Intermed Acc 1 Ppt Ch05

8/13/2019 Intermed Acc 1 Ppt Ch05

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Prepared byCoby Harmon

University of California, Santa Barbara

IntermediateAccounting


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Intermediate Accounting

14th Edition

5 Balance Sheet andStatement of Cash Flows

Kieso, Weygandt, and Warfield


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1. Explain the uses and limitations of a balance sheet.

2. Identify the major classifications of the balance sheet.

3. Prepare a classified balance sheet using the report and account

formats.

4. Indicate the purpose of the statement of cash flows.

5. Identify the content of the statement of cash flows.

6. Prepare a statement of cash flows.

7. Understand the usefulness of the statement of cash flows.

8. Determine which balance sheet information requires supplemental

disclosure.

9. Describe the major disclosure techniques for the balance sheet.

Learning Objectives


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Balance SheetAdditional

Information

Usefulness

Limitations

Classification

Supplemental

disclosures

Techniques of

disclosure

Balance Sheet and Statement of Cash Flows

Statement of Cash

Flows

Purpose

Content and format

Preparation

Usefulness


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Balance Sheet, also referred to as the statement of

financial position:

1. Reports assets, liabilities, and equity at a specific date.

2. Provides information about resources, obligations to

creditors, and equity in net resources.

3. Helps in predicting amounts, timing, and uncertainty of

future cash flows.

Balance Sheet

LO 1 Explain the uses and limitat ion s of a balance sheet.


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Computing rates of return.

Evaluating the capital structure.

Assess risk and future cash flows.

Analyze the companys:

Liquidity,

Solvency, and

Financial flexibility.

Balance Sheet

Usefulness of the Balance Sheet



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Most assets and liabilities are reported at historical

cost.

Use of judgments and estimates.

Many items of financial value are omitted.

Limitations of the Balance Sheet

Balance Sheet



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Classification

LO 2 Identi fy the major classif icat io ns of the balance sheet.

Balance Sheet


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Illustration 5-1

In practice you usually see little departure from these major subdivisions.

Balance Sheet

Classification



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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.

Current Assets

Classification in the Balance Sheet

Illustration 5-2



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Review

The correct order to present current assets is

a. Cash, accounts receivable, prepaid items, inventories.

b. Cash, accounts receivable, inventories, prepaid items.

c. Cash, inventories, accounts receivable, prepaid items.

d. Cash, inventories, prepaid items, accounts receivable.




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Generally any monies available on demand.

Cash equivalents- short-term highly liquid investments

that mature within three months or less. Restrictions or commitments must be disclosed.

Cash

LO 2

Illustration 5-3

Balance SheetCurrent Assets


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Illustration 5-4

Balance SheetRestricted Cash

Cash




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Portfolios Type Valuation Classification

Held-to-Maturity Debt AmortizedCost Current orNoncurrent

TradingDebt orEquity

Fair Value Current

Available-for-Sale

Debt orEquity

Fair ValueCurrent orNoncurrent

Short-Term Investments




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Illustration 5-5

Balance Sheet Presentation of

Investments in Securities

Short-Term Investments




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Major categories of receivables should be shown in the

balance sheet or the related notes.

A company should clearly identify

Anticipated loss due to uncollectibles.

Amount and nature of any nontrade receivables.

Receivables used as collateral.

Receivables




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ReceivablesIllustration 5-6

Balance Sheet Presentation

of Receivables




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Inventories

Disclose:

Basis of valuation (e.g., lower-of-cost-or-market).

Cost flow assumption (e.g., FIFO or average cost).

LO 2

Illustration 5-6



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Payment of cash, that is recorded as an asset becauseservice or benefit will be received in the future.

insurance

supplies

advertising

Cash Payment Expense RecordedBEFORE

rent

taxes

Prepayments often occur in regard to:

Prepaid Expenses




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Prepaid Expenses

Illustration 5-9




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Current Assets - Summary

Balance Sheet (in thousands)

Current assets

Cash 285,000$ST Investments 140,000

Accounts receivable 777,000

Inventory 402,000

Prepaid expenses 170,000

Total current assets 1,774,000Investments:

Invesment in ABC bonds 321,657

Investment in UC Inc. 253,980

Cash and other assets

a company expects to

convert into cash,

sell, or

consume

either in one year orinthe operating cycle,

whichever is longer.




