Professional Documents
Culture Documents
Lecture 07
Instructor
Adnan Shoaib
1
Learning
Learning Objectives
Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
Balance
Balance Sheet
Sheet and
and Statement
Statement of
of Cash
Cash Flows
Flows
Balance Sheet
Statement of
Cash Flows
Usefulness
Purpose
Limitations
Classification
Preparation
Usefulness
Additional
Information
Supplemental
disclosures
Techniques of
disclosure
Balance
Balance Sheet
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.
Balance
Balance Sheet
Sheet
Usefulness of the Balance Sheet
Liquidity,
Solvency, and
Financial flexibility.
LO 1 Explain the uses and limitations of a balance sheet.
Balance
Balance Sheet
Sheet
Limitations of the Balance Sheet
Balance
Balance Sheet
Sheet
Classification
Balance
Balance Sheet
Sheet
Classification
Illustration 5-1
In practice you usually see little departure from these major subdivisions.
Classification
Classification in
in the
the Balance
Balance Sheet
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
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Cash
10
LO 2
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Cash
Illustration 5-4
Balance SheetRestricted Cash
11
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Short-Term Investments
12
Portfolios
Type
Valuation
Classification
Held-toMaturity
Debt
Amortized
Cost
Current or
Noncurrent
Trading
Debt or
Equity
Fair Value
Current
Availablefor-Sale
Debt or
Equity
Fair Value
Current or
Noncurrent
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Short-Term Investments
Illustration 5-5
Balance Sheet Presentation of
Investments in Securities
13
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Receivables
Major categories of receivables should be shown in the
balance sheet or the related notes.
A company should clearly identify
14
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Receivables
Illustration 5-6
Balance Sheet Presentation
of Receivables
15
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Inventories
Disclose:
16
LO 2
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
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
17
insurance
rent
supplies
taxes
advertising
LO 2 Identify the major classifications of the balance sheet.
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Prepaid Expenses
Illustration 5-9
18
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Current Assets - Summary
Cash and other assets
a company expects to
sell, or
consume
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
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.
20
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term Investments
Portfolios
21
Type
Valuation
Classification
Held-toMaturity
Debt
Amortized
Cost
Current or
Noncurrent
Trading
Debt or
Equity
Fair Value
Current
Availablefor-Sale
Debt or
Equity
Fair Value
Current or
Noncurrent
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Securities
bonds,
stock, and
long-term notes
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Fixed Assets
23
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Special Funds
24
Sinking fund
Pensions fund
Cash surrender
value of life
insurance
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Nonconsolidated
Nonconsolidated
Subsidiaries
Subsidiaries or
or
Affiliated
Companies
Companies
25
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term Investments
Illustration 5-10
Balance Sheet
Presentation of
Long-Term Investments
26
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Property, Plant, and Equipment
Tangible long-lived assets used in the regular operations
of the business.
27
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Property, Plant, and
Equipment
Tangible assets used
in the regular
operations of the
business.
28
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Illustration 5-11
Balance Sheet Presentation of
Property, Plant, and Equipment
29
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Intangibles
Lack physical substance
and are not financial
instruments.
30
Indefinite-life
intangibles tested for
impairment.
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
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
47,000
Patents
33,000
Trademarks
10,000
Total
31
$ 50,000
$140,000
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Intangible Assets
Illustration 5-12
Balance Sheet
Presentation of
Intangible Assets
32
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Other Assets
Items vary in practice. Can include:
33
Non-current receivables
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Other Assets
This section should
include only unusual items
sufficiently different from
assets in the other
categories.
34
LO 2
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Current Liabilities
Obligations that a
company reasonably
expects to liquidate either
through the use of current
assets or the creation of
other current liabilities.
35
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Current Liabilities
Illustration 5-13
Balance Sheet Presentation
of Current Liabilities
36
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Long-Term Liabilities
Obligations that a
company does not
reasonably expect to
liquidate within the normal
operating cycle.
All covenants and
restrictions must be
disclosed.
37
Balance
Balance Sheet
Sheet Long-Term
Long-Term Liabilities
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
38
$375,000
400,000
(29,000)
746,000
Balance
Balance Sheet
Sheet Long-Term
Long-Term Liabilities
Liabilities
Non-Current Liabilities
Illustration 5-14
Balance Sheet Presentation
of Non-Current Liabilities
39
Balance
Balance Sheet
Sheet Owners
Owners Equity
Equity
Owners Equity
40
Balance
Balance Sheet
Sheet Owners
Owners Equity
Equity
Owners Equity
Illustration 5-15
Balance Sheet Presentation
of Stockholders Equity
41
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Account
42
Classification
(e) Contra-asset
(g) Deficit
Balance
Balance Sheet
Sheet Format
Format
Classified Balance Sheet
Account form
Report form
43
LO 3 Prepare a classified balance sheet using the report and account formats.
