al 1.
2.
IntermediateAccounting
IntermediateAccounting
October19th,2010
Gener Cour se Questi ons
4, 17 & 22
Questi ons befor e Qui z Chapter s
3.
I ncome Statement, Statement of RE and Compr ehensi ve I ncome
(Non-r ecur r i ng i tems, I ntr a per i od Tax Al l ocati on & EPS)
Changes i n Accounti ng Esti mates, Er r or Cor r ecti ons, Changes i n
A ccounti ng Pr i nci pl es
4.
Revi ew the Bal ance Sheet usi ng todays homewor k
5.
Assi gnments for Thur sday, October 21st :
A. Chapter 5 Bal ance Sheet & Statement of Cash Fl ows
B. Chapter 23 Statement of Cash Fl ows
6. Retur n Di scussi on Questi ons #3 Ear ni ngs M anagement
1
Chapter5
BalanceSheet
Financial Position at a particular point in time
IFRS vs. US GAAP
IFRS requires presentation of 2 years of balance sheet data
US GAAP
Public companies, 2 years B/S (SEC)
Private companies, only 1 year B/S required
Generally listed in order of liquidity
Classified as Current or Non-Current.
2
BalanceSheet:Classification
Assets
CurrentAssets
Longterm
investments
Property,plant,and
equipment
Intangibleassets
Otherassets
Question6,ex3,Prob.1
LiabilitiesandEquity
Currentliabilities
Longtermdebt
Ownersequity
Capitalstock
Addlpaidincap.
Retainedearnings
AccumulatedOther
Comp.Income
3
(TreasuryStock)
BalanceSheet:Usefulness
The balance sheet provides information:
Evaluating Capital structure financing by creditors/investors
Analyzing an enterprises:
Liquidity (sufficient resources for day-to-day operations)
Current Ratio, Quick Ratio, Working Capital
Solvency (ability to pay debts as they mature more long-run)
Lower solvency = higher debt
Financial flexibility (ability to respond to threats or take advantage
of opportunities)
Effectiveness in using assets employed
Inventory and Receivables turnover
Profitability with rates of return (in combination with the I/S)
ROE
ROA
Question1&3
4
TypesofRatios
Type
Liquidityratios
Coverage/
Whatismeasured
Examples
Shorttermabilityto
paymaturing
obligations
Currentratio
Quickassetsratio
CapitalStructure
Solvencyratios
Degreeofprotectionfor
longtermcreditorsand
investors
Activityratios
Effectivenessinusing
assetsemployed
Receivablesturnover
Inventoryturnover
TotalAssetTurnover
Degreeofsuccessor
failureforagiven
period
Rateofreturnonassets
Returnonequity
Earningspershare
5
Profitability
ratios
Debttototalassets
Timesinterestearned
FinancialStatementAnalysis
Benchmarks:
Trends
Peers
Scaling:
Ratios
Common size financial statements
Limitations: Must compare apples to apples
Nature of accounting
Accounting choices
Economic conditions and business model differences
6
BalanceSheet:Limitations
Is the B/S appropriate for valuing a company?
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 certain off-balance
sheet financing.
Question7&8
7
BalanceSheetCurrentAssets
Asset Category
General Valuation Rule
Cash & Cash
Equivalents
Fair Market value
Marketable Securities or Fair Market value
Short term Investments
Trading (Gains or Losses in Income)
AVS (Gains or Losses in Equity)
Accounts Receivable
Net realizable value (estimated amount
collectible)
Inventory
Lower of cost or market (cost measured
using a variety of methods, LIFO, FIFO)
Prepaid Expenses
Historical cost
8
Balance Sheet Current Assets
C a sh
Gener al l y any moni es avai l abl e on demand.
Ca sh equi va l ents - shor t-ter m hi ghl y l i qui d
i nvestments that matur e wi thi n thr ee months or l ess.
Restr i cti ons or commi tments must be di scl osed.
