Intermed Acc 1 PPT Ch05

Intermediate Accounting
5-1
Prepared by Coby Harmon University of California, Santa Barbara
Balance Sheet and Statement of Cash Flows
Intermediate Accounting 14th Edition
Kieso, Weygandt, and Warfield

5-2
Learning Objectives
1. 2. Explain the uses and limitations of a balance sheet. Identify the major classifications of the balance sheet.
3.
4. 5. 6. 7. 8. 9.
5-3
Prepare a classified balance sheet using the report and account formats.
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. Determine which balance sheet information requires supplemental disclosure. Describe the major disclosure techniques for the balance sheet.
Balance Sheet and Statement of Cash Flows
Balance Sheet
Statement of Cash Flows

Purpose
Additional Information
Supplemental disclosures Techniques of disclosure
Usefulness
Limitations
Classification
Content and format

Preparation Usefulness
5-4
Balance Sheet
Balance Sheet, also referred to as the statement of
financial position:
1. Reports assets, liabilities, and equity at a specific date. 2. Provides information about resources, obligations to creditors, and equity in net resources. 3. Helps in predicting amounts, timing, and uncertainty of future cash flows.
5-5
LO 1 Explain the uses and limitations of a balance sheet.
Balance Sheet
Usefulness of the Balance Sheet

Computing rates of return. Evaluating the capital structure. Assess risk and future cash flows. Analyze the companys:

Liquidity,
Solvency, and Financial flexibility.
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Balance Sheet
Limitations of the Balance Sheet
Most assets and liabilities are reported at historical cost.
Use of judgments and estimates.

Many items of financial value are omitted.
5-7
Balance Sheet
Classification
5-8
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet
Classification
Illustration 5-1
In practice you usually see little departure from these major subdivisions.
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Classification in the Balance Sheet

Current Assets
Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer.
Illustration 5-2
5-10
Classification in the Balance Sheet Review

The correct order to present current assets is a. Cash, accounts receivable, prepaid items, inventories. b. Cash, accounts receivable, inventories, prepaid items. c. Cash, inventories, accounts receivable, prepaid items. d. Cash, inventories, prepaid items, accounts receivable.
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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
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LO 2

Cash
Illustration 5-4 Balance SheetRestricted Cash
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Short-Term Investments
Portfolios
Held-toMaturity Trading
Type
Debt Debt or Equity
Valuation
Amortized Cost Fair Value
Classification
Current or Noncurrent Current
Availablefor-Sale
Debt or Equity
Fair Value
Current or Noncurrent
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Short-Term Investments
Illustration 5-5 Balance Sheet Presentation of Investments in Securities
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Receivables
Major categories of receivables should be shown in the balance sheet or the related notes. A company should clearly identify

Anticipated loss due to uncollectibles. Amount and nature of any nontrade receivables. Receivables used as collateral.
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Receivables
Illustration 5-6 Balance Sheet Presentation of Receivables
5-17

Inventories
Disclose:

Basis of valuation (e.g., lower-of-cost-or-market). Cost flow assumption (e.g., FIFO or average cost).
Illustration 5-6
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LO 2

Prepaid Expenses
Payment of cash, that is recorded as an asset because service or benefit will be received in the future.
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to:

5-19
insurance
rent
taxes
supplies
advertising

Prepaid Expenses
Illustration 5-9
5-20

Current Assets - Summary
Cash and other assets a company expects to

Balance Sheet (in thousands) Current assets Cash ST Investments Accounts receivable Inventory Prepaid expenses Total current assets Investments: Invesment in ABC bonds Investment in UC Inc. 321,657 253,980 $ 285,000 140,000 777,000 402,000 170,000 1,774,000
convert into cash, sell, or consume
either in one year or in the operating cycle, whichever is longer.
5-21

Non-Current Assets
Long-term Investments
1. Securities (bonds, common stock, or long-term notes).
2. Tangible fixed assets not currently used in operations (land held for speculation). 3. Special funds (sinking fund, pension fund, or plant expansion fund. 4. Non-consolidated subsidiaries or affilated companies.
5-22
Balance Sheet Noncurrent Assets

