ALSARHANI YAHYA 1 Intermediate Accounting part (2) CH (1)

ALSARHANI YAHYA 1

Intermediate Accounting

part (2)CH (1)

Chapter 5-2

Balance SheetBalance SheetStatement of Cash Statement of Cash

FlowsFlows

UsefulnessUsefulness

LimitationsLimitations

ClassificationClassification

Additional information Additional information

reportedreported

Techniques of Techniques of

disclosuredisclosure

PurposePurpose

Content and formatContent and format

PreparationPreparation

UsefulnessUsefulness

Balance Sheet and Statement of Cash Balance Sheet and Statement of Cash FlowsFlows

Balance Sheet and Statement of Cash Balance Sheet and Statement of Cash FlowsFlows

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In this course we will discussing the following:

Evaluated the short term-Asset. Evaluated the long term-Asset. Intangibles Asset.

Evaluated the short term-Liabilities. Evaluated the long term-Liabilities.

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BALANCE SHEET USEFULNESS OF THE BALANCE SHEET

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Evaluating the capital structure. Assess risk and future cash flows. Analyse the company’s: • Liquidity• Solvency , and• Financial flexibilities.

LIMITATION OF THE BALANCE SHEET Most assets and liabilities are reported at

historical cost. Use of judgments and estimates.

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CLASSIFICATION IN THE BALANCE SHEET

Three General Classifications: Assets, Liabilities, and Stockholders’ Equity Companies further divide these

classifications:

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CURRENT ASSET Cash and other assets a company expects

to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer.

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ReviewReview

The correct order to present current assets isThe correct order to present current assets is

a. a. Cash, accounts receivable, prepaid items, Cash, accounts receivable, prepaid items, inventories.inventories.

b. b. Cash, accounts receivable, inventories, prepaid Cash, accounts receivable, inventories, prepaid items.items.

c. c. Cash, inventories, accounts receivable, prepaid Cash, inventories, accounts receivable, prepaid items.items.

d. d. Cash, inventories, prepaid items, accounts Cash, inventories, prepaid items, accounts receivable.receivable.

Balance Sheet

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Evaluated the short term-Asset Increasing importance of assets traded in all

economic units, therefore, be compiled in the budget according to the degree of liquidity and the speed of its transformation into cash.

That the foundations for measuring and assessing the elements of a volume of short-term assets have a direct impact on both the net income or financial status , liquidity to ensure the ability of the business to repay its short-term

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profitability requires the use of available resources in inventory so that a high proportion of transactions, will be increase the profitability.

Therefore, attention to short-term asset plays an important role both in the evaluation of previous decisions, or planning to take decisions in the future.

So, in this chapter we are going to talk about the cash, short-term investment, customer account and Securities receivable.

CASH Generally any monies available “on

demand.” Cash equivalents - short-term highly liquid

investments that mature within three months or less

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CASH Includes cash and coins, paper checks deposited

in the treasury, whether established or in a current account with one of the banks.

Reflect the cash budget in the first component assets traded in the elements as the most liquidity.

With the assumption that the cash available to fund ongoing operations, but it may lose this feature, when the administration put restrictions on the use during the financial year and

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Limited to accounting procedures for cash at the end of the accounting period to three adjustments:

1. Settlement of the deficit or increase in the treasury.

2. The settlement of petty cash .

3. The balance of bank account.(Reconciliation).

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Short – term Investment The used of term ( Marketable securities) for the

bonds issued from government ,or the bonds and shares issued from shareholders companies

The invest in this type of securities are considered of liquid assets like cash because it almost can be sold in the market at any time and so often to invest in negotiable securities as the second source of cash.

Usually the company diversity her investment and not limited to investment from one company, but is seeking to diversify to avoid risk, and try to have (Investment Portfolio)

The categories of short –term investment Marketable securities are highly liquid because

they can quickly be converted to cash. Short –term investment fall into three

categories:

1. Held-to- maturity securities.

2. Trading securities.

3. Available-for-sale securities.

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Held-to- maturity securities The company intends to hold until the

securities maturity date and on which it earns interest revenue.

Only dept. securities can be classified as held- to – maturity because by definition , equity securities have no maturity date.

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Companies buy held-to-maturity securities to earn interest revenue , and they plan to hold these investment until their maturity date.

Many held-to-maturity securities are virtually risk-free . Example include U.S.treasury bills, the commercial paper of companies with excellent credit ratings , and bonds

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Example 1: On June 1 .2013 , ABC company pays

$1500 million for XYZ commercial paper that will mature at $1500 million in 90 days . All investment are recorded initially at cost.

What's the journal entries for this event?

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Example 2: ABC company fiscal year ends on June30,

so at year end the company would accrue 30 days interest revenue that it has earned on the investment . With investments such as commercial paper and U.S. Treasury bills , the accrual of interest revenue increase the carrying ( book) value of the investment.

