Ch 5 Handout-4 - CHAPTER 5 Balance Sheet and Statement of...

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
•
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.
2.
3.
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

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

• 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
are not capitalized but are expensed as incurred
E. Other Assets
• special classification for unusual items that cannot be included in one of the other
asset categories (e.g.s, deferred charges noncurrent receivables, and advances to