Balance
Balance Sheet
Sheet Format
Format
Account Form
44
Illustration 5-16
LO 3 Prepare a classified balance sheet using the report and account formats.
Balance
Balance Sheet
Sheet
Format
Format
Report Form
Illustration 5-16
45
LO 3
U.
U. S.
S. GAAP
GAAP vs.
vs. IFRS
IFRS
There are more similarities than differences in balance sheets
prepared according to U.S. GAAP and those prepared applying
IFRS.
Some difference are highlighted below.
46
U.
U. S.
S. GAAP
GAAP vs.
vs. IFRS
IFRS
47
Statement
Statement of
of Cash
Cash Flows
Flows
One of the three basic objectives of financial
reporting is
48
Statement
Statement of
of Cash
Cash Flows
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:
49
1.
2.
3.
Statement
Statement of
of Cash
Cash Flows
Flows
Content and Format
Three different activities:
Operating,
Investing,
Financing
Illustration 5-17
Basic Format of Cash
Flow Statement
50
Statement
Statement of
of Cash
Cash Flows
Flows
Content and Format
Operating
Investing
Financing
Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-18
52
Direct
Direct and
and Indirect
Indirect Methods
Methods of
of Reporting
Reporting
Two Formats for Reporting Operating Activities
53
Direct Method
Indirect Method
Reports the
cash effects of
each operating
activity
Starts with
accrual net
income and
converts to
cash basis
54
Direct
Direct Method
Method
Under the direct method, the cash effect of each
operating activity is reported directly in the statement.
55
Indirect
Indirect Method
Method
By the indirect method, we arrive at net cash flow from operating
activities indirectly by starting with reported net income and
working backwards to convert that amount to a cash basis.
56
Preparation
Preparation of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Sources of Information
Information obtained from several sources:
(1) comparative balance sheets,
(2) the current income statement, and
(3) selected transaction data.
57
Statement
Statement of
of Cash
Cash Flows
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.
58
Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-19
Illustration 5-20
59
LO 6
Statement
Statement of
of Cash
Cash Flows
Flows
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.
60
Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-19
Illustration 5-20
61
Illustration 5-21
Illustration 5-19
Illustration 5-20
Statement
Statement of
of
Cash
Cash Flows
Flows
Next, the company
determines its investing
and financing activities.
62
Illustration 5-21
Statement
Statement of
of Cash
Cash Flows
Flows
Statement of Cash Flows (BE 5-12): Keyser Beverage
Company reported the following items in the most recent year.
Activity
Net income
Dividends paid
Increase in accounts receivable
Increase in accounts payable
Purchase of equipment
Depreciation expense
Issue of notes payable
$40,000
5,000
10,000
7,000
8,000
4,000
20,000
Operating
Financing
Operating
Operating
Investing
Operating
Financing
Statement
Statement of
of Cash
Cash Flows
Flows
Statement of Cash Flows (BE 5-12)
Noncash credit to
revenues.
Noncash charge to
expenses.
64
Statement
Statement of
of Cash
Cash Flows
Flows
Review
In preparing a statement of cash flows, which of the following
transactions would be considered an investing activity?
65
a.
b.
c.
d.
Statement
Statement of
of Cash
Cash Flows
Flows
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:
66
Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-23
Comprehensive
Statement of Cash Flows
67
U.
U. S.
S. GAAP
GAAP vs.
vs. IFRS
IFRS
Like U.S. GAAP, international standards also require a statement of
cash flows. Consistent with U.S. GAAP, cash flows are classified
as operating, investing, or financing.
Operating Activities
Dividends Received
Interest Received
Interest Paid
Operating Activities
Investing Activities
Investing Activities
Financing Activities
68
Dividends Paid
Dividends Received
Interest Received
Financing Activities
Dividends Paid
Interest Paid
U.
U. S.
S. GAAP
GAAP vs.
vs. IFRS
IFRS
The FASB and IASB are working together on a project, Financial
Statement Presentation, to establish a common standard for
presenting information in the financial statements.
69
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Without cash, a company will not survive.
Cash flow from Operations:
70
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Financial Liquidity
Current Cash
Debt Coverage
Ratio
Ratio indicates whether the company can pay off its current
liabilities from its operations. A ratio near 1:1 is good.
71
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Financial Liquidity
Cash Debt
Coverage
Ratio
72
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Free Cash Flow
Illustration 5-28
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Review
The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
74
Supplemental
Supplemental Disclosures
Disclosures
Four types of information that are supplemental to account
titles and amounts presented in the balance sheet:
75
Techniques
Techniques of
of Disclosure
Disclosure
76
Parenthetical Explanations
Notes
Supporting Schedules
Terminology
RELEVANT FACTS
77
IFRS recommends but does not require the use of the title
statement of financial position rather than balance sheet.
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.
RELEVANT FACTS
78
IFRS has many differences in terminology that you will notice in this
textbook.
End
End of
of Lecture
Lecture 07
07
79