I l l ustr a ti on 5-3
9
Investmentsof<20%
Held-to-maturity: (current or non-current)
Record debt securities at amortized cost, dont revalue
Fair value or Mark to Market
Trading: (current)
Debt & equities intended to sell.
Revalue annually to Fair Value in B/S. Unrealized
holding gains and losses in income
Available for Sale: (current or noncurrent)
question 11
All others (debt or equity)
Revalue annually to Fair Value in B/S. Unrealized
holding gains and losses in OCI and equity (AOCI)
10
Investmentsof<20%
Issues with Fair Value Method
How is fair value determined?
Level 1: active market
Level 2: observable market data other than quoted market
price
Level 3: determined only through unobservable inputs
and prices based on internal models or estimates
Classification of Trading vs. AFS
Dividends received:
DR Cash CR Dividend Income
11
BalanceSheetNonCurrentAssets
Asset Category
General Valuation Rule
Property, Plant, &
Equipment
Historical cost less accumulated
depreciation
Land
Historical cost, no depreciation
Long-term Investments Historical cost, Market value, Equity
method
Other Assets (Deferred Undiscounted sum of expected future tax
Income Tax Asset
benefits
Intangible Assets
BE 5-6
Acquisition cost less amortization if
acquired from external parties (usually
12
zero if developed internally)
LongTermInvestments
G ener a l l y consi sts of four types:
Secur i ti es
Secur
Fi xed a ssets
Fi
Speci a l funds
N onconsol i da ted subsi di a r i es or affi l i ated
compani es.
e
13
LongTermInvestments
G ener a l l y consi sts of four types:
Secur i ti es
Secur
Fi xed a ssets
Fi
Speci a l funds
N onconsol i da ted subsi di a r i es or affi l i ated
compani es.
e
14
LongTermInvestments
LongTermInvestments
Balance Sheet (in t housands)
Current asset s
Cash
$
285,000
I nvest ment s:
Secur i ti es
bonds,
stock, ong-ter and
l m notes
For mar ketabl e secur i ti es,
m anagements i ntent
d eter mi nes cur r ent or
n oncur r ent cl assi fi cati on.
I nvesment in ABC bonds
I nvest ment in UC I nc.
N ot es r eceivable
Land held f or speculat ion
Sinking f und
Pension f und
Cash sur r ender value
I nvest ment in Uncon. Sub.
T ot al invest ment s
Propert y, Plant , and Equip.
Building
Land
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
9 75,000
15
Property,PlantandEquipment
Property,PlantandEquipment
Balance Sheet (in t housands)
Current asset s
Cash
$
285,000
T ot al invest ment s
Propert y, Plant , and Equip.
Assets of a dur a bl e
n a tur e used i n the
r egul a r oper a ti ons
of the busi ness.
2,696,592
Building
Land
M achiner y and equipment
Capit al leases
Leasehold impr ovement s
A ccumulat ed depr eciat ion
T ot al PP&E
I nt angibles
1,375,778
9 75,000
234,958
384,650
175,000
(975,000)
2,170,386
Goodwill
Pat ent s
T r ademar ks
3,000,000
177,000
40,000
16
Intangibles
Intangibles
Balance Sheet (in t housands)
Current asset s
Cash
L a ck physi ca l
substa nce a nd a r e not
f i na nci a l
i nstr uments.
Li mi ted l i fe
i nta ngi bl es
a mor ti zed.
I ndefi ni te-l i fe
i nta ngi bl es tested
f or i mpa i r ment.
$
285,000
A ccumulat ed depr eciat ion
T ot al PP&E
I nt angibles
(975,000)
2,170,386
Goodwill
Pat ent s
T r ademar k
Fr anchises
Copyr ight
T ot al int angibles
Ot her asset s
2,000,000
177,000
40,000
125,000
55,000
2,397,000
Pr epaid pension cost s
Def er r ed income t ax
T ot al ot her
133,000
40,000
173,000
17
OtherAssets
OtherAssets
Balance Sheet (in t housands)
Current asset s
Cash
$
285,000
I nt angibles
T hi s secti on shoul d
i ncl ude onl y unusua l
i tems suffi ci entl y
d i ffer ent fr om a ssets
i n the other
ca tegor i es.