What's the journal entries for this action?

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The invest in bond Calculated the benefit of the year as a

percentage of the nominal value. For example if the company have bond the interest 12% and the nominal value was 1000 so the company will get in the last year??? (usually the interest will take it in the half of year ).

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Example ABC company purchased in the first of August

1000 bond and the nominal value for the bond was 100 R.O and the interest rate was 12% paid in the first of June and the first of December .

Note that: The purchased price was cover 98% from the

nominal value. The commission expenses was 490 R.OSo what is the total of amount that the company will

pay to get these bonds?

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What is the journal entries? Assume that the company receive the interest in

the first of December, what is the journal entry? The fiscal year of the company ended in the 31st

of December every year in accordance with the accrued basis , we are should doing the adjustment for the interest revenue ( what is the journal entry).

What is the journal entry when the company receive the interest in the next June ?

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Invest in the shares For example, if the ABO SALM company

purchased 1000 shares by 12 R.O ,the commission expenses was 60 R.O, the nominal value for the share was 10 R.O , so what is the journal entry?

Assume that if the company announce to distributed the profit in Feb. (4) R.O for each share , and the company paid it in March. What is the journal entry?

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The profit and loss for selling securities

Selling the investment in the bond: If the A company have 1000 bond and the

company want to sold the half of his bond own by 99 R.O and the commission was 150 R.O so, what is the journal entry?

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Selling the investment in the shares: In the same example in the above what is

the journal entry if the company sold have his own shares by 114 R.O and the commission was 60 R.O

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EVALUATED THE INVESTMENT IN THE SECURITIES

1. Evaluated the bonds: shows short-term investments in the form of bonds, accounting records in accordance with the cost and recognizes the gains or losses realized when the sale actually.

2. Evaluated the shares: Share prices may fluctuate in the stock market considerably during the accounting period, and if a company sold the shares available to them will be realized gains or losses from the sale.

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Often the diversity of investment companies in order to avoid the risk, therefore, often include the portfolio of several types of shares and should be compared to the total cost of shares in the portfolio with a total market value. If the market value of the existing one was less than the cost would be adjusted to be the devaluation of investments in the portfolio at par with market value. So the company have unrealized losses.

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To explain that , if ABC company provide the marketable securities which belong to the company in 13/12/2005

Sort of securitiesCostThe market price

The share capital (A)100,000110,000

The share capital (B)120,00090,000

The share capital (C)150,000150,000

The share capital (D)170,000160,000

TOTAL540,000510,000

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We can see from the table the cost of investment bigger then the market price . The different is unrealized Losses.

So the journal entry will be:

Unrealized losses 30,000

Allowance stock price fall 30,000

Allowance account appear in the balance sheet under Asset (investment in securities)

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At the end of the accounting period should be amended to show the expense of investments in accordance with the budget and the cost or market price whichever is less, if there has been a further decline in market value should be increased ad hoc, and vice versa. As in the last example if the market price = 530,000 so we should decrease the allowance account to become 10,000 (540,000 – 530,000)

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In these situation we will do settlement to reduce the expense allowance by 20000 and in accordance with the following:

Allowance securities price fall 20,000

Loss for the rise of securities price 20,000

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If we assume that the prices of securities is now 560,000 then the remedy should be limited to the amount of losses, who was in an ad hoc account for the decline is 10000, this means that the increase in market value for the cost are not taken into account so the journal entry will be:

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Allowance securities price fall 10,000

Loss for the rise of securities price 10,000

Note that:

The loss for the rise of securities price are type of earn so it is appear in income statement under the revenue and unearned revenue

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EXAMPLE The following data appeared in the balance sheet of the

pyramids company: Asset:

Invest in securities 260,000

Less:

Allowance securities price fall (7000) _______253,000

The Investment Portfolio was:

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Sort of securitiesCostThe market price

The share capital (H)50,00055,000

The share capital (I)60,00058,000

The share capital (J)70,00060,000

The share capital (K)80,00080,000

TOTAL260,000253,000

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During the year the company did these operation:

1. The company sold The share capital (J) by 64,000.

2. Convert the share capital (H) to long term investment, and the sale price in the date of convert was 57,000

3. Company bought share from company (M) by 40,000

4. The company sold The share capital (I) by 61,000

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The new Investment Portfolio will be:

Type of investment cost market price

Share capital (K) 80,000 79,000

Share capital (M) 40,000 44,000

Total 120,000 123,000

Prepare all journal entries

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Assume that :the revenue for good sold was 380,000 and the cost of good sold was 220,000 and the sold expenses was 30,000 and the management expenses was 20,000

So prepare the income statement when you finish the journal entries.