SB-BMGT310-sess07_ch_5

SB-BMGT310-sess07_ch_5 - Balance Sheet and Balance Sheet...

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Unformatted text preview: Balance Sheet and Balance Sheet and Statement Statement of Cash Flows of Cash Flows Chapter 5 Chapter 5-1 Initially prepared by Coby Harmon, University of California, Santa Barbara revised by Stephen Brown Learning Objectives Learning Objectives 1. 2. 3. 4. 5. 6. 7. 8. 9. Explain the uses and limitations of a balance sheet. Identify the major classifications of the balance sheet. Prepare a classified balance sheet using the report and account formats. Determine which balance sheet information requires supplemental disclosure. Describe the major disclosure techniques for the balance sheet. Indicate the purpose of the statement of cash flows. Identify the content of the statement of cash flows. Prepare a statement of cash flows. Understand the usefulness of the statement of cash flows. Chapter 5-2 Balance Sheet Balance Sheet Used for: Evaluating the capital structure. Assess risk and future cash flows. Analyzing the company's: Liquidity, Solvency, and Financial flexibility. Limitations: Most assets and liabilities are reported at historical cost. Use of judgments and estimates. Many items of financial value are omitted. Chapter 5-3 LO 1 Explain the uses and limitations of a balance sheet. Balance Sheet Balance Sheet Classification in the Balance Sheet Three General Classifications Assets, Liabilities, and Stockholders' Equity Companies further divide these classifications: Illu s tra tio n 5 1 Ba la nc e S h e e t C la s s ific a tio n Chapter 5-4 LO 2 Identify the major classifications of the balance sheet. Balance Sheet Balance Sheet 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. Illu s tra tio n 5 2 Ac c o u nts a nd b a s is o f va lu a tio n Chapter 5-5 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Balance Sheet "Current Assets" Cash Generally any monies available "on demand." Cash equivalents are shortterm highly liquid investments that will mature within three months or less. Any restrictions or commitments must be disclosed. Illustration 53 Chapter 5-6 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Balance Sheet "Current Assets" Short-Term Investments Portfolios HeldtoMaturity Trading Available forSale Type Debt Debt or Equity Debt or Equity Valuation Amortized Cost Fair Value Fair Value Classification Current or Noncurrent Current Current or Noncurrent Chapter 5-7 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Balance Sheet "Current Assets" Receivables Claims held against customers and others for money, goods, or services. Accounts receivable no interest Notes receivable more formal, interest bearing Major categories of receivables should be shown in the balance sheet or the related notes. Chapter 5-8 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Balance Sheet "Current Assets" Accounts Receivable Presentation Options 1 1 Current Assets: Cash Accounts receivable 500 Less allowance for doubtful accounts 25 Inventory Total current assets Current Assets: Cash Accounts receivable, net of $25 allowance Inventory Total current assets $ 346 475 812 $1,633 2 2 $ 346 475 812 $1,633 Chapter 5-9 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Balance Sheet "Current Assets" Inventories Company discloses: basis of valuation (e.g., lowerofcostormarket) and the cost flow assumption implicit in the valuation method (e.g., FIFO or LIFO). Chapter 5-10 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Current Assets" Balance Sheet "Current Assets" Prepaid Expenses Payment of cash, that is recorded as an asset because service or benefit will be received in the future. Cash Payment BEFORE Expense Recorded Prepayments often occur in regard to: insurance supplies advertising Chapter 5-11 rent maintenance on equipment LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Long-Term Investments Generally consists of four types: Securities Securities Fixed assets Special funds Nonconsolidated subsidiaries or affiliated subsidiaries companies. Chapter 5-12 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Long-Term Investments Securities bonds, stock, and longterm notes For marketable securities, management's intent determines current or noncurrent classification. Chapter 5-13 Balance Sheet (in t h o us a nd s ) Current asset s Ca s h $ 8 5 ,0 0 0 2 I nvest ment s: I nve s m e nt in A BC b o nd s I nve s t m e nt in UC I nc . No t e s r e c e iva b le La nd h e ld f o r s pe c ula t io n S ink ing f und Pe ns io n f und Ca s h s ur r e nd e r va lue I nve s t m e nt in Unc o n. S ub . T o t a l inve s t m e nt s Propert y, Plant , and Equip. Build ing La nd 2 1,6 5 7 3 2 5 3 ,9 8 0 0 ,0 0 0 15 5 5 0 ,0 0 0 2 2 5 ,0 0 0 6 5 3 ,7 9 8 4 ,3 2 1 8 4 5 7 ,8 3 6 2 ,6 9 6 ,5 9 2 7 5 ,7 7 8 1,3 9 7 5 ,0 0 0 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Long-Term Investments Fixed Assets Land held for speculation Balance Sheet (in t h o us a nd s ) Current asset s Ca s h $ 8 5 ,0 0 0 2 I nvest ment s: I nve s m e nt in A BC b o nd s I nve s t m e nt in UC I nc . No t e s r e c e iva b le La nd h e ld f o r s pe c ula t io n S ink ing f und Pe ns io n f und Ca s h s ur r e nd e r va lue I nve s t m e nt in Unc o n. S ub . T o t a l inve s t m e nt s Propert y, Plant , and Equip. Build ing La nd Chapter 5-14 2 1,6 5 7 3 2 5 3 ,9 8 0 0 ,0 0 0 15 5 5 0 ,0 0 0 2 2 5 ,0 0 0 6 5 3 ,7 9 8 4 ,3 2 1 8 4 5 7 ,8 3 6 2 ,6 9 6 ,5 9 2 7 5 ,7 7 8 1,3 9 7 5 ,0 0 0 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Long-Term Investments Special Funds Sinking fund Pensions fund Cash surrender value of life insurance Balance Sheet (in t h o us a nd s ) Current asset s Ca s h $ 8 5 ,0 0 0 2 I nvest ment s: I nve s m e nt in A BC b o nd s I nve s t m e nt in UC I nc . No t e s r e c e iva b le La nd h e ld f o r s pe c ula t io n S ink ing f und Pe ns io n f und Ca s h s ur r e nd e r va lue I nve s t m e nt in Unc o n. S ub . T o t a l inve s t m e nt s Propert y, Plant , and Equip. Build ing La nd Chapter 5-15 2 1,6 5 7 3 2 5 3 ,9 8 0 0 ,0 0 0 15 5 5 0 ,0 0 0 2 2 5 ,0 0 0 6 5 3 ,7 9 8 4 ,3 2 1 8 4 5 7 ,8 3 6 2 ,6 9 6 ,5 9 2 7 5 ,7 7 8 1,3 9 7 5 ,0 0 0 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Long-Term Investments Balance Sheet (in t h o us a nd s ) Current asset s Ca s h $ 8 5 ,0 0 0 2 I nvest ment s: I nve s m e nt in A BC b o nd s I nve s t m e nt in UC I nc . No t e s r e c e iva b le La nd h e ld f o r s pe c ula t io n S ink ing f und Pe ns io n f und Ca s h s ur r e nd e r va lue I nve s t m e nt in Unc o n. S ub . T o t a l inve s t m e nt s Propert y, Plant , and Equip. Build ing La nd 2 1,6 5 7 3 2 5 3 ,9 8 0 0 ,0 0 0 15 5 5 0 ,0 0 0 2 2 5 ,0 0 0 6 5 3 ,7 9 8 4 ,3 2 1 8 4 5 7 ,8 3 6 2 ,6 9 6 ,5 9 2 7 5 ,7 7 8 1,3 9 7 5 ,0 0 0 Nonconsolidated Subsidiaries or Affiliated Companies Chapter 5-16 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Property, Plant, and Equipment Assets of a durable nature used in the regular operations of the business. Balance Sheet (in t h o us a nd s ) Current asset s Ca s h $ 8 5 ,0 0 0 2 T o t a l inve s t m e nt s 2 ,6 9 6 ,5 9 2 Propert y, Plant , and Equip. Build ing La nd Ma c h ine r y a nd e q uipm e nt Ca pit a l le as e s Le a s e h o ld im pr o ve m e nt s A c c um ula t e d d e pr e c ia t io n T o t a l PP&E I nt angibles Go o d will Pa t e nt s T r ad e m ar ks 7 5 ,7 7 8 1,3 9 7 5 ,0 0 0 2 3 4 ,9 5 8 3 8 4 ,6 5 0 5 ,0 0 0 17 (9 7 5 ,0 0 0 ) ,17 0 ,3 8 6 2 3 ,0 0 0 ,0 0 0 7 ,0 0 0 17 4 0 ,0 0 0 Chapter 5-17 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Intangibles Lack physical substance and are not financial instruments. Limited life intangibles amortized. Indefinite-life intangibles tested