CHAPTER 5Balance Sheetand Statement of Cash Flows……..…………………………………………………………...

Usefulness of the Balance Sheet

Assets, liabilities, & equity at a specific date.

helps predict amount &

uncertainty of future cash

flows

2003 2004 2005

useful for analyzing a company’s …

ability to getcash as needed

ability topay debts

ability to respondto the unexpected

Limitations of the Balance Sheet

Historical cost is not

always . …

… but it’s more . than fair value estimates.

Omits items of financial value.

When reliable estimates cannot

be made.

Numbers not completely

reliable.

Judgment is frequently involved.

D LLE

$3 M

$300 M?

Type or expected function

Financial flexibilityand liquidity

characteristics

CLASSIFICATION IN THE BALANCE SHEET

land for production vs. land for investment

petty cash vs. bond sinking fund

Cash

Short-termInvestments

Receivables

Current Assets

restrictions must be noted

restricted cash might be non-current held-to-maturity

trading available-for-sale

trade vs. non-trade pledged

Current Assets (cont.)

Inventories valuation basis

disclosed grouped by stage

of completion

Prepaid ExpensesPAID benefits to be received

within 1 year

Long-Term Investments

Securities$1,000

REGISTERED

8.0%TangibleFixed Assets

Special FundsSubsidiaries(nonconsolidated)

intended to be held for more than a year not currently used

in operations

Property, Plant, and Equipment

Intangible Assets

durable nature

used in operations

disclose accumulated depreciation

lacking physical substance

Current Liabilities

AccountsPayable Current Portion

Long-Term Bonds

reasonably expected to be liquidated

within the normal business cycle

Unearned Revenue

$1,000

REGISTERED

8.0%

$1,000

REGISTERED

8.0%

$1,000

REGISTERED

8.0%Due 2003

Long-Term Liabilities

not expected to be liquidated within a year

Bonds Payable

$1,000

REGISTERED

8.0%

$1,000

REGISTERED

8.0%

PensionObligations

ProductWarranties

Financial Instruments

carrying value and estimated fair value

Owners’ Equity

Capital Stock

par value

authorized, issued, and outstanding

Additional Paid-In Capital

Retained Earnings

unappropriated vs. restricted

Treasury Stock

STATEMENT OF CASH FLOWS

Operating activities

cash receipts from operations

cash expenditures from operations

Investing activities

property, plant, & equipment

debt or equity securities

Financing activities

issuance of stocks or bonds

payment of dividends

Net Income Cash from Operations

Adjust for non-cash expenses

add back

depreciation expense

amortization expense

Adjust for non-cash gains and losses

add back

loss on sale of plant assets

subtract

gain on sale of securities

Adjust for changes in operating assets

accounts receivable

inventory

prepaid expenses

Adjust for changes operating liabilities

accounts payable

unearned revenues

Changes in Assets and Liabilities

Assets Liabilities

Increase

Decrease

Usefulness of the Statement of Cash Flows

“cash is the lifeblood of a company”

the statement provides useful information:

whether the company is generating

sufficient cash through operations

reasons for positive or negative cash flow

Current cash debtcoverage ratio

Net Cash from Operations

Average Current Liabilities=

Cash debtcoverage ratio

Net Cash from Operations

Average Total Liabilities=

Free Cash Flow

discretionary cash flow from operations

cash flow from selling investment securities,

issuing stock, or taking out a loan doesn’t count!

Net cash from operations

Free cash flow

- Dividends

- Capital expenditures