Intermediate Accounting 11 th ed Kieso Weygandt and

Intermediate Accounting, 11 th ed. Kieso, Weygandt, and Warfield Chapter 5: Balance Sheet and Statement of Cash Flows Systems Prepared by Jep Robertson New Mexico State University Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. )

Chapter 5: Balance Sheet and Statement of Cash Flows Systems After studying this chapter, you should be able to: 1. Identify the uses and limitations of a balance sheet. 2. Identify the major classifications of the balance sheet. 3. Prepare a classified balance sheet using the report and account formats. 4. Identify balance sheet information 3/11/2021 Intermediate Accounting, 10 th requiring supplemental disclosure. Edition, Ch. 5 (Kieso et al. ) 2

Chapter 5: Balance Sheet and Statement of Cash Flows Systems 5. Identify major disclosure techniques for the balance sheet. 6. Indicate the purpose of the statement of cash flows. 7. Identify the content of the statement of cash flows. 8. Prepare a statement of cash flows. 9. Understand the usefulness of the statement of cash flows. 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 3

Part 1: The Balance Sheet 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 4

Balance Sheet: Usefulness The balance sheet provides information for evaluating: ü Capital structure ü Rates of return ü Analyzing an enterprise’s: üLiquidity üSolvency üFinancial flexibility 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 5

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 3/11/2021 Intermediate Accounting, 10 th 6 regarding off-balance sheet financing. Edition, Ch. 5 (Kieso et al. ) •

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 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 7

Balance Sheet: Classification Assets Liabilities and Equity • Current Assets • Long-term investments • Property, plant, and equipment • Intangible assets • Other assets 3/11/2021 • Current liabilities • Long-term debt • Owners’ equity Capital stock • Additional paid-in capital • Retained earnings Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 8

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: 1 Short-term investments at fair value 2 Accounts receivable at net realizable value 3/11/2021 Intermediate Accounting, 10 th 9 Edition, Ch. 5 (Kieso et al. )

Long-Term Investments Long-term investments may be: 1 2 3 4 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 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 10

Current Liabilities Current liabilities are liquidated: 1 2 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 3/11/2021 Intermediate Accounting, 10 th 11 Edition, Ch. 5 (Kieso et al. ) 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) 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 12

Balance Sheet: Additional Information Reported Additional information may be: 1 Information not presented elsewhere, or 2 Information that qualifies items in the balance sheet Supplemental information examples: • Material events having an uncertain outcome • Explanations regarding accounting policies • Covenant restrictions 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 13

Balance Sheet: Techniques of Disclosure • • Parenthetical explanations Notes Cross references and contra items Supporting schedules 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 14

Part 1: The Statement of Cash Flows 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 15

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 • 3/11/2021 financing activities Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 16

Cash Inflows and Outflows 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 17

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 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 18

The Statement of Cash Flows: Indirect Method 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 Financing activities: Balance Sheet: Changes in Inflows and outflows Non-Current Liabilities from loan and equity and 3/11/2021 Intermediate Accounting, 10 th transactions Equity Edition, Ch. 5 (Kieso et al. ) 19

Ratio Analysis Ratio analysis expresses the relationship between selected financial data. These relationships can be expressed as: • percentages • rates, or • proportions 3/11/2021 Intermediate Accounting, 10 th Edition, Ch. 5 (Kieso et al. ) 20

Types of Ratios Type What is measured Examples Liquidity ratios Short-term ability to pay maturing obligations Current ratio Quick assets ratio 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 Coverage ratios 3/11/2021 Degree of protection for Debt to total assets long-term creditors and Intermediate Accounting, 10 th 21 Times interest earned Edition, Ch. 5 (Kieso et al. ) investors

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