for impairment. Balance Sheet (in t h o us a nd s ) Current asset s Ca s h $ 8 5 ,0 0 0 2 A c c um ula t e d d e pr e c ia t io n T o t a l PP&E I nt angibles Go o d will Pa t e nt s T r ad e m ar k Fr a nc h is e s Co py r ig h t T o t a l int a ng ib le s Ot her asset s Pr e paid pe ns io n c o s t s De f e r r e d inc o m e t a x T o t a l o t h e r (9 7 5 ,0 0 0 ) ,17 0 ,3 8 6 2 2 ,0 0 0 ,0 0 0 7 ,0 0 0 17 4 0 ,0 0 0 5 ,0 0 0 12 5 5 ,0 0 0 2 ,3 9 7 ,0 0 0 3 ,0 0 0 13 4 0 ,0 0 0 3 ,0 0 0 17 Chapter 5-18 LO 2 Identify the major classifications of the balance sheet. Balance Sheet "Noncurrent Assets" Balance Sheet "Noncurrent Assets" Other Assets This section should include only unusual items sufficiently different from assets in the other categories. Balance Sheet (in t h o us a nd s ) Current asset s Ca s h $ 8 5 ,0 0 0 2 I nt angibles Go o d will Pa t e nt s T r ad e m a r k Fr a nc h is e s Co py r ig h t T o t al int a ng ib le s Ot her asset s Pr e paid pe ns io n c o s t s De f e r r e d inc o m e t a x T o t al o t h e r Tot al Asset s 2 ,0 0 0 ,0 0 0 7 ,0 0 0 17 4 0 ,0 0 0 5 ,0 0 0 12 5 5 ,0 0 0 2 ,3 9 7 ,0 0 0 3 ,0 0 0 13 4 0 ,0 0 0 3 ,0 0 0 17 $ 9 ,2 10 ,9 7 8 Chapter 5-19 LO 2 Identify the major classifications of the balance sheet. Balance Sheet Balance Sheet Current Liabilities "Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities." Balance Sheet (in t h o us and s ) Current liabilit ies No t e s pay a b le $ 3 3 ,4 5 0 2 A c c o unt s pay ab le 13 1,8 0 0 A c c r ue d c o m pe ns at io n 4 3 ,0 0 0 Une ar ne d r e ve nue ,0 0 0 17 I nc o m e t ax pay ab le 2 3 ,4 0 0 Cur r e nt m at ur it ie s LT d e b t 12 1,0 0 0 T o t al c ur r e nt lia b ilit ie s 5 6 9 ,6 5 0 Long- t erm liabilit ies Lo ng t e r m d e b t O b lig at io ns c a pit a l le a s e De f e r r e d inc o m e t ax e s T o t al lo ng t e r m liab ilit ie s St ockholders' equit y 9 7 9 ,5 0 0 3 4 5 ,8 0 0 7 7 ,9 0 9 2 ,0 9 3 ,8 5 9 Chapter 5-20 LO 2 Identify the major classifications of the balance sheet. Balance Sheet Balance Sheet Long-Term Liabilities "Obligations that a company does not reasonably expect to liquidate within the normal operating cycle." All covenants and restrictions must be disclosed. Chapter 5-21 Balance Sheet (in t h o us and s ) Current liabilit ies No t e s pay a b le $ 3 3 ,4 5 0 2 A c c o unt s pay ab le 13 1,8 0 0 A c c r ue d c o m pe ns at io n 4 3 ,0 0 0 Une ar ne d r e ve nue ,0 0 0 17 I nc o m e t ax pay ab le 2 3 ,4 0 0 Cur r e nt m at ur it ie s LT d e b t 12 1,0 0 0 T o t al c ur r e nt lia b ilit ie s 5 6 9 ,6 5 0 Long- t erm liabilit ies Lo ng t e r m d e b t O b lig at io ns c a pit a l le a s e De f e r r e d inc o m e t ax e s T o t al lo ng t e r m liab ilit ie s St ockholders' equit y 9 7 9 ,5 0 0 3 4 5 ,8 0 0 7 7 ,9 0 9 2 ,0 9 3 ,8 5 9 LO 2 Identify the major classifications of the balance sheet. Examples of Balance Sheet Examples of Balance Sheet IBM Citigroup Amazon Chapter 5-22 Transparency in Accounting Transparency in Accounting Chapter 5-23 Balance Sheet Balance Sheet Owners' Equity Companies usually divide equity into three parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings. Illustration 515 Chapter 5-24 LO 2 Identify the major classifications of the balance sheet. Pause before Statement of Cash Flows Pause before Statement of Cash Flows Example for class: E53 Chapter 5-25 The Statement of Cash Flows The Statement of Cash Flows One of the three basic objectives of financial reporting is "assessing the amounts, timing, and uncertainty of cash flows." Chapter 5-26 LO 6 Indicate the purpose of the statement of cash flows. The Statement of Cash Flows The Statement of Cash Flows Purpose of the Statement To provide relevant information about the cash receipts and cash payments of an enterprise during a period. The statement provides answers to the following questions: 1 . Where