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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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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

  • 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:


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.

Balance Sheet: Usefulness

The balance sheet provides information for evaluating:

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

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.

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
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


Liabilities and Equity

Balance Sheet: Classification


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

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

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

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)

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

Balance Sheet: Techniques of Disclosure

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

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

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

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


Balance Sheet: Changes in

Non-Current Liabilities



Financing activities:

Inflows and outflows

from loan and equity


The Statement of Cash Flows: Indirect Method


Ratio Analysis

Ratio analysis expresses the relationship between selected financial data.

These relationships can be expressed as:

  • percentages
  • rates, or
  • proportions

Short-term ability to

pay maturing


Current ratio

Quick assets ratio

Liquidity ratios

Activity ratios

Effectiveness in using

assets employed

Receivables turnover

Inventory turnover



Degree of success or

failure for a given


Rate of return on assets

Earnings per share

Degree of protection for

long-term creditors and


Coverage ratios

Debt to total assets

Times interest earned

Types of Ratios


What is measured




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.