CH_05_Balance Sheet and Statement of Cash Flows

8/10/2019 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


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


Balance Sheet Current Assets

Illustration 5-3


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Chapter5-10

Portfolios

Short-Term Investments


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



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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




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Chapter5-12

Accounts Receivable Presentation Options


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



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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




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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




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Chapter5-15

Generally consists of four types:

Securities

Fixed assets

Special funds

Nonconsolidated subsidiariesor

affiliated companies.

Long-Term Investments


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



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:









Building 1,375,778

Land 975,000



Land held forspeculation





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Chapter5-18

Special Funds

Investments:









Building 1,375,778

Land 975,000



Sinking fund

Pensions fund

Cash surrendervalue of lifeinsurance





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Chapter5-19

Nonconsolidated

Subsidiaries orAffiliatedCompanies

Investments:


Investment in UC Inc. 253,980

Notes receivable 150,000







Building 1,375,778

Land 975,000







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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



Lack physicalsubstance and are not

financial instruments.Limited lifeintangibles amortized.

Indefinite-life

intangibles tested forimpairment.




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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$



This section shouldinclude only unusual

items sufficientlydifferent from assetsin the othercategories.




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Chapter5-24

Obligations that acompany reasonably

expects to liquidateeither through the useof current assets or thecreation of other

current liabilities.


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.


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.


Balance Sheet

Owners Equity

Illustration 5-15


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Chapter

5-28

(a) Investment in preferred stock


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


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


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


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$



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



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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:



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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


Ratio indicates whether the company can pay off its

current liabilities from its operations. A ratio near1:1 is good.


Financial Liquidity

Net Cash Provided byOperating Activities

Average Current Liabilities

Current Cash

Debt CoverageRatio =


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Chapter

5-43


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.


Financial Flexibility

Net Cash Provided byOperating Activities

Average Total Liabilities

Cash Debt

CoverageRatio =


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Chapter

5-44


The amount of discretionary cash flow a company hasfor purchasing additional investments, retiring itsdebt, purchasing treasury stock, or simply adding toits liquidity.


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



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Chapter

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CH_05_Balance Sheet and Statement of Cash Flows

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