We’ll only do balance sheet here, and will discuss statement of Cash flows in Ch.23 Chapter 5:...
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Transcript of We’ll only do balance sheet here, and will discuss statement of Cash flows in Ch.23 Chapter 5:...
We’ll only do balance sheet here, and will discuss statement of
Cash flows in Ch.23
Chapter 5: Balance Sheet Chapter 5: Balance Sheet and Statement of Cash and Statement of Cash
Flows SystemsFlows 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.
5. Identify major disclosure techniques for the balance sheet.
After studying this chapter, you should be able to:
Chapter 5: Balance SheetChapter 5: Balance Sheet
The balance sheet provides information for evaluating:
Capital structureRates of returnAnalyzing an enterprise’s:
LiquiditySolvency Financial flexibility
Balance Sheet: UsefulnessBalance 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: LimitationsBalance 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: Balance Sheet: ClassificationClassification
• 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: Balance Sheet: ClassificationClassification
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 AssetsCurrent 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 InvestmentsLong-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 LiabilitiesCurrent 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 LiabilitiesLong-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 Balance Sheet: Additional Information ReportedInformation Reported
• Parenthetical explanations• Notes• Cross references and contra items • Supporting schedules
Balance Sheet: Techniques Balance Sheet: Techniques of Disclosureof Disclosure
Ratio analysis expresses the relationship between selected financial data.
These relationships can be expressed as:• percentages • rates, or• proportions
Ratio AnalysisRatio Analysis
14Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
04/19/23Coverage 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 RatiosTypes of Ratios