Ch 5 Handout-6

Ch 5 Handout-6 - CHAPTER 5: Balance Sheet and Statement of...

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CHAPTER 5: Balance Sheet and Statement of Cash Flows Usefulness and Purpose of the Balance Sheet Provides information about the entity's Aids in assessing risk and predicting future cash flows Used to evaluate: o Liquidity:     o Solvency:     Capital Structure: o Financial Flexibility:    Limitations of the Balance Sheet Current values are not reflected (Most assets and liabilities are reported at historical cost) Use of judgments and estimates o To determine the collectability of receivables o To assess the salability of inventory o To determine the useful lives of long-term assets Many items of financial value to the business Classifications in the Balance Sheet 1. Assets 2. Liabilities 3. Stockholder’s equity Major Sub-classifications in the Balance Sheet A. Current assets resources which are expected to be turned into cash, sold, or consumed presented in the order of liquidity: 1) Cash excludes any cash restricted for purposes other than to meet current obligations 2) Short-term investments a. Trading securities 1
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o o o o b. Available-for-Sale (AFS) o o o o c. Held-to-Maturity (HTM) o o o 3) Accounts Receivable Report estimated collectible amount aka o disclose the amounts of expected uncollectibles, nontrade receivables, and accounts pledged or discounted 4) Inventories 5) Prepaid expenses report unexpired cost if prepaid beyond the current operating cycle, report as deferred charges in the "other asset" section B. Long-term investments management intends to hold these for an extended period including: 1. investments in securities a. b. 2. Long term Notes Receivable 3. investments in tangible fixed assets acquired for speculative purposes, which are not currently used in operations 4. investments set aside in special funds 5. investments in nonconsolidated subsidiaries or affiliated companies 6. C. Property, plant, and equipment 2
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durable physical property used in operations "wasting resources" or natural resources used in operations most assets in this category are either depreciable or consumable Valued at Land long-lived costly tools are usually included in this category but in practice, small tools are usually expensed when purchased or are included in current assets the basis of valuation any liens against the property, and accumulated depreciation or depletion must be disclosed in practice, a detailed classification of property, plant, and equipment is disclosed in a supplementary schedule rather than on the face of the balance sheet D. Intangible Assets Valued at resources that lack physical substance but provide economic rights and advantages a high degree of uncertainty exists regarding realizability of future benefits usually exists limited-life intangible assets are amortized over their and reported net of the accumulated amortization indefinite-life intangible assets expenditures for some intangible assets
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Ch 5 Handout-6 - CHAPTER 5: Balance Sheet and Statement of...

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