Chapter 4-1

Chapter 4-2 CHAPTER 4 BALANCE SHEET INTERMEDIATE ACCOUNTING Principles and Analysis 2nd Edition Warfield Weygandt Kieso

Chapter 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 and account formats. 4.Determine which balance sheet information requires supplemental disclosure. 5.Describe the major disclosure techniques for the balance sheet. Learning Objectives

Chapter 4-4 Use and Limitations UsefulnessLimitations ClassificationClassification Additional Information Techniques of Disclosure Parenthetical explanations Notes Cross- reference and contra items Supporting schedules TerminologyContingencies Accounting policies Contractual situations Post–balance- sheet events Fair values Balance Sheet Current assets Noncurrent assets Liabilities Owners’ equity Format

Chapter 4-5 Evaluating the capital structure. Assess risk and future cash flows. Analyze the company’s:  Liquidity,  Solvency, and  Financial flexibility. Balance Sheet Usefulness of the Balance Sheet LO 1 Explain the uses and limitations of a balance sheet.

Chapter 4-6 Review: Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows. FalseTrueTrue Balance Sheet LO 1 Explain the uses and limitations of a balance sheet.

Chapter 4-7 Use of historical cost. Use of judgments and estimates. Many items of financial value are omitted. Limitations of the Balance Sheet Balance Sheet LO 1 Explain the uses and limitations of a balance sheet.

Chapter 4-8 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 4-1 Illustration 4-1 Balance Sheet Classifications

Chapter 4-9 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. Current Assets LO 2 Identify the major classifications of the balance sheet. Balance Sheet Illustration 4-2 Illustration 4-2 Accounts and basis of valuation

Chapter 4-10 Review The correct order to present current assets is a. Cash, Accounts Receivable, Prepaid Items, Inventories. a. Cash, Accounts Receivable, Prepaid Items, Inventories. b. Cash, Accounts Receivable, Inventories, Prepaid Items. b. Cash, Accounts Receivable, Inventories, Prepaid Items. c. Cash, Inventories, Accounts Receivable, Prepaid Items. c. Cash, Inventories, Accounts Receivable, Prepaid Items. d. Cash, Inventories, Prepaid Items, Accounts Receivable. d. Cash, Inventories, Prepaid Items, Accounts Receivable. Balance Sheet LO 2 Identify the major classifications of the balance sheet.

Chapter 4-11 Review: An asset which is expected to be converted into cash, sold, or consumed within one year of the balance sheet date is always reported as a current asset. FalseTrueFalse Balance Sheet LO 2 Identify the major classifications of the balance sheet.

Chapter 4-12 Generally any monies available “on demand.” Cash equivalents are short-term highly liquid investments that will mature within three months or less. Any restrictions or commitments must be disclosed. Cash LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 4-3

Chapter 4-13 Portfolios Short-Term Investments LO 2 Identify the major classifications of the balance sheet. TypeValuationClassification Held-to- Maturity Debt Amortized Cost Current or Noncurrent TradingDebt or EquityFair ValueCurrent Available- for-Sale Debt or EquityFair Value Current or Noncurrent Balance Sheet – “Current Assets”

Chapter 4-14 Short-Term Investments LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 4-5 Illustration 4-5 Balance Sheet Presentation

Chapter 4-15 Claims held against customers and others for money, goods, or services. Accounts Receivable – oral promises Notes 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 the balance sheet. Balance Sheet – “Current Assets”

Chapter 4-16 Accounts Receivable – Presentation Options LO 2 Identify the major classifications of the balance sheet. Current assets: Cash $ 346 Accounts receivable500 Less: Allowance for doubtful accounts Inventory 812 Total current assets $1,633 Current assets: Cash $ 346 Accounts receivable, net of $25 allowance475 Inventory 812 Total current assets $1, Balance Sheet – “Current Assets”

Chapter 4-17 Accounts Receivable LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 4-6 Illustration 4-6 Balance Sheet Presentation

Chapter 4-18 Company discloses: basis of valuation (e.g., lower-of-cost-or- market) and the method of pricing (e.g., FIFO or LIFO). Inventories LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets”

