 812
Total current assets $1,633
Current Assets:
Cash $ 346Accounts receivable, net of $25 allowance 475
Inventory 812
Total current assets $1,633
2
Balance Sheet Current Assets
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Chapter5-13
Company discloses:
basis of valuation (e.g., lower-of-cost-or-
market) andthe method of pricing (e.g., FIFO or LIFO).
Inventories
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Current Assets
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Chapter5-14
Payment of cash, that is recorded as an asset becauseservice or benefit will be received in the future.
insurance
supplies
advertising
Cash Payment Expense RecordedBEFORE
rent
maintenance on equipment
Prepayments often occur in regard to:
Prepaid Expenses
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Current Assets
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Chapter5-15
Generally consists of four types:
Securities
Fixed assets
Special funds
Nonconsolidated subsidiariesor
affiliated companies.
Long-Term Investments
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Noncurrent Assets
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Chapter5-16
Long-TermInvestments
SecuritiesInvestments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Noncurrent Assets
bonds,stock, and
long-term notes
For marketable securities,managements intentdetermines current ornoncurrent classification.
Balance Sheet (in thousands)
Current assetsCash 285,000$
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Chapter5-17
Fixed Assets
Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Noncurrent Assets
Land held forspeculation
Long-TermInvestments
Balance Sheet (in thousands)
Current assetsCash 285,000$
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Chapter5-18
Special Funds
Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Noncurrent Assets
Sinking fund
Pensions fund
Cash surrendervalue of lifeinsurance
Long-TermInvestments
Balance Sheet (in thousands)
Current assetsCash 285,000$
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Chapter5-19
Nonconsolidated
Subsidiaries orAffiliatedCompanies
Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Noncurrent Assets
Long-TermInvestments
Balance Sheet (in thousands)
Current assetsCash 285,000$
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Chapter5-21
Intangibles
Accumulated depreciation (975,000)
Total PP&E 2,170,386
Intangibles
Goodwill 2,000,000
Patents 177,000
Trademark 40,000
Franchises 125,000
Copyright 55,000
Total intangibles 2,397,000Other assets
Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Noncurrent Assets
Lack physicalsubstance and are not
financial instruments.Limited lifeintangibles amortized.
Indefinite-life
intangibles tested forimpairment.
Balance Sheet (in thousands)
Current assetsCash 285,000$
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Chapter5-22 LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Exercise
BE5-6Mickey Snyder Corporations adjusted trial balancecontained the following asset accounts at December 31, 2007:Prepaid Rent $12,000; Goodwill $40,000; Franchise FeesReceivable $2,000; Franchises $47,000; Patents $33,000;Trademarks $10,000. Prepare the intangible assets sectionof the
balance sheet.Intangibles
Goodwill $ 40,000
Franchises 47,000
Patents 33,000Trademarks 10,000
Total $130,000
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Chapter5-23
Other Assets
Intangibles
Goodwill 2,000,000
Patents 177,000
Trademark 40,000
Franchises 125,000
Copyright 55,000
Total intangibles 2,397,000
Other assets
Prepaid pension costs 133,000Deferred income tax 40,000
Total other 173,000
Total Assets 9,210,978$
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Noncurrent Assets
This section shouldinclude only unusual
items sufficientlydifferent from assetsin the othercategories.
Balance Sheet (in thousands)
Current assetsCash 285,000$
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Chapter5-24
Obligations that acompany reasonably
expects to liquidateeither through the useof current assets or thecreation of other
current liabilities.
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet
Current Liabilities Balance Sheet (in thousands)Current liabilitiesNotes payable 233,450$
Accounts payable 131,800
Accrued compensation 43,000
Unearned revenue 17,000
Income tax payable 23,400Current maturities LT debt 121,000
Total current liabilities 569,650
Long-term liabilities
Long-term debt 979,500
Obligations capital lease 345,800Deferred income taxes 77,909
Total long-term liabilities 2,093,859
Stockholders' equity
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Chapter5-25
Obligations that acompany does not
reasonably expect toliquidate within thenormal operating cycle.
All covenants andrestrictions must bedisclosed.
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet
Balance Sheet (in thousands)Current liabilities
Notes payable 233,450$
Accounts payable 131,800
Accrued compensation 43,000
Unearned revenue 17,000
Income tax payable 23,400Current maturities LT debt 121,000
Total current liabilities 569,650
Long-term liabilities
Long-term debt 979,500
Obligations capital lease 345,800Deferred income taxes 77,909
Total long-term liabilities 2,093,859
Stockholders' equity
Long-Term Liabilities
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Chapter5-27
Companies usually divide equity into three parts,(1)Capital Stock, (2)Additional Paid-In Capital,
and (3)Retained Earnings.
