1. Intermediate Accounting October 19th, 2010
General Course Questions
Questions before Quiz Chapters 4, 17 & 22
Income Statement, Statement of RE and Comprehensive Income (Non-recurring items, Intra period Tax Allocation & EPS) Changes in Accounting Estimates, Error Corrections, Changes in Accounting Principles
Review the Balance Sheet using today’s homework
5. Assignments for Thursday, October 21st:
A. Chapter 5 Balance Sheet & Statement of Cash Flows
B. Chapter 23 Statement of Cash Flows
6. Return Discussion Questions #3 Earnings Management

2. Chapter 5 Balance Sheet
Financial Position at a particular point in time
IFRS vs. US GAAP
IFRS requires presentation of 2 years of balance sheet data
US GAAP
Public companies, 2 years B/S (SEC)
Private companies, only 1 year B/S required
Generally listed in order of liquidity
Classified as “Current” or “Non-Current”.

3. 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
Add’l paid-in cap.
Retained earnings
Accumulated Other
Comp. Income
(Treasury Stock)
Question 6, ex 3, Prob. 1

4. Balance Sheet: Usefulness
The balance sheet provides information:
Evaluating Capital structure – financing by creditors/investors
Analyzing an enterprise’s:
Liquidity (sufficient resources for day-to-day operations)
Current Ratio, Quick Ratio, Working Capital
Solvency (ability to pay debts as they mature – more long-run)
Lower solvency = higher debt
Financial flexibility (ability to respond to threats or take advantage of opportunities)
Effectiveness in using assets employed
Inventory and Receivables turnover
Profitability with rates of return (in combination with the I/S)
ROE
ROA
Question 1 & 3

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

6. Financial Statement Analysis
Benchmarks:
Trends
Peers
Scaling:
Ratios
Common size financial statements
Limitations: Must compare apples to apples
Nature of accounting
Accounting choices
Economic conditions and business model differences

7. Balance Sheet: Limitations
Is the B/S appropriate for valuing a company?
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 certain off-balance sheet financing.
Need to be able to reliably measure and control
Human Resources, Litigation exposure, Research and Development, Intellectual capital,
Question 7 & 8

8. Balance Sheet – Current Assets
Asset Category
General Valuation Rule
Cash & Cash Equivalents
Fair Market value
Marketable Securities or Short term Investments
Trading (Gains or Losses in Income)
AVS (Gains or Losses in Equity)
Accounts Receivable
Net realizable value (estimated amount collectible)
Inventory
Lower of cost or market (cost measured using a variety of methods, LIFO, FIFO)
Prepaid Expenses
Historical cost
Chapter 5 question 11 where should AVS securities be on the B/S

9. Balance Sheet – “Current Assets”
Cash
Generally any monies available “on demand.”
Cash equivalents - short-term highly liquid investments that mature within three months or less.
Restrictions or commitments must be disclosed.
Illustration 5-3

10. Investments of < 20% Held-to-maturity: (current or non-current)
Record debt securities at amortized cost, don’t revalue
“Fair value” or “Mark to Market”
Trading: (current)
Debt & equities intended to sell.
Revalue annually to Fair Value in B/S. Unrealized holding gains and losses in income
Available for Sale: (current or noncurrent)
All others (debt or equity)
Revalue annually to Fair Value in B/S. Unrealized holding gains and losses in OCI and equity (AOCI)
question 11

11. Investments of < 20% Issues with Fair Value Method
How is “fair value” determined?
Level 1: active market
Level 2: observable market data other than quoted market price
Level 3: determined only through “unobservable inputs” and prices based on internal models or estimates
Classification of Trading vs. AFS
Dividends received:
DR Cash CR Dividend Income

12. Balance Sheet – Non Current Assets
Asset Category
General Valuation Rule
Property, Plant, & Equipment
Historical cost less accumulated depreciation
Land
Historical cost, no depreciation
Long-term Investments
Historical cost, Market value, Equity method
Other Assets (Deferred Income Tax Asset
Undiscounted sum of expected future tax benefits
Intangible Assets
BE 5-6
Acquisition cost less amortization if acquired from external parties (usually zero if developed internally)

13. Long – Term Investments
Generally consists of four types:
Securities
Fixed assets
Special funds
Nonconsolidated subsidiaries or affiliated companies. e

14. Long – Term Investments
Generally consists of four types:
Securities
Fixed assets
Special funds
Nonconsolidated subsidiaries or affiliated companies. e

15. Long – Term Investments
Securities
bonds,
stock, and
long-term notes
For marketable securities, management’s intent determines current or noncurrent classification.

16. Property, Plant and Equipment
Assets of a durable nature used in the regular operations of the business.

17. Intangibles Lack physical substance and are not financial instruments.
Limited life intangibles amortized.
Indefinite-life intangibles tested for impairment.

18. Other Assets
This section should include only unusual items sufficiently different from assets in the other categories.

19. Liabilities
Current Liabilities: “Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”
Long-Term Liabilities
“Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.”
All covenants and restrictions must be disclosed.

20. Liabilities Short-term obligations: Long-term obligations:
Accounts payable, accrued liabilities (examples?)
Notes payable, Unearned Revenue
Current portion of long-term debt
Long-term obligations:
obligations arising from specific financing situations (issuance of bonds, bank debt)
obligations arising from ordinary business operations (pension obligations, capital leases, deferred income taxes)
obligations that are contingent (product warranties for long-term items)
Question 13

21. Balance Sheet - Liabilities
Measurement of Liabilities uses a variety of techniques:
Amount equal to actual future payment
The present value of expected future payments
Some future obligations are not reported on the balance sheet, but instead disclosed entirely in the notes to the financial statements.

22. Owners’ Equity Capital Stock Additional paid-in capital
Par or stated value of the shares issued
Additional paid-in capital
The excess of amounts paid in over par value
Retained earnings
Undistributed earnings
Accumulated Other Comprehensive Income
Analogous to RE for Other Comprehensive Income
Treasury Stock (contra Stockholders’ Equity)

23. Owners’ Equity

24. Balance Sheet - Equity Measurement
Amounts reported in these accounts represent the aggregate of transactions that occurred at various points in time
Common Stock & Additional Paid in Capital will include proceeds from the sale of stock from inception to present
Retained Earnings will include the sum of Net Income from inception through current year less dividends paid
Note that each year’s net income is expressed in that year’s dollars (i.e., monetary unit assumption)
RE may be adjusted when purchase of Treasury Stock exceeds original iss

25. Balance Sheet Supplemental Information Reported
Contingencies – material events that have an uncertain outcome
Accounting Policies – Explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation, investment in subsidiaries, etc.
Contractual Situations – Explanations of certain restrictions or covenants attached to specific assets or, more likely, liabilities.
Fair Values – Disclosures of fair values for certain items
Subsequent Events – Disclosure of material events or transactions that occur between the balance sheet date and its issuance date.
Events that relate to conditions that existed as of the balance sheet date are incorporated into the balance sheet as if the subsequent information was known as of the balance sheet date.
Events that relate to conditions that did not exist as of the balance sheet date are typically disclosed in the notes to the financial statements.
Add some exercises here for balance sheet