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