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet
Owners Equity
Illustration 5-15
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Chapter
5-28
(a) Investment in preferred stock
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet Classification Exercise
Account
(b) Treasury stock
(c) Common stock
(d) Cash dividends payable
(e) Accumulated depreciation
(f) Interest payable
(g) Deficit(h) Trading securities
(i) Unearned revenue
(a) Current asset/Investment
(b) Equity
(c) Equity
(d) Current liability
(e) Contra-asset
(f) Current liability
(g) Equity(h) Current asset
(i) Current liability
Classification
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Chapter
5-29
Classified Balance Sheet
Account form
Report form
Balance Sheet - Format
Accounting Trends and Techniques2004 (New York:AICPA) indicates that all of the 600 companies surveyed
use either the report form (506) or the accountform (94), sometimes collectively referred to as thecustomary form.
LO 3 Prepare a classified balance sheet using the report and account formats.
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Chapter
5-30
Contingencies
Accounting Policies
Contractual Situations
Fair Values
Additional Information Reported
There are normally four types ofinformation that are supplemental toaccount titles and amounts presented inthe balance sheet:
LO 4 Determine which balance sheet informationrequires supplemental disclosure.
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Chapter
5-31
Parenthetical Explanations
Notes
Cross-Reference and Contra Items
Supporting SchedulesTerminology
Techniques of Disclosure
LO 5 Describe the major disclosure techniques for the balance sheet.
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Chapter
5-32
The Statement of Cash Flows
LO 6 Indicate the purpose of the statement of cash flows.
One of the three basic objectives of financialreporting is
assessing the amounts, timing, and
uncertainty of cash flows.
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Chapter
5-34
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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Chapter
5-35
Content and Format
The Statement of Cash Flows
Operating
Cash inflows
and outflowsfromoperations.
Investing
Cash inflows
and outflowsfromnon-currentassets.
Financing
Cash inflows
and outflowsfromnon-currentliabilities and
equity.The statements value is that it helps users evaluateliquidity, solvency, and financial flexibility.
LO 7 Identify the content of the statement of cash flows.
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Chapter
5-37
Preparation
The Statement of Cash Flows
LO 8 Prepare a statement of cash flows.
BE 5-12Midwest Beverage Company reported thefollowing items in the most recent year.
Activity
OperatingFinancing
Operating
Operating
InvestingOperating
Financing
Required: Prepare a Statement of Cash Flows
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Chapter
5-38
PreparationStatement of Cash Flow (in thousands)
Operating activities
Net income 40,000$
Increase in accounts receivable (10,000)
Increase in accounts payable 5,000
Depreciation expense 40,000
Cash flow from operations 75,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Proceeds from notes payable 20,000Dividends paid (5,000)
Cash flow from financing 15,000
Increase in cash 82,000$
The Statement of Cash Flows
LO 8 Prepare a statement of cash flows.
Noncash credit torevenues.
Noncash charge toexpenses.
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Chapter
5-39
ReviewIn preparing a statement of cash flows, which of thefollowing transactions would be considered an investingactivity?
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 discount receivable.
Balance Sheet
LO 8 Prepare a statement of cash flows.
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Chapter
5-40
Issuance of common stock to purchase assets.Conversion of bonds into common stock.
Issuance of debt to purchase assets.Exchanges on long-lived assets.
Additional Information Reported
Significant financing and investing activitiesthat do not affect cash are reported in either aseparate schedule at the bottom of thestatement of cash flows or in the notes.
Examples include:
LO 8 Prepare a statement of cash flows.
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Chapter
5-41
High amount- company able to generate
sufficient cash to pay its bills.Low amount- company may have to borrow orissue equity securities to pay bills.
Usefulness of the Statement of Cash Flows
Without cash, a company will not survive.
Cash flow from Operations:
LO 9 Understand the usefulness of the statement of cash flows.
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Chapter
5-42
Usefulness of the Statement of Cash Flows
Ratio indicates whether the company can pay off its
current liabilities from its operations. A ratio near1:1 is good.
LO 9 Understand the usefulness of the statement of cash flows.
Financial Liquidity
Net Cash Provided byOperating Activities
Average Current Liabilities
Current Cash
Debt CoverageRatio =
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Chapter
5-43
Usefulness of the Statement of Cash Flows
This ratio indicates a companys ability to repay its
liabilities from net cash provided by operatingactivities, without having to liquidate the assetsemployed in its operations.
LO 9 Understand the usefulness of the statement of cash flows.
Financial Flexibility
Net Cash Provided byOperating Activities
Average Total Liabilities
Cash Debt
CoverageRatio =
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Chapter
5-44
Usefulness of the Statement of Cash Flows
The amount of discretionary cash flow a company hasfor purchasing additional investments, retiring itsdebt, purchasing treasury stock, or simply adding toits liquidity.
LO 9 Understand the usefulness of the statement of cash flows.
Free Cash FlowIllustration 5-34
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Chapter
5-45
ReviewThe current cash debt coverage ratio is often used toassess
a. financial flexibility.b. liquidity.
c. profitability.
d. solvency.
Balance Sheet
LO 9 Understand the usefulness of the statement of cash flows.
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Chapter
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