Long-Term Investments
Portfolios
Held-toMaturity Trading
Type
Debt Debt or Equity
Valuation
Amortized Cost Fair Value
Classification
Current or Noncurrent Current
Availablefor-Sale
Debt or Equity
Fair Value
Current or Noncurrent
5-23

Securities

Balance Sheet (in thousands) Current assets Cash $ 285,000
Investments: Invesment in ABC bonds Investment in UC Inc. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. Sub. Total investments Property, Plant, and Equip. Building Land 1,375,778 975,000 321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592
bonds,
stock, and long-term notes
For marketable securities, managements intent determines current or noncurrent classification.

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LO 2

Fixed Assets
Investments: Invesment in ABC bonds Investment in UC Inc. Notes receivable Land held for speculation Sinking fund Pension fund Cash surrender value Investment in Uncon. Sub. Total investments Property, Plant, and Equip. Building
5-25
321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592 1,375,778 975,000
Land held for speculation
LO 2
Land

Special Funds
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321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592 1,375,778 975,000
Sinking fund
Pensions fund
Cash surrender value of life insurance
LO 2
Land

5-27
321,657 253,980 150,000 550,000 225,000 653,798 84,321 457,836 2,696,592 1,375,778 975,000
Nonconsolidated Subsidiaries or Affiliated Companies

LO 2
Land

Illustration 5-10 Balance Sheet Presentation of Long-Term Investments
5-28

Property, Plant, and Equipment
Tangible long-lived assets used in the regular operations of the business.
Physical property such as land, buildings, machinery, furniture, tools, and wasting resources (minerals).
With the exception of land, a company either depreciates (e.g., buildings) or depletes (e.g., oil reserves) these assets.
5-29

Balance Sheet (in thousands)
Property, Plant, and Equipment

Tangible assets used in the regular
Current assets Cash $ 285,000
operations of the business.
Total investments Property, Plant, and Equip. Building Land Machinery and equipment Capital leases Leasehold improvements Accumulated depreciation Total PP&E Intangibles Goodwill Patents Trademarks
2,696,592 1,375,778 975,000 234,958 384,650 175,000 (975,000) 2,170,386 3,000,000 177,000 40,000
5-30

Illustration 5-11 Balance Sheet Presentation of Property, Plant, and Equipment
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Intangibles
Lack physical substance and are not financial instruments.
Limited life intangibles amortized.

Indefinite-life intangibles tested for impairment.
Total PP&E Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other Total Assets
2,170,386 2,000,000 177,000 40,000 125,000 55,000 2,397,000 133,000 40,000 173,000 $ 9,210,978
LO 2
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Intangibles (BE5-6): Patrick Corporation adjusted trial balance
contained the following asset accounts at December 31, 2012: Prepaid Rent $12,000; Goodwill $50,000; Franchise Fees Receivable $2,000; Franchises $47,000; Patents $33,000; Trademarks $10,000. Prepare the intangible assets section of the balance sheet. Intangibles Goodwill Franchises Patents Trademarks Total
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$ 50,000 47,000 33,000 10,000 $140,000

Intangible Assets
Illustration 5-12 Balance Sheet Presentation of Intangible Assets
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Other Assets
Items vary in practice. Can include:
Long-term prepaid expenses
Non-current receivables
Assets in special funds
Property held for sale

Restricted cash or securities
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Other Assets
This section should include only unusual items sufficiently different from assets in the other categories.
Total PP&E Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other Total Assets
2,170,386 2,000,000 177,000 40,000 125,000 55,000 2,397,000 133,000 40,000 173,000 $ 9,210,978
LO 2
5-36

Current Liabilities
Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.
Balance Sheet (in thousands) Current liabilities Notes payable Accounts payable Accrued compensation Unearned revenue Income tax payable Current maturities LT debt Total current liabilities Long-term liabilities Long-term debt Obligations capital lease Deferred income taxes Total long-term liabilities Stockholders' equity $ 233,450 131,800 43,000 17,000 23,400 121,000 569,650 979,500 345,800 77,909 1,403,209
5-37