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Long-term Investments

1. Securities(bonds, common stock, or long-term notes).

2. Tangible fixed assetsnot currently used in operations

(land held for speculation).

3. Special funds(sinking fund, pension fund, or plant

expansion fund.

4. Non-consolidated subsidiariesor affilated companies.


Non-Current Assets



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Portfolios Type Valuation Classification

Held-to-Maturity Debt

AmortizedCost

Current orNoncurrent

TradingDebt orEquity

Fair Value Current

Available-for-Sale

Debt orEquity

Fair ValueCurrent orNoncurrent

Balance SheetNoncurrent Assets

Long-Term Investments



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Long-TermInvestments

SecuritiesInvestments:


Investment in UC Inc. 253,980Notes receivable 150,000

Land held for speculation 550,000

Sinking fund 225,000

Pension fund 653,798

Cash surrender value 84,321Investment in Uncon. Sub. 457,836

Total investments 2,696,592

Property, Plant, and Equip.

Building 1,375,778

Land 975,000

bonds,

stock, and

long-term notes

For marketable securities,

managements intent

determines current or

noncurrent classification.


Current assets

Cash 285,000$

LO 2



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Investments:









Building 1,375,778

Land 975,000



Current assets

Cash 285,000$

Fixed Assets

Land held for

speculation

LO 2


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Investments:









Building 1,375,778

Land 975,000



Current assets

Cash 285,000$

Special Funds Sinking fund

Pensions fund

Cash surrender

value of life

insurance

LO 2


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Investments:









Building 1,375,778

Land 975,000



Current assets

Cash 285,000$

Nonconsolidated

Subsidiaries orAffiliated

Companies

LO 2


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Long-Term InvestmentsIllustration 5-10

Balance Sheet

Presentation of

Long-Term Investments




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Tangible long-lived assets used in the regular operations

of the business.

Physical propertysuch as land, buildings, machinery,

furniture, tools, and wasting resources (minerals).

With the exception of land, a company either depreciates

(e.g., buildings) or depletes (e.g., oil reserves) theseassets.

Property, Plant, and Equipment




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5-30 LO 2 Identi fy the major classif icat io ns of the balance sheet.

Property, Plant, andEquipment



Building 1,375,778

Land 975,000

Machinery and equipment 234,958

Capital leases 384,650

Leasehold improvements 175,000

Accumulated depreciation (975,000)

Total PP&E 2,170,386Intangibles

Goodwill 3,000,000

Patents 177,000

Trademarks 40,000


Tangible assets used

in the regular

operations of the

business.


Current assets

Cash 285,000$


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Illustration 5-11Balance Sheet Presentation of

Property, Plant, and Equipment




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Total PP&E 2,170,386

Intangibles

Goodwill 2,000,000

Patents 177,000

Trademark 40,000

Franchises 125,000

Copyright 55,000

Total intangibles 2,397,000

Other assets

Prepaid pension costs 133,000

Deferred income tax 40,000

Total other 173,000

Total Assets 9,210,978$



Current assets

Cash 285,000$Intangibles

Lack physical substance

and are not financial

instruments.

Limited life

intangibles amortized.

Indefinite-life

intangibles tested forimpairment.

LO 2


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Int ang ib les (BE5-6): Patrick Corporation adjusted trial balancecontained the following asset accounts at December 31, 2012: Prepaid

Rent $12,000; Goodwill $50,000; Franchise Fees Receivable $2,000;

Franchises $47,000; Patents $33,000; Trademarks $10,000. Prepare

the intangible assets sectionof the balance sheet.

