1. Structure of the Balance Sheet and Statement of Cash Flows
Revsine/Collins/Johnson/Mittelstaedt: Chapter 4
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, All Rights Reserved.

2. Learning objectives
How balance sheet accounts are measured and classified.
How balance sheet information is used.
Balance sheet terminology and format outside the U.S.
How footnotes aid your understanding of the firm’s accounting policies, subsequent events, and related-party transactions.
How successive balance sheet and the income statement can be used to identify cash inflows and outflows.
How the cash flow statements can be used to explain changes in successive balance sheets.

3. Learning objectives Concluded
The distinction between operating, investing, and financing sources and uses of cash.
How changes in current asset and current liability accounts can be used to compute “cash flows from operations” from accrual earnings.

4. Elements of the balance sheet
How the money is invested
Where the money came from
ASSETS
LIABILITIES
EQUITY = +
Probable future economic benefits
Obtained from past transactions or events
Probable future sacrifices of economic benefits
Arising from present obligations
To transfer assets or provide services in the future
As a result of past transactions or events
The residual interest in net assets.

5. Balance sheet information
Rates of return
ROA and ROCE
ASSETS
Capital structure
Debt vs. Equity
Helps
Liquidity
Cash conversion
LIABILITIES +
EQUITY
assess
Solvency
Ability to pay debt
Flexibility
Operating and financial
Balance Sheet

6. Balance sheet measurement conventions
Historical cost
ASSETS
Current cost (fair value)
Measurement
LIABILITIES +
EQUITY
methods
Net realizable value
Discounted present value
Balance Sheet

7. Balance sheet classification: Overview
ASSETS
LIABILITIES
EQUITY = +
Current assets
Property, plant and equipment
Investments
Other assets
Current liabilities
Long-term debt
Other liabilities
Preferred and common stock
Additional paid-in capital
Retained earnings

8. Balance sheet presentation: International differences
U.S. Format:
U.K. Format:
Current Assets
Fixed Assets + +
Long-lived Assets
Current Assets - =
Current Liabilities -
Current Liabilities
Non-current Liabilities +
Non-current Liabilities = +
Stockholders’ Equity
Capital Employed

9. Financial statement footnotes
Footnotes are an integral part of companies’ financial reports.
These “notes” help users better understand and interpret the numbers presented in the body of the financial statements.
Three important notes:
Summary of significant accounting policies.
Subsequent event disclosures.
Related party transactions

10. Statement of cash flows
Explains why a firm’s cash position changed between successive balance sheet dates. Here’s a balance sheet equation:
Cash +
Non-cash assets =
Liabilities +
Stockholders’ equity
Cash
Non-cash assets
Liabilities = + -
Stockholder’s equity
ΔCash
Δ Stockholders’ equity = +
At the same time, it explains why non-cash assets, liabilities, and stockholders’ equity have changed.
Δ Non-cash assets
Δ Liabilities -

11. Cash flow statement format
Cash inflows and outflows from transactions and events that affect operating income
Operating Activities
Cash inflows and outflows from loaning money to others, investing in securities, or in assets (e.g., equipment) used to produce goods and services.
Investing Activities
Cash inflows and outflows from borrowing money, selling stock, and paying dividends
Financing Activities
Δ Cash

12. Deriving cash flows from operations: Indirect approach

13. Deriving cash flow information: Overview
Income
statement
Beginning
Balance sheet
Ending
Balance sheet
Cash flow
statement
You can always derive any one financial statement from information available in the other three statements.

14. Summary
The balance sheet shows the assets owned by a company at a given point in time, and how those assets are financed (debt vs. equity).
Be alert for differences in balance sheet measurement bases, account titles, and statement format.
Financial statement footnotes provide important information.
The cash flow statement shows the change in cash for a given period, broken down into operating, investing, and financing activities.

15. Summary concluded
Changes in certain balance sheet accounts help explain why operating cash flows differ from accrual income.
Conversely, the cash flow statement helps to explain changes in balance sheet accounts
T-accounts are a useful analytical device for deriving cash flow and accrual income information from successive balance sheets