Current Liabilities
Illustration 5-13 Balance Sheet Presentation of Current Liabilities
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Long-Term Liabilities
Obligations that a company does not reasonably expect to liquidate within the normal operating cycle. All covenants and
Balance Sheet (in thousands) Current liabilities Notes payable Accounts payable Accrued compensation Unearned revenue Income tax payable Current maturities LT debt Total current liabilities Long-term liabilities Long-term debt Obligations capital lease Deferred income taxes Total long-term liabilities Stockholders' equity $ 233,450 131,800 43,000 17,000 23,400 121,000 569,650 979,500 345,800 77,909 1,403,209
restrictions must be disclosed.

5-39
Balance Sheet Long-Term Liabilities

Long-Term Liabilities (BE5-9): Included in Adams Companys
December 31, 2012, trial balance are the following accounts: Accounts Payable $220,000; Pension Asset/Liability $375,000; Discount on Bonds Payable $29,000; Unearned Revenue $41,000; Bonds Payable $400,000; Salaries and Wages Payable $27,000; Interest Payable $12,000; Income Taxes Payable $29,000. Prepare the long-term liabilities section of the balance sheet. Long-term liabilities Pension Asset/liability Bonds payable Discount on bonds payable Total
5-40
$375,000 400,000 (29,000) 746,000
Balance Sheet Long-Term Liabilities

Non-Current Liabilities
Illustration 5-14 Balance Sheet Presentation of Non-Current Liabilities
5-41
Balance Sheet Owners Equity

Owners Equity
5-42
Balance Sheet Owners Equity

Owners Equity
Illustration 5-15 Balance Sheet Presentation of Stockholders Equity
5-43

Account
(a) Investment in preferred stock (b) Treasury stock (c) Common stock (d) Cash dividends payable (e) Accumulated depreciation (f) Interest payable (g) Deficit (h) Trading securities (i) Unearned revenue
5-44
Classification
(a) Current asset/Investment (b) Stockholders Equity (c) Stockholders Equity (d) Current liability (e) Contra-asset (f) Current liability (g) Stockholders Equity (h) Current asset (i) Current liability
Balance Sheet Format

Classified Balance Sheet
Account form
Report form
Accounting Trends and Techniques2009 (New York: AICPA) indicates that all of the 500 companies surveyed use either the report form (438) or the account form (62), sometimes collectively referred to as the customary form.
5-45
LO 3 Prepare a classified balance sheet using the report and account formats.

Account Form
Illustration 5-16
5-46
LO 3 Prepare a classified balance sheet using the report and account formats.
Report Form
Illustration 5-16
5-47
LO 3

One of the three basic objectives of financial reporting is
assessing the amounts, timing, and uncertainty of cash flows.
5-48
LO 4 Indicate the purpose of the statement of cash flows.

Purpose of the Statement of Cash Flows
To provide relevant information about the cash receipts and cash payments of an enterprise during a period.
The statement provides answers to the following questions: 1. 2. 3.
5-49
Where did the cash come from? What was the cash used for? What was the change in the cash balance?
LO 4 Indicate the purpose of the statement of cash flows.

Content and Format
Three different activities:
Operating,
Investing,
Financing
Illustration 5-17 Basic Format of Cash Flow Statement
5-50
LO 5 Identify the content of the statement of cash flows.

Content and Format
Operating
Cash inflows and
Investing
Cash inflows and outflows from non-current assets.
Financing
Cash inflows and
outflows that
enter into the determination of
outflows from
non-current liabilities and
net income.
equity.
The statements value is that it helps users evaluate liquidity, solvency, and financial flexibility.
5-51

Illustration 5-18
5-52
Preparation of the Statement of Cash Flows

Sources of Information
Information obtained from several sources:
(1) comparative balance sheets,

(2) the current income statement, and (3) selected transaction data.
5-53
LO 6 Prepare a basic statement of cash flows.