Chapter 4-19 Inventories LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 4-7 Illustration 4-7 Balance Sheet Presentation

Chapter 4-20 Payment of cash, that is recorded as an asset because service or benefit will be received in the future. insurancesuppliesadvertising Cash Payment Expense Recorded BEFORE rent maintenance on equipment Prepayments often occur in regard to: Prepaid Expenses LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets”

Chapter 4-21 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 4-9 Illustration 4-9 Balance Sheet Presentation Prepaid Expenses

Chapter 4-22 Generally consists of four types:Securities Tangible fixed assets Special funds Nonconsolidated subsidiaries Nonconsolidated subsidiaries or affiliated companies. Long-Term Investments LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets”

Chapter 4-23 Long-Term Investments SecuritiesSecurities LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” bonds, stock, and long-term notes For marketable securities, management’s intent determines current or noncurrent classification.

Chapter 4-24 Fixed Assets LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Land held for speculation Long-Term Investments

Chapter 4-25 Special Funds LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Sinking fund Pensions fund Cash surrender value of life insurance Long-Term Investments

Chapter 4-26 Nonconsolidated Subsidiaries or Affiliated Companies LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Long-Term Investments

Chapter 4-27 Property, Plant, and Equipment LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Assets of a durable nature used in the regular operations of the business.

Chapter 4-28 Review: Land held for speculation is reported in the property, plant, and equipment section of the balance sheet. FalseTrueFalse Balance Sheet LO 2 Identify the major classifications of the balance sheet.

Chapter 4-29 Intangibles LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Lack physical substance and are not financial instruments. Limited life intangibles amortized. Indefinite-life intangibles tested for impairment.

Chapter 4-30 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Exercise” Exercise Mickey Snyder Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2008: Prepaid Rent $12,000; Goodwill $40,000; Franchise Fees Receivable $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 33,000 Trademarks 10,000 Total $130,000

Chapter 4-31 Other Assets LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” This section should include only unusual items sufficiently different from assets in the other categories.

Chapter 4-32 “Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.” LO 2 Identify the major classifications of the balance sheet. Balance Sheet Current Liabilities

Chapter 4-33 “Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.” All covenants and restrictions must be disclosed. LO 2 Identify the major classifications of the balance sheet. Balance Sheet Long-Term Liabilities

Chapter 4-34 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Exercise” Exercise Included in Ewing Company’s December 31, 2008, trial balance 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 the balance sheet. Long-term liabilities Pension liability $375,000 Bonds payable 400,000 Discount on bonds payable (24,000) Total 751,000

Chapter 4-35 Companies usually divide equity into three parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings. LO 2 Identify the major classifications of the balance sheet. Balance Sheet Owners’ Equity Illustration 4-15 Illustration 4-15 Balance Sheet Presentation

Chapter 4-36 (a)Investment in Preferred Stock LO 2 Identify the major classifications of the balance sheet. 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

Chapter 4-37 Classified Balance Sheet Account form Report form Balance Sheet - Format Accounting Trends and Techniques—2004 (New York: AICPA) indicates that all of the 600 companies surveyed use either the “report form” (506) or the “account form” (94), sometimes collectively referred to as the “customary form.” LO 3 Prepare a classified balance sheet using the report and account formats.

Chapter 4-38 Contingencies Accounting Policies Contractual Situations Post-Balance-Sheet Disclosures Fair Values Additional Information Reported There are normally five types of information that are supplemental to account titles and amounts presented in the balance sheet: LO 4 Determine which balance sheet information requires supplemental disclosure.

Chapter 4-39 Additional Information Reported LO 4 Determine which balance sheet information requires supplemental disclosure. Post-Balance-Sheet Disclosures Two Types: 1.Events that provide evidence about conditions that existed at the balance sheet date. 2.Events that provide evidence about conditions that did not exist at the balance sheet date.

Chapter 4-40 Parenthetical Explanations Notes Cross-Reference and Contra Items Supporting Schedules Terminology Techniques of Disclosure LO 5 Describe the major disclosure techniques for the balance sheet.

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