Chapter 5: Balance Sheet and Statement of Cash Flows Systems
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1 Chapter 5: Balance Sheet and Statement of Cash Flows Systems Intermediate Accounting, 11th ed.Kieso, Weygandt, and WarfieldChapter 5: Balance Sheet and Statement of Cash Flows Systems2
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.
5 Balance Sheet: Usefulness The balance sheet provides information for evaluating:Capital structureRates of returnAnalyzing an enterprise’s:LiquiditySolvencyFinancial 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 operationsImplications for the enterprise’s financial flexibilityLiquidity characteristics
8 Balance Sheet: Classification AssetsLiabilities and EquityCurrent AssetsLong-term investmentsProperty, plant, and equipmentIntangible assetsOther assetsCurrent liabilitiesLong-term debtOwners’ equity Capital stockAdditional paid-in capitalRetained earnings
9 Current AssetsCurrent 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 valueAccounts 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, orBy creation of other current liabilitiesExamples of current liabilities include:Payables resulting from acquisitions of goods and servicesCollections received in advance of servicesOther 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, orInformation that qualifies items in the balance sheetSupplemental information examples:Material events having an uncertain outcomeExplanations regarding accounting policiesCovenant restrictions
14 Balance Sheet: Techniques of Disclosure Parenthetical explanationsNotesCross references and contra itemsSupporting schedules
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 timeInflows and outflows are reported for:operatinginvestingfinancing activities
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 statementsDirect method: derives cash flows directly for each source or use of cash
19 The Statement of Cash Flows: Indirect Method Accrual Based StatementsCash Flow StatementIncome Statementitems & Changes inCurrent Assets andCurrent LiabilitiesOperating activities:Adjust net income for accrualsand non-cash charges to getcash flowsBalance Sheet: Changes inNon-Current AssetsInvesting activities:Inflows from sale of assets andOutflows from purchases ofassetsBalance Sheet: Changes inNon-Current LiabilitiesandEquityFinancing activities:Inflows and outflowsfrom loan and equitytransactions
20 Ratio AnalysisRatio analysis expresses the relationship between selected financial data.These relationships can be expressed as:percentagesrates, orproportions
21 Types of Ratios Type What is measured Examples Liquidity ratios Short-term ability topay maturingobligationsCurrent ratioQuick assets ratioActivity ratiosEffectiveness in usingassets employedReceivables turnoverInventory turnoverProfitabilityratiosDegree of success orfailure for a givenperiodRate of return on assetsEarnings per shareCoverage ratiosDegree of protection forlong-term creditors andinvestorsDebt to total assetsTimes interest earned