ch05s - Chapter 5 Balance Sheet and Statement of Cash Flows...

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Chapter 5 Balance Sheet and Statement of Cash Flows
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Chapter 5: Key Concepts Discuss usefulness and limitations of the Balance Sheet. Discuss classifications of the Balance Sheet & prepare a classified Balance Sheet. Discuss major disclosure techniques and supplemental disclosures related to the Balance Sheet. Identify and explain the purposes and content in the Statement of Cash Flows. Discuss the usefulness of the Statement of Cash Flows. Prepare a Statement of Cash Flows. 2 Accounting 301A-Eiler
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Balance Sheet List of Assets, Liabilities and Equity accounts and their balances at a particular point in time. SEC requires 2 years of balance sheet data. Numbers reported on the balance sheet arise from a wide variety of accounting rules and methods, and not necessarily the most appropriate for valuation purposes. Accounting 301A-Eiler 3
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Balance Sheet: Usefulness Provides information useful for evaluating: Capital structure Rates of return Analyzing Liquidity Solvency Financial flexibility Net Working Capital (i.e., Total Assets – Total Liabilities) The balance sheet reports a company’s financial position at a point in time (e.g. Balance Sheet as of September 30, Accounting 301A-Eiler 4
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Balance Sheet: Limitations Use of Historical Cost: Most assets and liabilities are reported at historical cost – is this relevant? What is an alternative to Historical Cost? Use of Judgments and Estimates: Allowance for Doubtful Accounts, Useful lives for PP&E, Warranty Reserves, etc. Omitted Items: If the amount of an asset or liability cannot be objectively determined, it is omitted. Examples: Accounting 301A-Eiler 5
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Classified Balance Sheet Presentation of Assets Generally listed in order of liquidity Liquidity – length of time required to realize the economic benefits of owning the asset. Classified as “Current” or “Non-Current”. Current – expect economic benefit to be realized in one year from balance sheet date, or within one operating cycle, whichever is longer. Accounting 301A-Eiler 6
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Classified Balance Sheet (cont.) Presentation of Liabilities Classified as “Current” or “Non-Current”. Current – obligations expected to be liquidated either through the use of current assets or the creation of other current liabilities. Examples : Payables resulting from acquisition of goods and services Unearned revenues Other – including portion of long-term debt to be paid in the current period. Accounting 301A-Eiler 7
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Classified Balance Sheet (cont.) Measurement of Liabilities Liabilities are measured using a variety of techniques. Some are reported at an amount equal to actual future payment.
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This note was uploaded on 11/08/2011 for the course ECON 102 taught by Professor Smith during the Spring '11 term at Saddleback.

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ch05s - Chapter 5 Balance Sheet and Statement of Cash Flows...

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