Statement of Cash Flows: On January 1, 2012, in its first
year of operations, Telemarketing Inc. issued 50,000 shares of
$1 par value common stock for $50,000 cash. The company

rented its office space, furniture, and telecommunications equipment and performed marketing services throughout the
first year. In June 2012 the company purchased land for

$15,000. Illustration 5-19 shows the companys comparative balance sheets at the beginning and end of 2012.
5-54

Illustration 5-19
Illustration 5-20
5-55
LO 6

Preparing the Statement of Cash Flows
Determine:
1. Cash provided by (or used in) operating activities. 2. Cash provided by or used in investing and financing activities.
3. Determine the change (increase or decrease) in cash during the period.

4. Reconcile the change in cash with the beginning and the ending cash balances.
5-56

Illustration 5-19
Illustration 5-20
Cash provided by operating activities
Illustration 5-21
5-57
Illustration 5-19 Illustration 5-20

Next, the company determines its investing and financing activities.
Illustration 5-21
5-58

Statement of Cash Flows (BE 5-12): Keyser Beverage
Company reported the following items in the most recent year.
Activity Net income Dividends paid $40,000 5,000 Operating Financing
Increase in accounts receivable Increase in accounts payable

Purchase of equipment Depreciation expense Issue of notes payable
10,000 7,000
8,000 4,000 20,000
Operating Operating
Investing Operating Financing
Required: Compute net cash provided by operating activities.

5-59

Statement of Cash Flows (BE 5-12)
Statement of Cash Flow (in thousands) Operating activities Net income Increase in accounts receivable Increase in accounts payable Depreciation expense Cash flow from operations Investing activities Purchase of equipment Financing activities Proceeds from notes payable Dividends paid Cash flow from financing Increase in cash
5-60
$ 40,000 (10,000) 5,000 40,000 75,000 (8,000) 20,000 (5,000) 15,000 $ 82,000
Noncash credit to revenues.

Noncash charge to expenses.
Statement of Cash Flows Review

In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
a. Sale of equipment at book value
b.
c.
Sale of merchandise on credit

Declaration of a cash dividend
d.
Issuance of bonds payable at a discount receivable.
5-61

Significant Noncash Activities
Significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows or in the notes. Examples include:

Issuance of common stock to purchase assets. Conversion of bonds into common stock.
5-62
Issuance of debt to purchase assets.

Exchanges on long-lived assets.
Illustration 5-23 Comprehensive Statement of Cash Flows
5-63
Usefulness of the Statement of Cash Flows

Without cash, a company will not survive.
Cash flow from Operations:
High amount - company able to generate sufficient cash to pay its bills.
Low amount - company may have to borrow or issue

equity securities to pay bills.
5-64
LO 7 Understand the usefulness of the statement of cash flows.

Financial Liquidity
Current Cash Debt Coverage Ratio Net Cash Provided by Operating Activities
=
Average Current Liabilities
Ratio indicates whether the company can pay off its current
liabilities from its operations. A ratio near 1:1 is good.
5-65

Financial Liquidity
Cash Debt Coverage Ratio Net Cash Provided by Operating Activities
=
Average Total Liabilities
This ratio indicates a companys ability to repay its liabilities from net cash provided by operating activities, without having
to liquidate the assets employed in its operations.
5-66

Free Cash Flow
Illustration 5-28
The amount of discretionary cash flow a company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity.
5-67
Usefulness of the Statement of Cash Flows Review

The current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.
5-68
Supplemental Disclosures
Four types of information that are supplemental to account titles and amounts presented in the balance sheet:
5-69
LO 8 Determine which balance sheet information requires supplemental disclosure.
Techniques of Disclosure
Parenthetical Explanations
Notes
Cross-Reference and Contra Items
Supporting Schedules
Terminology
5-70
LO 9 Describe the major disclosure techniques for the balance sheet.
APPENDIX
5A
Ratio AnalysisA Reference
Using Ratios to Analyze Performance