did the cash come from? 2 . What was the cash used for? 3 . What was the change in the cash balance? Chapter 5-27 LO 6 Indicate the purpose of the statement of cash flows. The Statement of Cash Flows The Statement of Cash Flows Content and Format Three different activities: Operating, Illustration 524 Investing, Financing Chapter 5-28 LO 7 Identify the content of the statement of cash flows. The Statement of Cash Flows The Statement of Cash Flows Preparation Information obtained from several sources: (1) comparative balance sheets, (2) the current income statement, and (3) selected transaction data. Chapter 5-29 LO 8 Prepare a statement of cash flows. The Statement of Cash Flows The Statement of Cash Flows Preparation BE 512 Midwest Beverage Company reported the following items in the most recent year. Activity Required: Prepare a Statement of Cash Flows Chapter 5-30 LO 8 Prepare a statement of cash flows. The Statement of Cash Flows The Statement of Cash Flows Preparation St at ement of Cash Flow (in t h o us a nd s ) Operat ing act ivit ies Ne t inc o m e I nc r e a s e in a c c o unt s r e c e ivab le I nc r e a s e in a c c o unt s pa y a b le De pr e c iat io n e x pe ns e Ca s h f lo w f r o m o pe r a t io ns I nvest ing act ivit ies Pur c h a s e o f e q uipm e nt Financing act ivit ies Pr o c e e d s f r o m no t e s pa y a b le Divid e nd s pa id Ca s h f lo w f r o m f ina nc ing I ncrease in cash Chapter 5-31 $ 0 ,0 0 0 4 (10 ,0 0 0 ) 5 ,0 0 0 4 0 ,0 0 0 7 5 ,0 0 0 (8 ,0 0 0 ) 2 0 ,0 0 0 (5 ,0 0 0 ) ,0 0 0 15 $ 2 ,0 0 0 8 Noncash credit to revenues. Noncash charge to expenses. LO 8 Prepare a statement of cash flows. Additional Information Reported Additional Information Reported Significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows or in the notes. Examples include: Issuance of common stock to purchase assets. Conversion of bonds into common stock. Issuance of debt to purchase assets. Exchanges on longlived assets. Chapter 5-32 LO 8 Prepare a statement of cash flows. Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Without cash, a company will not survive. Cash flow from Operations: High amount company able to generate sufficient cash to pay its bills. Low amount company may have to borrow or issue equity securities to pay bills. Chapter 5-33 LO 9 Understand the usefulness of the statement of cash flows. Proposed Presentation of Financial Proposed Presentation of Financial Statements (IASB/FASB project) Statements (IASB/FASB project) FASB/IASB Chapter 5-34 project Examples of Financial Statements Examples of Financial Statements IBM Citigroup Amazon SAP (IFRS) Chapter 5-35 Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Financial Liquidity Current Cash Debt Coverage Ratio Net Cash Provided by Operating Activities = Average Current Liabilities Ratio indicates whether the company can pay off its current liabilities from its operations. A ratio near 1:1 is good. Chapter 5-36 LO 9 Understand the usefulness of the statement of cash flows. Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Financial Flexibility Cash Debt Coverage Ratio Net Cash Provided by Operating Activities = Average Total Liabilities This ratio indicates a company's ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets employed in its operations. Chapter 5-37 LO 9 Understand the usefulness of the statement of cash flows. Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Free Cash Flow Illustration 534 The amount of discretionary cash flow a company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity. Chapter 5-38 LO 9 Understand the usefulness of the statement of cash flows. ...
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This note was uploaded on 02/07/2012 for the course BMGT 310 taught by Professor Mckinney during the Fall '08 term at Maryland.

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