1. Chapter 5: Balance Sheet and Statement of Cash Flows Systems
Intermediate Accounting, 11th ed.
Kieso, Weygandt, and Warfield
Chapter 5: Balance Sheet and Statement of Cash Flows Systems 2

2. Chapter 5: Balance Sheet and Statement of Cash Flows Systems
After studying this chapter, you should be able to:
Identify the uses and limitations of a balance sheet.
Identify the major classifications of the balance sheet.
Prepare a classified balance sheet using the report and account formats.
Identify balance sheet information requiring supplemental disclosure.

3. Chapter 5: Balance Sheet and Statement of Cash Flows Systems
Identify major disclosure techniques for the balance sheet.
Indicate the purpose of the statement of cash flows.
Identify the content of the statement of cash flows.
Prepare a statement of cash flows.
Understand the usefulness of the statement of cash flows.

4. Part 1: The Balance Sheet

5. Balance Sheet: Usefulness
The balance sheet provides information for evaluating:
Capital structure
Rates of return
Analyzing an enterprise’s:
Liquidity
Solvency
Financial flexibility

6. Balance Sheet: Limitations
Most assets and liabilities are stated at historical cost.
Judgments and estimates are used in determining many of the items.
The balance sheet does not report items that can not be objectively determined.
It does not report information regarding off-balance sheet financing.

7. Balance Sheet: Classification
Guidelines for reporting assets and liabilities separately:
Type or expected function in the central operations
Implications for the enterprise’s financial flexibility
Liquidity characteristics

8. Balance Sheet: Classification
Assets
Liabilities and Equity
Current Assets
Long-term investments
Property, plant, and equipment
Intangible assets
Other assets
Current liabilities
Long-term debt
Owners’ equity Capital stock
Additional paid-in capital
Retained earnings

9. Current Assets
Current assets are expected to be consumed, sold, or converted into cash:
either in one year or in the operating cycle, whichever is longer.
Current assets are presented in order of liquidity.
The following valuation principles are used:
Short-term investments at fair value
Accounts receivable at net realizable value

10. Long-Term Investments
Long-term investments may be:
Investments in securities (bonds, stock)
Investments in fixed assets (land not used in operations)
Investments set aside in special funds (e.g., sinking fund)
Investments in non-consolidated subsidiaries or affiliated companies

11. Current Liabilities Current liabilities are liquidated:
Either through the use of current assets, or
By creation of other current liabilities
Examples of current liabilities include:
Payables resulting from acquisitions of goods and services
Collections received in advance of services
Other liabilities which will be paid in the short term

12. Long-Term Liabilities
Long-term obligations are those not expected to be paid within the operating cycle.
Examples are:
obligations arising from specific financing situations (issuance of bonds)
obligations arising from ordinary business operations (pension obligations)
obligations that are contingent (product warranties)

13. Balance Sheet: Additional Information Reported
Additional information may be:
Information not presented elsewhere, or
Information that qualifies items in the balance sheet
Supplemental information examples:
Material events having an uncertain outcome
Explanations regarding accounting policies
Covenant restrictions

14. Balance Sheet: Techniques of Disclosure
Parenthetical explanations
Notes
Cross references and contra items
Supporting schedules

15. Part 1: The Statement of Cash Flows

16. The Cash Flow Statement
The cash flow statement provides information about:
cash receipts (cash inflows)
uses of cash (cash outflows)
during a period of time
Inflows and outflows are reported for:
operating
investing
financing activities

17. Cash Inflows and Outflows

18. Preparing a Statement of Cash Flows
There are two methods of preparing the statement of cash flows:
Indirect method: derives cash flows from accrual based statements
Direct method: derives cash flows directly for each source or use of cash

19. The Statement of Cash Flows: Indirect Method
Accrual Based Statements
Cash Flow Statement
Income Statement
items & Changes in
Current Assets and
Current Liabilities
Operating activities:
Adjust net income for accruals
and non-cash charges to get
cash flows
Balance Sheet: Changes in
Non-Current Assets
Investing activities:
Inflows from sale of assets and
Outflows from purchases of
assets
Balance Sheet: Changes in
Non-Current Liabilities
and
Equity
Financing activities:
Inflows and outflows
from loan and equity
transactions

20. Ratio Analysis
Ratio analysis expresses the relationship between selected financial data.
These relationships can be expressed as:
percentages
rates, or
proportions

21. Types of Ratios Type What is measured Examples Liquidity ratios
Short-term ability to
pay maturing
obligations
Current ratio
Quick assets ratio
Activity ratios
Effectiveness in using
assets employed
Receivables turnover
Inventory turnover
Profitability
ratios
Degree of success or
failure for a given
period
Rate of return on assets
Earnings per share
Coverage ratios
Degree of protection for
long-term creditors and
investors
Debt to total assets
Times interest earned

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