5_ Chpt 5Lecture

Intermediate Accounting

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CHAPTER 5 LECTURE I would like to emphasize that this chapter is a review chapter and the intent is to provide an overview for topics that will be dealt with in greater detail in later chapters. As a review of Chapters 4 and 5, I would like to encourage you all to examine a set of actual financial statements and the accompanying notes. Appendix 5-B in the text contains specimen financial statements for 3M Company. Illustration 5-7 is for discussion purposes on the specimen financial statements of 3M Company that appear in Appendix 5-B in the textbook Let’s talk about the balance sheet. A. Usefulness and Purpose of the Balance Sheet. 1. Provides information about entity's assets, liabilities, and equity. 2. Evaluation of liquidity, solvency. and financial flexibility. 3. Aids in assessing risk and predicting future cash flows. B. Limitations of the Balance Sheet. 1. Current value is not reflected. 2. Estimates and judgments must be utilized: a. in determining the collectibility of receivables. b. in assessing the salability of inventory. c. in determining the useful lives of long-term assets. 3. Omits many items that are of financial value to the business. a. Assets such as the value of a company's human resources and research and development are not reported. b. Some liabilities or commitments such as leases and certain contractual arrangements are reported in an "off balance sheet" manner. C. Classifications in the Balance Sheet. Review definitions on text page 173. Illustration 5-1 can be used to review the major classifications and subclassifications in the balance sheet 1. Assets. 2. Liabilities. 3. Equity. D. Major Subclassifications in the Balance Sheet. 1. Current assets. 2. Illustration 5-2 can be used in discussing the relationship among current assets, current liabilities, working capital and the operating cycle. a. Definition: Resources which are expected to be turned into cash, sold, or consumed within a year or the operating cycle, whichever is longer. There is a difference between the operating cycle and the accounting cycle. b. There are some conceptual weaknesses in the classification of current assets: (1) Prepaid expenses will neither be turned into cash nor used to pay a current liability. So what is the justification for including them in current assets? (2) Consumption of fixed assets during the current period: conceptually, the current depreciation and amortization charges should be classified as current assets, analogous to the "currently maturing portion of long-term debt." c. Items included in the current asset section are presented in order of liquidity. (1)
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5_ Chpt 5Lecture - CHAPTER 5 LECTURE I would like to...

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