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Intermediate Accounting, 11th ed. Kieso, Weygandt, and Warfield. Chapter 5: Balance Sheet and Statement of Cash Flows Systems. Prepared by Jep Robertson New Mexico State University. Chapter 5: Balance Sheet and Statement of Cash Flows Systems.

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slide1

Intermediate Accounting, 11th ed.

Kieso, Weygandt, and Warfield

Chapter 5: Balance Sheet and Statement of Cash Flows Systems

Prepared by

Jep Robertson

New Mexico State University

slide2

Chapter 5: Balance Sheet and Statement of Cash Flows Systems

  • 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.

After studying this chapter, you should be able to:

slide3

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.
slide5

Balance Sheet: Usefulness

The balance sheet provides information for evaluating:

  • Capital structure
  • Rates of return
  • Analyzing an enterprise’s:
    • Liquidity
    • Solvency
    • Financial flexibility
slide6

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.
slide7

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
slide8
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

Assets

Liabilities and Equity

Balance Sheet: Classification

slide9

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
slide10

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
slide11

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
slide12

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)
slide13

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
slide14

Balance Sheet: Techniques of Disclosure

  • Parenthetical explanations
  • Notes
  • Cross references and contra items
  • Supporting schedules
slide16

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
slide18

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
slide19

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

The Statement of Cash Flows: Indirect Method

slide20

Ratio Analysis

Ratio analysis expresses the relationship between selected financial data.

These relationships can be expressed as:

  • percentages
  • rates, or
  • proportions
slide21

Short-term ability to

pay maturing

obligations

Current ratio

Quick assets ratio

Liquidity ratios

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

Degree of protection for

long-term creditors and

investors

Coverage ratios

Debt to total assets

Times interest earned

Types of Ratios

Type

What is measured

Examples

slide22

COPYRIGHT

Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.