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Class7-8 Notes Post - Chapter 5 Balance Sheet and Statement...

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Unformatted text preview: Chapter 5: Balance Sheet and Statement of Cash Flows Balance Sheet Usefulness of the Balance Sheet Evaluating the capital structure structure. Assess risk and future cash flows. Analyze the company's: SYRACUSE UNIVERSITY Whitman School of Management Professor Hong Xie ACC 356/601 Chapter 5-1 Chapter 5-2 Liquidity, Solvency, and y, Financial flexibility. LO 1 Explain the uses and limitations of a balance sheet. Balance Sheet Limitations of the Balance Sheet Most assets and liabilities are reported at historical cost. Historical cost is very reliable but may not be relevant. Balance Sheet Classification in the Balance Sheet Three General Classifications Assets, Liabilities, and Stockholders' Equity Companies further divide these classifications: Use of judgments and estimates (e.g., bad debt allowance is estimated). Many items of financial value are omitted (e.g., intangible assets). Chapter 5-3 Illustration 5-1 5Balance Sheet Classification LO 1 Understand the uses and limitations of an income statement. Chapter 5-4 LO 2 Identify the major classifications of the balance sheet. 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 cycle, longer. Illustration 5-2 5Accounts and basis of valuation Balance Sheet "Current Assets" Cash Generally any monies available "on demand." on demand Cash equivalents are short-term highly liquid investments that will mature within three months or less. Any restrictions or commitments must be disclosed. disclosed Illustration 5-3 ll 5- Chapter 5-5 LO 2 Identify the major classifications of the balance sheet. Chapter 5-6 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Short-Term Investments Portfolios P tf li Held-toMaturity Trading Availablefor-Sale Balance Sheet "Current Assets" Receivables Type T Debt Debt or Equity Debt or Equity Valuation V l ti Amortized Cost Fair Value Fair Value Classification Cl ifi ti Current or Noncurrent Current Current or Noncurrent Claims held against customers and others for money, goods, or services. Accounts receivable oral promises Notes receivable written promises Major categories of receivables should be shown in th b l h t th l t d t the balance sheet or the related notes. Chapter 5-7 LO 2 Identify the major classifications of the balance sheet. Chapter 5-8 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Accounts Receivable Presentation Options 1 Current Assets: Cash Accounts receivable Less allowance for doubtful accounts Inventory Total current assets Current Assets: Cash Accounts receivable, net of $25 allowance Inventory Total current assets $ 346 500 25 475 812 $1,633 Balance Sheet "Current Assets" Inventories Company discloses: basis of valuation (e.g., lower-of-cost-ormarket) and the method of pricing (e.g., FIFO or LIFO). 2 $ 346 475 812 $1,633 Chapter 5-10 Chapter 5-9 LO 2 Identify the major classifications of the balance sheet. LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Prepaid Expenses Payment of cash, that is recorded as an asset because P t f h th t i d d tb service or benefit will be received in the future. Cash Payment BEFORE Balance Sheet "Noncurrent Assets" Long-Term Investments Generally consists of four types: Securities Fixed assets Special funds Investments in nonconsolidated subsidiaries or affiliated companies. Expense Recorded Prepayments often occur in regard to: insurance supplies advertising Chapter 5-11 rent maintenance on equipment LO 2 Identify the major classifications of the balance sheet. Chapter 5-12 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Long-Term Investments Securities bonds, stock, and long-term notes For marketable securities, management's intent determines current or noncurrent classification. Chapter 5-13 Balance Sheet "Noncurrent Assets" Long-Term Investments Fixed Assets Land held for speculation Balance Sheet (in thousands) Current assets Cash $ 285,000 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 321,657 253,980 150,000 550,000 225,000 653,798 84,321 84 321 457,836 2,696,592 1,375,778 975,000 Chapter 5-14 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 321,657 253,980 150,000 550,000 225,000 653,798 84,321 84 321 457,836 2,696,592 1,375,778 975,000 LO 2 Identify the major classifications of the balance sheet. LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Long-Term Investments Special Funds Sinking fund Pensions fund C sh surrender d Cash s value of life insurance Chapter 5-15 Balance Sheet "Noncurrent Assets" Long-Term Investments Balance Sheet (in thousands) Current assets Cash $ 285,000 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 321,657 253,980 150,000 550,000 225,000 653,798 84,321 84 321 457,836 2,696,592 1,375,778 975,000 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 321,657 253,980 150,000 550,000 225,000 653,798 84,321 84 321 457,836 2,696,592 1,375,778 975,000 Nonconsolidated Subsidiaries S b idi i or Affiliated Companies Chapter 5-16 LO 2 Identify the major classifications of the balance sheet. LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Property, Plant, and q p Equipment Assets of a durable nature used in the regular operations of the business. Balance Sheet (in thousands) Current assets Cash $ 285,000 Balance Sheet "Noncurrent Assets" Intangibles Lack physical substance and are not financial instruments. Limited life intangibles amortized. Indefinite-life intangibles (i e (i.e., goodwill) tested for impairment. Balance Sheet (in thousands) Current assets Cash $ 285,000 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) (975 000) 2,170,386 3,000,000 177,000 40,000 Accumulated depreciation Total PP&E Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other (975,000) 2,170,386 2,000,000 177,000 40,000 125,000 55,000 55 000 2,397,000 133,000 40,000 173,000 Chapter 5-17 LO 2 Identify the major classifications of the balance sheet. Chapter 5-18 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Exercise" BE5-6 Mickey Snyder Corporation's adjusted trial balance contained the following asset accounts at December 31, 2007: p $ , ; $ , ; Prepaid Rent $12,000; Goodwill $40,000; Franchise Fees Receivable $2,000; Franchises $47,000; Patents $33,000; Trademarks $10,000. Prepare the intangible assets section of the balance sheet. Intangibles Balance Sheet "Noncurrent Assets" Other Assets This section should include only unusual items sufficiently different from