Balance-Sheet-and-Statement-of-Cash-Flows.ppt

5-1Balance Sheet and Statement of Cash Flows5-2Intermediate Accounting14th Edition5Balance Sheet and Statement of Cash FlowsKieso,Weygandt,and Warfield 5-31.1.Explain the uses and limitations of a balance sheet.Explain the uses and limitations of a balance sheet.2.2.Identify the major classifications of the balance sheet.Identify the major classifications of the balance sheet.3.3.Prepare a classified balance sheet using the report and account Prepare a classified balance sheet using the report and account formats.formats.4.4.Indicate the purpose of the statement of cash flows.Indicate the purpose of the statement of cash flows.5.5.Identify the content of the statement of cash flows.Identify the content of the statement of cash flows.6.6.Prepare a statement of cash flows.Prepare a statement of cash flows.7.7.Understand the usefulness of the statement of cash flows.Understand the usefulness of the statement of cash flows.8.8.Determine which balance sheet information requires supplemental Determine which balance sheet information requires supplemental disclosure.disclosure.9.9.Describe the major disclosure techniques for the balance sheet.Describe the major disclosure techniques for the balance sheet.Learning Objectives5-4Balance SheetBalance SheetAdditional Additional InformationInformationUsefulnessUsefulnessLimitationsLimitationsClassificationClassificationSupplemental Supplemental disclosuresdisclosuresTechniques of Techniques of disclosuredisclosureBalance Sheet and Statement of Cash FlowsStatement of Cash Statement of Cash FlowsFlowsPurposePurposeContent and formatContent and formatPreparationPreparationUsefulnessUsefulness5-5Balance 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 SheetLO 1 Explain the uses and limitations of a balance sheet.5-6uComputing rates of return.uEvaluating the capital structure.uAssess risk and future cash flows.uAnalyze the companys:Liquidity,Solvency,and Financial flexibility.Balance SheetUsefulness of the Balance SheetLO 1 Explain the uses and limitations of a balance sheet.5-7uMost assets and liabilities are reported at historical cost.uUse of judgments and estimates.uMany items of financial value are omitted.Limitations of the Balance SheetBalance SheetLO 1 Explain the uses and limitations of a balance sheet.5-8ClassificationLO 2 Identify the major classifications of the balance sheet.Balance Sheet5-9Illustration 5-1In practice you usually see little departure from these major subdivisions.Balance SheetClassificationLO 2 Identify the major classifications of the balance sheet.5-10Cash 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.Current AssetsClassification in the Balance SheetIllustration 5-2LO 2 Identify the major classifications of the balance sheet.5-11ReviewThe correct order to present current assets isa.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.Classification in the Balance SheetLO 2 Identify the major classifications of the balance sheet.5-12uGenerally any monies available“on demand.”uCash equivalents-short-term highly liquid investments that mature within three months or less.uRestrictions or commitments must be disclosed.CashLO 2Illustration 5-3Balance Sheet “Current Assets”5-13Illustration 5-4Balance SheetRestricted CashCashLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-14PortfoliosTypeValuationClassificationHeld-to-MaturityDebtAmortized CostCurrent or NoncurrentTradingDebt or EquityFair ValueCurrentAvailable-for-SaleDebt or EquityFair ValueCurrent or NoncurrentShort-Term InvestmentsLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-15Illustration 5-5Balance Sheet Presentation of Investments in SecuritiesShort-Term InvestmentsLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-16Major categories of receivables should be shown in the balance sheet or the related notes.A company should clearly identify uAnticipated loss due to uncollectibles.uAmount and nature of any nontrade receivables.uReceivables used as collateral.ReceivablesLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-17ReceivablesIllustration 5-6Balance Sheet Presentationof ReceivablesLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-18InventoriesDisclose:Basis of valuation(e.g.,lower-of-cost-or-market).Cost flow assumption(e.g.,FIFO or average cost).LO 2Illustration 5-6Balance Sheet “Current Assets”5-19Payment of cash,that is recorded as an asset because Payment of cash,that is recorded as an asset because service or benefit will be received in the future.service or benefit will be received in the future.uuinsuranceinsuranceuusuppliessuppliesuuadvertisingadvertisingCash PaymentExpense RecordedBEFOREuurentrentuutaxestaxesPrepayments often occur in regard to:Prepayments often occur in regard to:Prepaid ExpensesLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-20Prepaid ExpensesIllustration 5-9LO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-21Current Assets-“Summary”Cash and other assets a company expects to uconvert into cash,usell,or uconsume either in one year or in the operating cycle,whichever is longer.LO 2 Identify the major classifications of the balance sheet.Balance Sheet “Current Assets”5-22Long-term Investments1.