a chapter 5

8/9/2019 A Chapter 5

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Chapter5-1

Balance Sheet andStatement of Cash Flows

Balance Sheet andBalance Sheet andStatement of Cash FlowsStatement of Cash Flows

ChapterChapter

55Intermediate Accounting

12th Edition

Kieso, Weygandt, and Warfield

Prepared by Coby Harmon, University of California, Santa Barbara Chapter5-2

1.1. Explain the uses and limitations of a balance sheet.Explain the uses and limitations of a balance sheet.

2.2. Identify the major classifications of the balance sheet.Identify the major classifications of the balance sheet.

3.3. Prepare a classified balance sheet using the report andPrepare a classified balance sheet using the report andaccount formats.account formats.

4.4. Determine which balance sheet information requiresDetermine which balance sheet information requiressupplemental disclosure.supplemental disclosure.

5.5. Describe the major disclosure techniques for the balanceDescribe the major disclosure techniques for the balancesheet.sheet.

6.6. Indicate the purpose of the statement of cash flows.Indicate the purpose of the statement of cash flows.

7.7. Identify the content of the statement of cash flows.Identify the content of the statement of cash flows.

8.8. Prepare a statement of cash flows.Prepare a statement of cash flows.

9.9. Understand the usefulness of the statement of cashUnderstand the usefulness of the statement of cashflows.flows.

Learning ObjectivesLearning ObjectivesLearning Objectives

Chapter5-3

BalanceBalance

SheetSheet

Statement ofStatement of

Cash FlowsCash Flows

PurposePurpose

Content andContent and

formatformat

PreparationPreparation

UsefulnessUsefulness

Balance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash Flows

UsefulnessUsefulness

LimitationsLimitations

ClassificationClassification

AdditionalAdditional

informationinformation

reportedreported

Techniques ofTechniques of

disclosuredisclosure

Chapter5-4

Evaluating the capital structure.

Assess risk and future cash flows.

Analyze the companys:

Liquidity,

Solvency, and

Financial flexibility.

Balance SheetBalance SheetBalance Sheet

Usefulness of the Balance Sheet

LO 1 Explain the uses and limitations of a 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.LO 1 Understand the uses and limitations of an income statement.


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.LO 2 Identify the major classifications of the balance sheet.


Illustration 5Illustration 5--11Balance SheetClassification

Chapter5-7

Cash and other assets a company expects toconvert into cash, sell, or consume either in oneyear or in the operating cycle, whichever is longer.

Current Assets



Illustration 5Illustration 5--22Accounts andbasis of valuation

Chapter5-8

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, prepaidCash, accounts receivable, inventories, prepaiditems.items.

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

items.items.d.d. Cash, inventories, prepaid items, accountsCash, inventories, prepaid items, accountsreceivable.receivable.

LO 8LO 8 Explain how to report other comprehensive income.Explain how to report other comprehensive income.



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Chapter5-9

Generally any monies available on demand.

Cash equivalents are short-term highly liquidinvestments that will mature within threemonths or less.

Any restrictions or commitments must bedisclosed.

Cash


Balance Sheet Current AssetsBalance SheetBalance SheetCurrent AssetsCurrent Assets

Illustration 5Illustration 5--33

Chapter5-10

Portfolios

Short-Term Investments


Type Valuation Classification

Held-to-Maturity

DebtAmortized

CostCurrent orNoncurrent

TradingDebt orEquity

Fair Value Current

Available-for-Sale

Debt orEquity

Fair ValueCurrent orNoncurrent


Chapter5-11

Claims held against customers and others formoney, goods, or services.

Accounts receivable oral promises

Notes receivable written promises

Major categories of receivables should be shown inthe balance sheet or the related notes.

Receivables



Chapter5-12

Accounts Receivable Presentation Options


Current Assets:Current Assets:

CashCash $ 346$ 346

Accounts receivableAccounts receivable 500500

Less allowance for doubtful accountsLess allowance for doubtful accounts 2525 475475

InventoryInventory 812812

Total current assetsTotal current assets $1,673$1,673

Current Assets:Current Assets:

CashCash $ 346$ 346Accounts receivable,Accounts receivable, net of $25 allowancenet of $25 allowance 475475

InventoryInventory 812812

Total current assetsTotal current assets $1,673$1,673

1

2



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Chapter5-13

Company discloses:

basis of valuation (e.g., lower-of-cost-or-market) and

the method of pricing (e.g., FIFO or LIFO).