Goodwill
Pat ent s
T r ademar k
Fr anchises
Copyr ight
T ot al int angibles
Ot her asset s
Pr epaid pension cost s
Def er r ed income t ax
T ot al ot her
T ot al Asset s
2,000,000
177,000
40,000
125,000
55,000
2,397,000
133,000
40,000
173,000
$ 9,210,978
18
Liabilities
C ur r ent Li a bi l i ti es:
Obl i ga ti ons tha t a
compa ny r ea sona bl y expects
t o l i qui da te ei ther thr ough
t he use of cur r ent a ssets or
t he cr ea ti on of other
cur r ent l i a bi l i ti es.
Long-T er m Li a bi l i ti es
Obl i ga ti ons tha t a
compa ny does not
r ea sona bl y expect to
l i qui da te wi thi n the nor ma l
oper a ti ng cycl e.
Al l covena nts a nd
r estr i cti ons must be
Balance Sheet ( in t housands)
Current liabilit ies
Not es payable
$ 233,450
Account s payable
131,800
Accr ued compensat ion
43,000
Unear ned r evenue
17,000
I ncome t ax payable
23,400
Cur r ent mat ur it ies LT debt
121,000
T ot al cur r ent liabilit ies
569,650
Long- t erm liabilit ies
Long-t er m debt
979,500
Obligat ions capit al lease
345,800
Def er r ed income t axes
77,909
T ot al long-t er m liabilit ies 1,403,209
St ockholders' equit y
19
Liabilities
Short-term obligations:
Accounts payable, accrued liabilities (examples?)
Notes payable, Unearned Revenue
Current portion of long-term debt
Long-term obligations:
obligations arising from specific financing situations
(issuance of bonds, bank debt)
obligations arising from ordinary business operations
(pension obligations, capital leases, deferred income
taxes)
obligations that are contingent (product warranties for
20
long-term items)
Question13
BalanceSheetLiabilities
Measurement of Liabilities uses a variety of
techniques:
Amount equal to actual future payment
The present value of expected future payments
Some future obligations are not reported on the
balance sheet, but instead disclosed entirely in the
notes to the financial statements.
21
OwnersEquity
1. Capital Stock
Par or stated value of the shares issued
2. Additional paid-in capital
The excess of amounts paid in over par value
3. Retained earnings
Undistributed earnings
4. Accumulated Other Comprehensive Income
Analogous to RE for Other Comprehensive Income
5. Treasury Stock (contra Stockholders Equity)
22
OwnersEquity
OwnersEquity
23
BalanceSheetEquity
Measurement
Amounts reported in these accounts represent the aggregate of
transactions that occurred at various points in time
Common Stock & Additional Paid in Capital will include
proceeds from the sale of stock from inception to present
Retained Earnings will include the sum of Net Income from
inception through current year less dividends paid
Note that each years net income is expressed in that years dollars
(i.e., monetary unit assumption)
RE may be adjusted when purchase of Treasury Stock exceeds
original iss
24
BalanceSheet
Supplemental Information Reported
Contingencies material events that have an uncertain outcome
Accounting Policies Explanations of the valuation methods used or
the basic assumptions made concerning inventory valuations,
depreciation, investment in subsidiaries, etc.
Contractual Situations Explanations of certain restrictions or
covenants attached to specific assets or, more likely, liabilities.
Fair Values Disclosures of fair values for certain items
Subsequent Events Disclosure of material events or transactions that
occur between the balance sheet date and its issuance date.
Events that relate to conditions that existed as of the balance sheet
date are incorporated into the balance sheet as if the subsequent
information was known as of the balance sheet date.
Events that relate to conditions that did not exist as of the balance
sheet date are typically disclosed in the notes to the financial 25
statements.