1. CHAPTER 5 Balance Sheet and Statement of Cash Flows ……..…………………………………………………………... Usefulness of the Balance Sheet Assets, liabilities, & equity at a specific date.  helps predict amount & uncertainty of future cash flows 2003 2004 2005

2.  useful for analyzing a company’s … ability to get cash as needed ability to pay debts ability to respond to the unexpected

3. Limitations of the Balance Sheet Historical cost is not always. … … but it’s more. than fair value estimates. Omits items of financial value. When reliable estimates cannot be made. Numbers not completely reliable. Judgment is frequently involved. D LL E $3 M $300 M ?

4. Type or expected function Financial flexibility and liquidity characteristics CLASSIFICATION IN THE BALANCE SHEET  land for production vs. land for investment  petty cash vs. bond sinking fund

5. CashShort-term Investments Receivables Current Assets  restrictions must be noted  restricted cash might be non-current  held-to-maturity  trading  available-for-sale  trade vs. non-trade  pledged

6. Current Assets (cont.) Inventories  valuation basis disclosed  grouped by stage of completion Prepaid Expenses PAID  benefits to be received within 1 year

7. Long-Term Investments Securities $1,000 REGISTERED 8.0% Tangible Fixed Assets Special FundsSubsidiaries (nonconsolidated)  intended to be held for more than a year  not currently used in operations

8. Property, Plant, and Equipment Intangible Assets  durable nature  used in operations  disclose accumulated depreciation  lacking physical substance

9. Current Liabilities Accounts Payable Current Portion Long-Term Bonds  reasonably expected to be liquidated within the normal business cycle Unearned Revenue $1,000 REGISTERED 8.0% $1,000 REGISTERED 8.0% $1,000 REGISTERED 8.0% Due 2003

10. Long-Term Liabilities  not expected to be liquidated within a year Bonds Payable $1,000 REGISTERED 8.0% $1,000 REGISTERED 8.0% Pension Obligations Product Warranties

11. Financial Instruments  carrying value and estimated fair value Owners’ Equity  Capital Stock  par value  authorized, issued, and outstanding  Additional Paid-In Capital  Retained Earnings  unappropriated vs. restricted  Treasury Stock

12. STATEMENT OF CASH FLOWS  Operating activities  cash receipts from operations  cash expenditures from operations  Investing activities  property, plant, & equipment  debt or equity securities  Financing activities  issuance of stocks or bonds  payment of dividends

13. Net Income  Cash from Operations  Adjust for non-cash expenses  add back  depreciation expense  amortization expense  Adjust for non-cash gains and losses  add back  loss on sale of plant assets  subtract  gain on sale of securities

14.  Adjust for changes in operating assets  accounts receivable  inventory  prepaid expenses  Adjust for changes operating liabilities  accounts payable  unearned revenues

15. Changes in Assets and Liabilities AssetsLiabilities Increase Decrease

16. Usefulness of the Statement of Cash Flows  “cash is the lifeblood of a company”  the statement provides useful information:  whether the company is generating sufficient cash through operations  reasons for positive or negative cash flow Current cash debt coverage ratio Net Cash from Operations Average Current Liabilities = Cash debt coverage ratio Net Cash from Operations Average Total Liabilities =

17. Free Cash Flow  discretionary cash flow from operations  cash flow from selling investment securities, issuing stock, or taking out a loan doesn’t count! Net cash from operations Free cash flow - Dividends - Capital expenditures