Inventories



Chapter5-14

Payment of cash, that is recorded as an asset becausePayment of cash, that is recorded as an asset becauseservice or benefit will be received in the future.service or benefit will be received in the future.

insuranceinsurance

suppliessupplies

advertisingadvertising

Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE

rentrent

maintenance on equipmentmaintenance on equipment

fixed assetsfixed assets

Prepayments often occur in regard to:Prepayments often occur in regard to:

Prepaid Expenses



Chapter5-15

Generally consists of four types:

SecuritiesSecurities

Fixed assetsFixed assets

Special fundsSpecial funds

Nonconsolidated subsidiariesNonconsolidated subsidiaries or

affiliated companies.

Long-Term Investments


Balance Sheet Noncurrent AssetsBalance SheetBalance SheetNoncurrent AssetsNoncurrent Assets

Chapter5-16

Long-TermInvestments

SecuritiesSecuritiesSecuritiesInvestments:

Invesment in ABC bond s 321,657

Investment in UC Inc. 253,980

Notes receivable 150,000

Land held for speculation 550,000

Sinking fund 225,000Pension fund 653,798

Cash surrender value 84,321

Investment in Uncon. Sub. 457,836Total investments 2,696,592

Property, Plant, and Equip.

Building 1,375,778Land 975,000



bonds,

stock, and

long-term notes

For marketable securities,managements intentdetermines current ornoncurrent classification.

Balance Sheet (in thousands)

Current assets

Cash 285,000$


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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 2,397,000

Other assets

Prepaid pension costs 133,000

Deferred income tax 40,000

Total other 173,000



Lack physicalsubstance and are notfinancial instruments.

Limited lifeintangibles amortized.

Indefinite-lifeintangibles tested forimpairment.


Current assets

Cash 285,000$

Chapter5-22 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance Sheet ExerciseBalance SheetBalance SheetExerciseExerciseBE5-6 Mickey 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 section of thebalance sheet.

Chapter5-23

Other Assets

Intangibles

Goodwill 2,000,000

Patents 177,000Trademark 40,000

Franchises 125,000Copyright 55,000

Total intangibles 2,397,000Other assets

Prepaid pension costs 133,000Deferred income tax 40,000

Total other 173,000Total Assets 9,210,978$



This section shouldinclude only unusualitems sufficientlydifferent from assetsin the othercategories.


Current assets

Cash 285,000$

Chapter5-24

Obligations that acompany reasonablyexpects to liquidateeither through the useof current assets or thecreation of othercurrent liabilities.



Current Liabilities Balance Sheet (in thousands)Current liabilities

Notes payable 233,450$

Accounts payable 131,800Accrued compensation 43,000Unearned revenue 17,000

Income tax payable 23,400Current maturities LT debt 121,000

Tota l current liabil ities 569,650Long-term liabilities

Long-term debt 979,500Obligations capita l lease 345,800

Deferred income taxes 77,909Total long-term liabilities 2,093,859

Stockholders' equity


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Chapter5-25

Obligations that acompany does notreasonably expect toliquidate within thenormal operating cycle.

All covenants andrestrictions must bedisclosed.




Current liabilities

Notes payable 233,450$

Accounts payable 131,800Accrued compensation 43,000Unearned revenue 17,000

Income tax payable 23,400Current maturities LT debt 121,000

Tota l current l iabilities 569,650Long-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

Chapter5-26 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance Sheet ExerciseBalance SheetBalance SheetExerciseExerciseBE5-8 Included in Ewing Companys December 31, 2007, trialbalance are the following accounts: Accounts Payable $240,000;Pension Liability $375,000; Discount on Bonds Payable $24,000;Advances from Customers $41,000; Bonds Payable $400,000;Wages Payable $27,000; Interest Payable $12,000; Income TaxesPayable $29,000. Prepare the long-term liabilities section of thebalance sheet.

Chapter5-27

Companies usually divide equity into three parts,(1) Capital Stock, (2) Additional Paid-In Capital,and (3) Retained Earnings.



Owners Equity


Chapter5-28

(a) Investment in preferred stock


Balance Sheet Classification ExerciseBalance Sheet Classification ExerciseBalance 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

Classification


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Chapter5-29

Classified Balance Sheet

Account formAccount form

Report formReport form

Balance Sheet - FormatBalance SheetBalance Sheet-- FormatFormat

Accounting Trends and Techniques2004(New York:AICPA) indicates that all of the 600 companies surveyeduse 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 accLO 3 Prepare a classified balance sheet using the report and account formats.ount formats. Chapter5-30

Contingencies

Accounting Policies

Contractual Situations

Fair Values

Additional Information ReportedAdditional Information ReportedAdditional 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 informationLO 4 Determine which balance sheet informationrequires supplemental disclosure.requires supplemental disclosure.

