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Chapter_5_Balance_Sheet_And_Statement_Of_Cash_Flows_Course_Notes

Chapter_5_Balance_Sheet_And_Statement_Of_Cash_Flows_Course_Notes

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CHAPTER 5 – BALANCE SHEET AND STATEMENT OF CASH  FLOWS 1. Usefulness 2. Limitations 3. Classification 4. Additional information reported 5. Techniques of disclosure Note: Our coverage will omit Section 2 Statement of Cash Flows  coverage (pages 197-205) 1. Usefulness of the Balance Sheet Evaluating the capital structure. Assess risk and future cash flows. Analyze the company’s:  o Liquidity,  o Solvency, and  o Financial flexibility. 2. Limitations of the Balance Sheet Most assets and liabilities are reported at historical cost. Use of judgments and estimates. Many items of financial value are omitted. 3. Classification in the Balance Sheet Three General Classifications  Assets, Liabilities, and Stockholders’ Equity Companies further divide these classifications:
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CHAPTER 5 – BALANCE SHEET AND STATEMENT OF CASH  FLOWS Assets Current assets Long-term investments Property, plant and equipment Intangible assets Other assets Liabilities and Owners’ equity Current liabilities Long-term debt Owners’ equity o Capital stock o Additional paid-in capital o Retained earnings Elements of the Balance Sheet Asset – Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or event. Liability – Probable future sacrifice of economic benefit arising from a present obligation of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Equity – Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Current Assets
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CHAPTER 5 – BALANCE SHEET AND STATEMENT OF CASH  FLOWS 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.  Item Basis of Valuation Cash and cash equivalents Fair value Short-term investments Generally fair value Receivables Estimated amount collectible Inventories Lower of cost or market Prepaid expenses Cost Cash Generally any monies available “on demand.” Cash equivalents  are short-term highly liquid investments that will  mature within three months or less.
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