ACIS3115 Chapter 5 - Chapter 5 Balance Sheet and Statement...

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1 Chapter 5 Balance Sheet and Statement of Cash Flows
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2 Balance Sheet and Statement of Cash Flows Balance Sheet Statement of Cash Flows Purpose Content and format Usefulness Usefulness Limitations Classification Additional information reported Techniques of disclosure
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3 Balance Sheet (B/S) Reports the assets, liabilities, and stockholders’ equity of a business enterprise at a specific date. Provides a basis for computing rates of return and evaluating the capital structure of the enterprise.
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4 Usefulness of the B/S Evaluating the capital structure. Assess risk and future cash flows. Analyze the company’s: Liquidity, Solvency, and Financial flexibility
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5 Usefulness of the B/S (Cont) Liquidity The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid. Short-term liquidity ratio: Cash Short-term liabilities Indicate whether a company will have the resources to pay its current and maturing obligations.
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6 Usefulness of the B/S (Cont) Solvency The ability of a company to pay its debts as they mature. Companies with higher debt are relatively more risky. Financial Flexibility Ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. Liquidity and solvency affect a company’s financial flexibility.
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7 Limitations of B/S Historical cost: Most assets and liabilities are reported at historical cost. Fair value could be more relevant. Judgment and estimates are used Example: Bad debt exp. Warranty etc. Omit many items that are valuable but not objectively measurable. Example: intangible assets
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8 1. The balance sheet is useful for analyzing all of the following except a. liquidity b. solvency c. profitability d. financial flexibility Question
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9 2. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as a. solvency b. financial flexibility c. liquidity d. exchangeability Question
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10 Classification in the B/S Elements of the B/S Assets Liabilities Equity Companies further divide these classifications: Illustration 5-1 Illustration 5-1 Balance Sheet Classification
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11 Example-Starbucks
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12 Example-Starbucks
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13 Example-Starbucks
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14 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. Current assets are presented in the B/S in order of liquidity. Illustration 5-2 Illustration 5-2 Accounts and basis of valuation
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15 1. The current assets section of the balance sheet should include a. machinery b. patents c. goodwill d. inventory Question
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16 Cash Generally any monies available “on demand.” Cash equivalents are short-term highly liquid investments that will mature within three months or less.
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