1. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-1 Balance Sheet and Statement of Cash Flows Chapter 5

2. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-2 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.

3. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-3 Most assets and liabilities are reported at historical 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. Balance Sheet

4. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-4 Resources (Assets) Claims against resources (Liabilities) Remaining claims accruing to owners (Owners’ Equity) Balance Sheet

5. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-5 Current Assets Cash Receivables Inventories Prepayments Cash Receivables Inventories Prepayments Will be converted to cash or consumed within one year or the operating cycle, whichever is longer. Current Assets

6. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-6 Current Assets - “Summary” LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” 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.

7. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-7 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”

8. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-8 Accounts Receivable – Presentation Options LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Current Assets: Cash $ 346 Accounts receivable500 Less allowance for doubtful accounts 25 475 Inventory 812 Total current assets $1,633 Current Assets: Cash $ 346 Accounts receivable, net of $25 allowance475 Inventory 812 Total current assets $1,633 1 1 2 2

9. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-9 Non-Current Assets Investments and Funds Property, Plant, & Equipment Intangibles Other Investments and Funds Property, Plant, & Equipment Intangibles Other Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer Noncurrent Assets

10. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-10 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.

11. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-11 Fixed Assets LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Land held for speculation Long-Term Investments

12. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-12 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

13. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-13 Nonconsolidated Subsidiaries or Affiliated Companies LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Long-Term Investments

14. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-14 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.

15. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-15 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.

16. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-16 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.

17. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-17 Current Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities Current Liabilities

18. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-18 “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

19. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-19 Non-Current Liabilities Capital Leases Bonds Payable Long-Term Notes Payable Pension Liabilities Capital Leases Bonds Payable Long-Term Notes Payable Pension Liabilities Obligations that will not be satisfied within one year or operating cycle, whichever is longer Long-Term Liabilities

20. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-20 LO 2 Identify the major classifications of the balance sheet. Balance Sheet “Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.” All covenants and restrictions must be disclosed. Long-Term Liabilities

21. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-21 Shareholders’ Equity Capital Stock Capital Stock Retained Earnings Treasury Stock Other Contributed Capital Accumulated Other Comprehensive Income

22. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-22 Now, let’s look at some ratios!

23. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-23

24. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-24

25. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-25

26. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-26 Liquidity Ratios = Current ratio Current assets Current liabilities Measures a company’s ability to satisfy its short- term liabilities = 2.15 $2,102,631 $977,188 Current ratio = 1.65 $1,453,144 $879,361 2012 2011

27. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-27 Liquidity Ratios = 1.56 $1,519,605 $977,188 Acid-test ratio = Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities = 1.05 $921,590 $879,361 2012 2011

28. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-28 Financing Ratios = Debt to equity ratio Total liabilities Shareholders’ equity Indicates the extent of reliance on creditors, rather than owners, in providing resources =.39 $1,491,747 $3,802,469 Debt to equity ratio =.43 $1,300,770 $2,991,305 20122011

29. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-29 Financing Ratios = 2,125 $752,398 $354 Times interest earned ratio = Net income + Interest expense + Taxes Interest expense Indicates the margin of safety provided to creditors = 143 $555,594 $3,882 20122011

30. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-30 Now, let’s move on to a new topic.

31. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-31 Statement of Cash Flows The Statement of Cash Flows provides relevant information about the cash receipts and cash payments of an enterprise during a period. It provides answers to questions: 1. Where did the cash come from during the period? 2. What was the cash used for during the period? 3. What was the change in the cash balance during the period?

32. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-32 Three different activities: Operating, Content and Format The Statement of Cash Flows LO 7 Identify the content of the statement of cash flows. Investing,Financing Illustration 5-24

33. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-33 Statement of Cash Flows Cash Flows from Operating Activities Reports the cash effects of transactions that enter into the determination of net income. The direct method and indirect method are two different approaches to report cash flows from operations. Each has its advantages and disadvantages, but each reconciles to the same number for total cash flows from operating activities.

34. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-34 Statement of Cash Flows Cash Flows from Investing Activities Reports cash effects of transactions that result in a change in long-term assets. For example: Buying or selling property, plant, or equipment Buying or selling financial investment instruments

35. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-35 Statement of Cash Flows Cash Flows from Financing Activities Reports cash effects of transactions that result in a change in long-term liabilities and stockholder’s equity. For example: Acquiring or paying down borrowings Issuing capital stock Paying dividends to stockholders

36. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-36 Cash flows from operating activities: $$ Cash flows from investing activities: $$ Cash flows from financing activities: $$ Net increase in cash $$ Cash at beginning of year $$ Cash at end of year $$ Basic Format for the Statement of Cash Flows Involve the purchase and sale of products or services Involve the acquisition and sale of long-term assets Involve the issuance and payment of long-term liabilities and stock

37. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-37 Preparation The Statement of Cash Flows LO 8 Prepare a statement of cash flows. Noncash credit to revenues. Noncash charge to expenses.

38. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-38 Review In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value a. Sale of equipment at book value b. Sale of merchandise on credit b. Sale of merchandise on credit c. Declaration of a cash dividend c. Declaration of a cash dividend d. Issuance of bonds payable at a discount receivable. d. Issuance of bonds payable at a discount receivable. The Statement of Cash Flows LO 8 Prepare a statement of cash flows.

39. Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Slide 3-39 Preparation The Statement of Cash Flows LO 8 Prepare a statement of cash flows. BE 5-12 Midwest Beverage Company reported the following items in the most recent year. Activity Operating Financing Operating Investing Operating Financing Required: Prepare a Statement of Cash Flows