Chapter5-31

Parenthetical Explanations

Notes

Cross-Reference and Contra Items

Supporting Schedules

Terminology

Techniques of DisclosureTechniques of DisclosureTechniques of Disclosure

LO 5 Describe the major disclosure techniques for the balance shLO 5 Describe the major disclosure techniques for the balance sheet.eet.Chapter

5-32

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 6 Indicate the purpose of 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, anduncertainty of cash flows.


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Chapter5-33

To provide relevant information about the cashreceipts and cash payments of an enterprise duringa period.

The statement provides answers to the followingquestions:

1. Where did the cash come from?

2. What was the cash used for?

3. What was the change in the cash balance?

Purpose of the Statement


LO 6 Indicate the purpose of the statement of cash flows.LO 6 Indicate the purpose of the statement of cash flows. Chapter5-34

Three different activities:

Operating,

Content and Format


LO 7 Identify the content of the statement of cash flows.LO 7 Identify the content of the statement of cash flows.

Investing, Financing


Chapter5-35

Content and Format


OperatingOperatingOperating

Cash inflowsand outflowsfromoperations.

InvestingInvestingInvesting

Cash inflowsand outflowsfromnon-currentassets.

FinancingFinancingFinancing

Cash inflowsand outflowsfromnon-currentliabilities andequity.

The statements value is that it helps users evaluateliquidity, solvency, and financial flexibility.The statements value is that it helps users evaluateliquidity, solvency, and financial flexibility.

LO 7 Identify the content of the statement of cash flows.LO 7 Identify the content of the statement of cash flows.Chapter

5-36

Information obtained from several sources:

(1) comparative balance sheets,

(2) the current income statement, and

(3) selected transaction data.

Preparation


LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.


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Chapter5-37

Preparation



BE 5-12 Midwest Beverage Company reported thefollowing items in the most recent year.

Activity

Required: Prepare a Statement of Cash FlowsChapter

5-38

PreparationStatement of Cash Flow (in thousands)

Operating activities

Net income 40,000$

Increase in accounts receivab le (10,000)

Increase in accounts payable 5,000

Depreciation expense 40,000

Cash flow from operations 75,000Investing activities

Purchase of equipment (8,000)Financing activities

Proceeds from notes payable 20,000

Dividends paid (5,000)

Cash flow from financing 15,000Increase in cash 82,000$



Noncash credit torevenues.

Noncash charge toexpenses.

Chapter5-39

ReviewReview

In preparing a statement of cash flows, which of theIn preparing a statement of cash flows, which of thefollowing transactions would be considered an investingfollowing transactions would be considered an investingactivity?activity?

a.a. Sale of equipment at book valueSale of equipment at book value

b.b. Sale of merchandise on creditSale of merchandise on credit

c.c. Declaration of a cash dividendDeclaration of a cash dividend

d.d. Issuance of bonds payable at a discountIssuance of bonds payable at a discountreceivable.receivable.


LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.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 ReportedAdditional Information ReportedAdditional 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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Chapter5-41

High amount - company able to generatesufficient cash to pay its bills.Low amount - company may have to borrow orissue equity securities to pay bills.

Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness 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.LO 9 Understand the usefulness of the statement of cash flows. Chapter5-42


Ratio indicates whether the company can pay off itscurrent liabilities from its operations. A ratio near1:1 is good.

LO 9 Understand the usefulness of the statement of cash flows.LO 9 Understand the usefulness of the statement of cash flows.

Financial Liquidity

Net Cash Provided byOperating Activities

Average Current Liabilities

Current CashDebt Coverage

Ratio=

Chapter5-43


This ratio indicates a companys ability to repay itsliabilities from net cash provided by operating

activities, without having to liquidate the assetsemployed in its operations.


Financial Flexibility

Net Cash Provided byOperating Activities

Average Total Liabilities

Cash DebtCoverage

Ratio=

Chapter5-44


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 5Illustration 5--3434


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Chapter5-45

ReviewReview

The current cash debt coverage ratio is often used toThe current cash debt coverage ratio is often used toassessassess

a. financial flexibility.a. financial flexibility.

b. liquidity.b. liquidity.

c. profitability.c. profitability.

d. solvency.d. solvency.


LO 9 Understand the usefulness of the statement of cash flows.LO 9 Understand the usefulness of the statement of cash flows. Chapter5-46

Copyright 2006 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permittedin Section 117 of the 1976 United States Copyright Act withoutthe express written permission of the copyright owner isunlawful. Request for further information should be addressedto the Permissions Department, John Wiley & Sons, Inc. Thepurchaser may make back-up copies for his/her own use onlyand not for distribution or resale. The Publisher assumes noresponsibility for errors, omissions, or damages, caused by theuse of these programs or from the use of the informationcontained herein.

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