intermediate power point (5)

8/7/2019 Intermediate Power Point (5)

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Chapter5-1

Balance Sheet andBalance Sheet andStatement of Cash FlowsStatement of Cash Flows

ChapterChapter55

Intermediate Accounting12th Edition

Kieso, Weygandt, and Warfield

Prepared by Coby Harmon, University of California, Santa Barbara


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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 Objectives


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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 Flows

UsefulnessUsefulness

LimitationsLimitations

ClassificationClassification

AdditionalAdditional

informationinformation

reportedreportedTechniques ofTechniques of

disclosuredisclosure


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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 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.



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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 balancesheet.LO 2 Identify the major classifications of the balancesheet.


Illustration 5Illustration 5--11

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



Illustration 5Illustration 5--22Accounts andbasis of valuation


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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, accounts

receivable.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.

Cashequivalents are short-term highly liquid

investments that will mature within threemonths or less.

Any restrictions or commitments must bedisclosed.

Cash


Balance SheetBalance Sheet Current AssetsCurrent Assets



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Chapter5-10

Portfolios

Short-Term Investments

LO 2 Identify the major classificationsof the balancesheet.LO 2 Identify the major classificationsof the balancesheet.

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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Chapter

5-11

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

LO 2 Identify the major classifications of thebalancesheet.LO 2 Identify the major classifications of thebalancesheet.



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Chapter

5-12

AccountsReceivable Presentation Options

LO 2 Identify the major classificationsof thebalancesheet.LO 2 Identify the major classificationsof thebalancesheet.

Current Assets:Current Assets:

CashCash $ 346$ 346

Accounts receivableAccounts receivable 500500

Less allowance for doubtful accountsLess allowance for doubtful accounts 2525 475475InventoryInventory 812812

Total current assetsTotal current assets $1,633$1,633

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 $1,633$1,633

1

2



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Chapter

5-13

Company discloses:

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

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

Inventories

LO 2Identify the major classificationsof the balancesheet.LO 2Identify the major classificationsof the balancesheet.



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Chapter

5-14

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 Payment Expense RecordedBEFORE

rentrent

maintenance on equipmentmaintenance on equipment

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

PrepaidExpenses




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Chapter

5-15

Generallyconsistsoffour types:

SecuritiesSecurities

FixedassetsFixedassets

SpecialfundsSpecialfunds

NonconsolidatedsubsidiariesNonconsolidatedsubsidiaries or

affiliated companies.

Long-TermInvestments

LO 2Identify the major classificationsof the balancesheet.LO 2Identify the major classificationsof the balancesheet.

Balance SheetBalance Sheet Noncurrent AssetsNoncurrent Assets


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Chapter

5-16


SecuritiesSecuritiesInvestments

Invesment in ABC bonds 321,657

Investment in UC Inc. 253,980Notes receivable 150,000

and held for speculation 550,000

Sinking fund 225,000

Pension fund 653,798

Cash surrender value 84,321

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

Property, Plant, and Equip.

Building 1,375,778

and 975,000

LO2Identify the major classificationsofthe balance sheet.LO2Identify the major classificationsofthe balance sheet.


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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Chapter

5-17

Fixed AssetsFixed Assets

Invest ents









Building 1,375,778

and 975,000



and held forspeculation



Cash 285,000$


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Chapter

5-18

SpecialFundsSpecialFunds

Investments









Building 1,375,778

and 975,000



Sinking fund

Pensions fund

Cash surrendervalue of lifeinsurance



Cash 285,000$


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Chapter

5-19

NonconsolidatedNonconsolidated

SubsidiariesorSubsidiariesorAffiliatedAffiliatedCompaniesCompanies

Investments









Building 1,375,778

and 975,000





Cash 285,000$


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Chapter

5-21

Intangibles

Accumulated depreciation 975,000

Total PP&E 2,170,386

IntangiblesGoodwill 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

LO 2Identifythe major classifications ofthe balance sheet.LO 2Identifythe major classifications ofthe balance sheet.


Lackphysicalsubstance andare not

financial instruments.Limitedlifeintangibles amortized.

Indefinite-lifeintangibles testedforimpairment.

Balance Sheet in thousandsCurrent assets

Cash 285,000$


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Chapter

5-22 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance SheetBalance Sheet ExerciseExercise

BE5-6 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 the

balance sheet.Intangibles

Goodwill $ 40,000

Franchises 47,000

Patents 33,000Trademarks 10,000

Total $130,000


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Chapter

5-23

Other Assets

t es

Goodwill 2,000,000

Patents 177,000rademark 40,000

Franchises 125,000

Copyright 55,000

otal intangibles 2,397,000

Other assets

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

otal other 173,000

Total Assets 9,210,978$

LO 2Identifythe major classifications ofthe balance sheet.LO 2Identifythe major classifications ofthe balance sheet.


This sectionshouldinclude onlyunusualitems sufficientlydifferent fromassetsinthe othercategories.


Cash 285,000$


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Chapter

5-24

Obligations thatacompany reasonably

expects toliquidateeither through the useofcurrentassetsor thecreationofother

currentliabilities.

LO 2 Identify themajor classificationsof thebalancesheet.LO 2 Identify themajor classificationsof thebalancesheet.