Analysts and other interested parties can gather qualitative information from financial statements by examining relationships between items on the statements and identifying trends in these relationships.
5-71
LO 10 Identify the major types of financial ratios and what they measure.
APPENDIX
5A

Illustration 5A-1 A Summary of Financial Ratios
5-72
APPENDIX
5A

5-73
APPENDIX
5A

5-74
APPENDIX
5B
Specimen Financial Statements: The Procter & Gamble Company
5-75
APPENDIX
5B
5-76
APPENDIX
5B
5-77
APPENDIX
5B
5-78
APPENDIX
5B
5-79
APPENDIX
5B
5-80
APPENDIX
5B
5-81
RELEVANT FACTS
IFRS recommends but does not require the use of the title statement of financial position rather than balance sheet. IFRS requires a classified statement of financial position except in very limited situations. IFRS follows the same guidelines as this textbook for distinguishing between current and noncurrent assets and liabilities. However under GAAP, public companies must follow SEC regulations, which require specific line items. In addition, specific GAAP standards mandate certain forms of reporting this information. Under IFRS, current assets are usually listed in the reverse order of liquidity. For example, under GAAP cash is listed first, but under IFRS it is listed last.
5-82
RELEVANT FACTS
IFRS has many differences in terminology that you will notice in this textbook. Both IFRS and GAAP require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entitys accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Comparative prior period information must be presented and financial statements must be prepared annually. Use of the term reserve is discouraged in GAAP, but there is no such prohibition in IFRS.
5-83
IFRS SELF-TEST QUESTION

Current assets under IFRS are listed generally:
a. by importance. b. in the reverse order of their expected conversion to cash. c. by longevity.
d. alphabetically.
5-84

Companies that use IFRS:
a. may report all their assets on the statement of financial position at fair value. b. are not allowed to net assets (assets 2 liabilities) on their statement of financial positions. c. may report noncurrent assets before current assets on the statement of financial position.
d. do not have any guidelines as to what should be reported on the statement of financial position.
5-85

A company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as: a. land expense.
b. property, plant, and equipment. c. an intangible asset.
d. a long-term investment.
5-86
Copyright
Copyright 2012 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.
5-87

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Intermediate Accounting

Prepared by Coby Harmon University of California, Santa Barbara

Balance Sheet and Statement of Cash Flows

Intermediate Accounting 14th Edition

Kieso, Weygandt, and Warfield

Balance Sheet and Statement of Cash Flows

Statement of Cash Flows

Content and format

LO 1 Explain the uses and limitations of a balance sheet.

Most assets and liabilities are reported at historical cost.

Use of judgments and estimates.

LO 1 Explain the uses and limitations of a balance sheet.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

Classification in the Balance Sheet

LO 2 Identify the major classifications of the balance sheet.

Classification in the Balance Sheet Review

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

Generally any monies available on demand.

Restrictions or commitments must be disclosed.

Balance Sheet Current Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

Balance Sheet Current Assets

Prepayments often occur in regard to:

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Current Assets

convert into cash, sell, or consume

either in one year or in the operating cycle, whichever is longer.

LO 2 Identify the major classifications of the balance sheet.

Classification in the Balance Sheet

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Noncurrent Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Noncurrent Assets

For marketable securities, managements intent determines current or noncurrent classification.

Balance Sheet Noncurrent Assets

Balance Sheet (in thousands) Current assets Cash $ 285,000

Land held for speculation

Balance Sheet Noncurrent Assets

Balance Sheet (in thousands) Current assets Cash $ 285,000

Balance Sheet Noncurrent Assets

Nonconsolidated Subsidiaries or Affiliated Companies

Balance Sheet Noncurrent Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Noncurrent Assets

LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Noncurrent Assets

Property, Plant, and Equipment

Current assets Cash $ 285,000

operations of the business.

LO 2 Identify the major classifications of the balance sheet.