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.Classification in the Balance SheetNon-Current AssetsLO 2 Identify the major classifications of the balance sheet.5-23PortfoliosTypeValuationClassificationHeld-to-MaturityDebtAmortized CostCurrent or NoncurrentTradingDebt or EquityFair ValueCurrentAvailable-for-SaleDebt or EquityFair ValueCurrent or NoncurrentBalance Sheet “Noncurrent Assets”Long-Term InvestmentsLO 2 Identify the major classifications of the balance sheet.5-24Long-Term Investments SecuritiesSecurities ubonds,ustock,and ulong-term notesFor marketable securities,managements intent determines current or noncurrent classification.LO 2Balance Sheet “Noncurrent Assets”5-25Long-Term Investments Balance Sheet “Noncurrent Assets”Fixed AssetsFixed Assets uLand held for speculationLO 25-26Long-Term Investments Balance Sheet “Noncurrent Assets”Special FundsSpecial Funds uSinking funduPensions funduCash surrender value of life insuranceLO 25-27Long-Term Investments Balance Sheet “Noncurrent Assets”Nonconsolidated Nonconsolidated Subsidiaries or Subsidiaries or Affiliated Affiliated CompaniesCompanies LO 25-28Long-Term Investments Illustration 5-10Balance Sheet Presentation ofLong-Term InvestmentsLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Noncurrent Assets”5-29Tangible long-lived assets used in the regular operations of the business.uPhysical property such as land,buildings,machinery,furniture,tools,and wasting resources(minerals).uWith the exception of land,a company either depreciates(e.g.,buildings)or depletes(e.g.,oil reserves)these assets.Property,Plant,and EquipmentLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Noncurrent Assets”5-30LO 2 Identify the major classifications of the balance sheet.Property,Plant,and EquipmentBalance Sheet “Noncurrent Assets”Tangible assets used in the regular operations of the business.5-31Illustration 5-11Balance Sheet Presentation of Property,Plant,and EquipmentLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Noncurrent Assets”5-32Balance Sheet “Noncurrent Assets”IntangiblesLack physical substance and are not financial instruments.uLimited life intangibles amortized.uIndefinite-life intangibles tested for impairment.LO 25-33Intangibles(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.IntangiblesGoodwill$50,000Franchises 47,000Patents 33,000Trademarks 10,000Total$140,000LO 2 Identify the major classifications of the balance sheet.Balance Sheet “Noncurrent Assets”5-34Intangible AssetsIllustration 5-12Balance Sheet Presentation ofIntangible AssetsLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Noncurrent Assets”5-35Items vary in practice.Can include:uLong-term prepaid expensesuNon-current receivablesuAssets in special fundsuProperty held for saleuRestricted cash or securitiesOther AssetsLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Noncurrent Assets”5-36Balance Sheet “Noncurrent Assets”Other AssetsThis section should include only unusual items sufficiently different from assets in the other categories.LO 25-37“Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”Classification in the Balance SheetCurrent LiabilitiesLO 2 Identify the major classifications of the balance sheet.5-38Current LiabilitiesIllustration 5-13Balance Sheet Presentation of Current LiabilitiesLO 2 Identify the major classifications of the balance sheet.Classification in the Balance Sheet5-39“Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.”All covenants and restrictions must be disclosed.Long-Term LiabilitiesLO 2 Identify the major classifications of the balance sheet.Classification in the Balance Sheet5-40Long-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 liabilitiesPension Asset/liability$375,000Bonds payable 400,000Discount on bonds payable(29,000)Total 746,000LO 2 Identify the major classifications of the balance sheet.Balance Sheet “Long-Term Liabilities”5-41Non-Current LiabilitiesIllustration 5-14Balance Sheet Presentation of Non-Current LiabilitiesLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Long-Term Liabilities”5-42Owners EquityLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Owners Equity”5-43Illustration 5-15Balance Sheet Presentation of Stockholders EquityOwners EquityLO 2 Identify the major classifications of the balance sheet.Balance Sheet “Owners Equity”5-44(a)Investment in preferred stockClassification in the Balance SheetAccount(b)Treasury stock(c)Common stock(d)Cash dividends payable(e)Accumulated depreciation(f)Interest payable(g)Deficit(h)Trading securities(i)Unearned revenue(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 liabilityClassificationLO 2 Identify the major classifications of the balance sheet.5-45Classified Balance SheetuAccount formuReport formBalance Sheet FormatAccounting 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.”LO 3 Prepare a classified balance sheet using the report and account formats.5-46LO 3 Prepare a classified balance sheet using the report and account formats.Balance Sheet FormatAccount FormIllustration 5-165-47LO 3Balance Sheet FormatReport FormIllustration 5-165-48Statement of Cash FlowsLO 4 Indicate the purpose of the statement of cash flows.One of the three basic objectives of financial reporting is“assessing the amounts,timing,and uncertainty of cash flows.”5-49To 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.Where did the cash come from?2.What was the cash used for?3.What was the change in the cash balance?Purpose of the Statement of Cash FlowsStatement of Cash FlowsLO 4 Indicate the purpose of the statement of cash flows.5-50Three different activities:uOperating,Content and FormatStatement of Cash FlowsLO 5 Identify the content of the statement of cash flows.uInvesting,uFinancingIllustration 5-17Basic Format of CashFlow Statement5-51FinancingCash inflows and outflows from non-current liabilities and equity.Statement of Cash FlowsOperatingCash inflows and outflows that enter into the determination of net income.InvestingCash inflows and outflows from non-current assets.The statements value is that it helps users evaluate liquidity,solvency,and financial flexibility.LO 5 Identify the content of the statement of cash flows.Content and Format5-52Statement of Cash FlowsLO 5 Identify the content of the statement of cash flows.Illustration 5-185-53Information obtained from several sources:(1)comparative balance sheets,(2)the current income statement,and(3)selected transaction data.Sources of InformationPreparation of the Statement of Cash FlowsLO 6 Prepare a basic statement of cash flows.5-54Statement of Cash FlowsStatement 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.LO 6 Prepare a basic statement of cash flows.5-55Statement of Cash FlowsLO 6Illustration 5-19Illustration 5-205-56Statement of Cash FlowsPreparing the Statement of Cash FlowsDetermine: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.LO 6 Prepare a basic statement of cash flows.5-57Statement of Cash FlowsCash provided by operating activitiesIllustration 5-21Illus