CurrentLiabilities Balance Sheet(in thousands)Current liabilities

Notes payable 233,450$

Accounts payable 131,800

Accrued compensation 43,000

Unearned revenue 17,000Income tax payable 23,400

Current 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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Chapter

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Obligations thatacompanydoesnot

reasonablyexpect toliquidatewithin thenormaloperatingcycle.

Allcovenantsandrestrictionsmustbedisclosed.

LO 2 Identify themajor classificationsof thebalancesheet.LO 2 Identify themajor classificationsof thebalancesheet.


Balance Sheet(in thousands)

Current liabilities

Notes payable 233,450$

Accounts payable 131,800

Accrued compensation 43,000

Unearned revenue 17,000Income tax payable 23,400

Current 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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Chapter

5-26 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance SheetBalance Sheet ExerciseExercise

BE5-9 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 Taxes

Payable $29,000. Prepare the long-term liabilities section of thebalance sheet.

Long-termliabilities

Pension liability $375,000

Bonds payable 400,000

Discount on bonds payable (24,000)

Total 751,000


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Chapter

5-27

Companies usuallydivideequity into three parts,(1) CapitalStock,(2) AdditionalPaid-InCapital,

and(3) Retained Earnings.

LO 2Identify themajor classificationsof the balancesheet.LO 2Identify themajor classificationsof the balancesheet.

BalanceSheetBalanceSheet

Owners Equity



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Chapter

5-28

(a) Investment in preferred stock

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

Balance 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

(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 BalanceSheet

AccountformAccountform

ReportformReportform

BalanceSheetBalanceSheet -- FormatFormat

Accounting Trendsand Techniques2004 (New York:AICPA) indicates that all of the 600companies surveyed

use either the report form (50

6) or the accountform (94), sometimes collectively referred to as thecustomary form.

LO 3 Prepare a classified balance sheet using the report and account formats.LO 3 Prepare a classified balance sheet using the report and account formats.


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Chapter

5-30

Contingencies

AccountingPolicies

ContractualSituations

Fair Values

Additional Information ReportedAdditional Information Reported

Therearenormally four typesofinformation thataresupplemental toaccount titlesandamountspresented in

thebalancesheet:

LO 4 Determine whichbalancesheet informationLO 4 Determine whichbalancesheet informationrequiressupplemental disclosure.requiressupplemental disclosure.


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Chapter

5-31

Parenthetical Explanations

Notes

Cross-ReferenceandContraItems

SupportingSchedulesTerminology

Techniquesof DisclosureTechniquesof Disclosure

LO 5 Describe themajor disclosure techniquesfor the balancesheet.LO 5 Describe themajor disclosure techniquesfor the balancesheet.


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Chapter

5-32

The Statement of Cash FlowsThe Statement of Cash Flows

LO 6 Indicate thepurpose of the statement of cash flows.LO 6 Indicate thepurpose of the statement of cash flows.

One of the three basic objectives of financialreporting is

assessing theamounts, timing,and

uncertaintyofcashflows.


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Chapter

5-33

To provide relevant information about the cashreceipts and cash payments of an enterprise during

a 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?

Purposeof theStatement

TheStatementof Cash FlowsTheStatementof Cash Flows

LO 6 Indicate the purposeof thestatementof cashflows.LO 6 Indicate the purposeof thestatementof cashflows.


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Chapter

5-34

Three different activities:

Operating,

ContentandFormat

The StatementofCashFlowsThe StatementofCashFlows

LO 7 Identify the contentof the statementof cash flows.LO 7 Identify the contentof the statementof cash flows.

Investing, Financing



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Chapter

5-35

ContentandFormat

The StatementofCashFlowsThe StatementofCashFlows

OperatingOperating

Cash inflowsand outflowsfromoperations.

InvestingInvesting

Cash inflowsand outflowsfromnon-currentassets.

FinancingFinancing

Cash inflowsand outflowsfromnon-currentliabilities and

equity.

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

LO 7Identify thecontent of thestatement ofcash flows.LO 7Identify thecontent of thestatement ofcash flows.


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Chapter

5-36

Information obtained from several sources:

(1) comparative balance sheets,

(2) the current income statement, and

(3) selected transaction data.

Preparation

The Statementof Cash FlowsThe Statementof Cash Flows

LO 8Preparea statementof cash flows.LO 8Preparea statementof cash flows.


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Chapter

5-37

Preparation

The Statementof Cash FlowsThe Statementof Cash Flows

LO 8Preparea statementof cash flows.LO 8Preparea statementof cash flows.

BE5-12 Midwest 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

5-39

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 investing

activity?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.


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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 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:

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


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Chapter

5-41

Highamount- company able to generatesufficient cash to pay its bills.Lowamount- company may have to borrow orissue equity securities to pay bills.

Usefulnessof the Statementof Cash FlowsUsefulnessof the Statementof Cash Flows

Without cash, a company will not survive.

Cash flow from Operations:

LO 9 Understand the usefulnessof the statementof cash flows.LO 9 Understand the usefulnessof the statementof cash flows.


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Chapter

5-42

Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash Flows

Ratio indicates whether the company can pay off its

current 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.

FinancialLiquidity

Net Cash Provided byOperating Activities

Average Current Liabilities

CurrentCash

DebtCoverageRatio

=


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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.


FinancialFlexibility

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.


FreeCashFlowIllustration 5Illustration 5--3434


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Chapter

5-45

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.




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Chapter

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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 addressed

to 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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