assets in the other categories. categories Balance Sheet (in thousands) Current assets Cash $ 285,000 Intangibles Goodwill Patents Trademark Franchises Copyright Total intangibles Other assets Prepaid pension costs Deferred income tax Total other Total Assets 2,000,000 177,000 40,000 125,000 55,000 2,397,000 133,000 40,000 173,000 $ 9,210,978 Chapter 5-19 LO 2 Identify the major classifications of the balance sheet. Chapter 5-20 LO 2 Identify the major classifications of the balance sheet. Balance Sheet Current Liabilities "Obligations that a "Obli ti th t 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 p y $ 233,450 , Accounts payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 Income tax payable 23,400 Current maturities LT debt 121,000 Total current liabilities 569,650 Long-term liabilities L g Long-term debt m Obligations capital lease Deferred income taxes Total long-term liabilities Stockholders' equity 9 9, 979,500 345,800 77,909 2,093,859 Balance Sheet Long-Term Liabilities "Obligations that a " bl h company does not reasonably expect to liquidate within the normal operating cycle." All covenants and restrictions must be disclosed. Chapter 5-22 Balance Sheet (in thousands) Current liabilities Notes payable p y $ 233,450 , Accounts payable 131,800 Accrued compensation 43,000 Unearned revenue 17,000 Income tax payable 23,400 Current maturities LT debt 121,000 Total current liabilities 569,650 Long-term liabilities L g Long-term debt m Obligations capital lease Deferred income taxes Total long-term liabilities Stockholders' equity 9 9, 979,500 345,800 77,909 2,093,859 Chapter 5-21 LO 2 Identify the major classifications of the balance sheet. LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Exercise" BE5-9 Included in Ewing Company's December 31, 2007, trial balance are the following accounts: Accounts Payable $240,000; y$ , ; y $ , ; Pension Liability $375,000; Discount on Bonds Payable $24,000; Advances from Customers $41,000; Bonds Payable $400,000; 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 Balance Sheet Owners' Equity Companies usually divide equity into three parts parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings. Illustration 5-15 5- Chapter 5-23 LO 2 Identify the major classifications of the balance sheet. Chapter 5-24 LO 2 Identify the major classifications of the balance sheet. Balance Sheet Classification Exercise 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 Chapter 5-25 Balance Sheet - Format Classified Balance Sheet Account form requires landscape layout or two facing pages Assets on left side and Liabilities and Stockholders' Equity on right side Classification Report form more common Asset section followed by Liability and Stockholders' Equity section Accounting Trends and Techniques--2004 (New York: AICPA) indicates that all of the 600 companies surveyed use either the "report form" (506) or the "account form" (94), sometimes collectively referred to as the "customary form." Chapter 5-26 LO 2 Identify the major classifications of the balance sheet. LO 3 Prepare a classified balance sheet using the report and account formats. The Statement of Cash Flows As we discussed in conceptual framework, one j of the three basic objectives of financial reporting is to provide information for investors, creditors and other invested parties to assess The Statement of Cash Flows Purpose of the Statement To provide relevant information about the cash receipts and cash payments of an enterprise during a period of time. 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? "the amounts, timing, and uncertainty f flows." of cash f Chapter 5-27 LO 6 Indicate the purpose of the statement of cash flows. Chapter 5-28 LO 6 Indicate the purpose of the statement of cash flows. The Statement of Cash Flows Content and Format There are three sections on the statement, corresponding to three different activities: Operating, Illustration 5-24 5- The Statement of Cash Flows Content and Format Operating O ti Cash inflows and outflows from operations. Investing, Financing Investing I ti Cash inflows and outflows from non-current assets. Financing Fi i Cash inflows and outflows from liabilities and equity. q y The statement's value is that it helps users evaluate liquidity, solvency, and financial flexibility. Chapter 5-29 LO 7 Identify the content of the statement of cash flows. Chapter 5-30 LO 7 Identify the content of the statement of cash flows. The Statement of Cash Flows Format and Content - Definitions Operating activities involves the cash effects of transactions that enter into the determination of net income such as Cash collections from customers Cash payments to suppliers and employees The Statement of Cash Flows Definitions Financing activities involves liability and stockholders' st kh ld s' equity items and include it it s d i l d Obtaining cash from creditors and repaying the amount borrowed Obtaining capital from owners and providing them with a return on, and a return of, their investment. Investing activities generally involves long-term assets and include Making and collecting loans Acquiring and disposing of investments and productive long-term assets Chapter 5-31 Chapter 5-32 LO 7 Identify the content of the statement of cash flows. LO 7 Identify the content of the statement of cash flows. The Statement of Cash Flows Preparation Information obtained from several sources: (1) comparative balance sheets, (2) the current income statement, and (3) selected transaction data. The Statement of Cash Flows Preparation BE 5-12 Midwest Beverage Company reported the 5 12 following items in the most recent year. Activity Required: Prepare a Statement of Cash Flows Chapter 5-33 LO 8 Prepare a statement of cash flows. Chapter 5-34 LO 8 Prepare a statement of cash flows. The Statement of Cash Flows Preparation Statement of Cash Flow (in thousands) Operating activities p g 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 Chapter 5-35 Additional Information Reported Significant financing and investing activities p 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. Issuance of debt to purchase assets. Exchanges on long-lived assets. $ 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. $ LO 8 Prepare a statement of cash flows. Chapter 5-36 LO 8 Prepare a statement of cash flows. ...
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This note was uploaded on 04/18/2008 for the course ACC 356 taught by Professor Xie during the Spring '08 term at Syracuse.

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