Intangibles

Goodwill $ 50,000

Franchises 47,000

Patents 33,000

Trademarks 10,000

Total $140,000




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Intangible AssetsIllustration 5-12

Balance Sheet

Presentation of

Intangible Assets




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Items vary in practice. Can include:

Long-term prepaid expenses

Non-current receivables

Assets in special funds

Property held for sale

Restricted cash or securities

Other Assets




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Total PP&E 2,170,386

Intangibles

Goodwill 2,000,000

Patents 177,000

Trademark 40,000

Franchises 125,000

Copyright 55,000

Total intangibles 2,397,000

Other assets

Prepaid pension costs 133,000

Deferred income tax 40,000

Total other 173,000

Total Assets 9,210,978$



Current assets

Cash 285,000$Other Assets

This section should

include only unusual items

sufficiently different from

assets in the other

categories.

LO 2


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Obligations that a

company reasonably

expects to liquidate eitherthrough the use of current

assets or the creation of

other current liabilities.


Current Liabilities Balance Sheet (in thousands)Current liabilities

Notes payable 233,450$

Accounts payable 131,800

Accrued compensation 43,000

Unearned revenue 17,000Income tax payable 23,400

Current maturities LT debt 121,000

Total current liabilities 569,650

Long-term liabilities

Long-term debt 979,500

Obligations capital lease 345,800

Deferred income taxes 77,909

Total long-term liabilities 1,403,209

Stockholders' equity



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Current LiabilitiesIllustration 5-13


of Current Liabilities




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Obligations that a

company does not

reasonably expect toliquidate within the normal

operating cycle.

All covenants andrestrictions must be

disclosed.

Long-Term Liabilities Balance Sheet (in thousands)Current liabilities

Notes payable 233,450$

Accounts payable 131,800

Accrued compensation 43,000

Unearned revenue 17,000Income tax payable 23,400

Current maturities LT debt 121,000

Total current liabilities 569,650


Long-term debt 979,500

Obligations capital lease 345,800

Deferred income taxes 77,909

Total long-term liabilities 1,403,209

Stockholders' equity




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Long -Term Liabi l i t ies (BE5-9): Included in Adams CompanysDecember 31, 2012, trial balance are the following accounts: Accounts

Payable $220,000; Pension Asset/Liability $375,000; Discount on

Bonds Payable $29,000; Unearned Revenue $41,000; Bonds Payable

$400,000; Salaries and Wages Payable $27,000; Interest Payable

$12,000; Income Taxes Payable $29,000. Prepare the long-termliabilitiessection of the balance sheet.


Pension Asset/liability $375,000

Bonds payable 400,000

Discount on bonds payable (29,000)

Total 746,000


Balance SheetLong-Term Liabilities


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Non-Current LiabilitiesIllustration 5-14


of Non-Current Liabilities


Balance SheetLong-Term Liabilities


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Owners Equity


Balance SheetOwners Equity


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Illustration 5-15


of Stockholders Equity

Owners Equity


Balance SheetOwners Equity


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(a) Investment in preferred stock


Account

(b) Treasury stock

(c) Common stock

(d) Cash dividends payable

(e) Accumulated depreciation

(f) Interest payable

(g) Deficit(h) Trading securities

(i) Unearned revenue

(a) Current asset/Investment

(b) Stockholders Equity

(c) Stockholders Equity

(d) Current liability

(e) Contra-asset

(f) Current liability

(g) Stockholders Equity(h) Current asset

(i) Current liability

Classification



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Classified Balance Sheet

Account form

Report form

Balance Sheet Format

Acc oun t ing Trends and Techn iques2009(New York:AICPA) indicates that all of the 500 companies surveyed

use either the report form (438) or the account form (62),sometimes collectively referred to as the customary form.

LO 3 Prepare a classi f ied balance sheet using the report and accoun t formats.


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5-46 LO 3 Prepare a classi f ied balance sheet using the report and accoun t formats.

Balance Sheet Format

Account Form Illustration 5-16


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Balance Sheet

Format

Report Form

Illustration 5-16


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Statement of Cash Flows

LO 4 Indicate the purp ose of the statement of cash f lows.

One of the three basic objectives of financialreporting is

assessing the amounts, timing, and

uncertainty of cash flows.


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To provide relevant information about the cash receipts

and cash payments of an enterprise during a period.

The statement provides answers to the followingquestions:

1. Where did the cash come from?

2. What was the cash used for?

3. What was the change in the cash balance?

Purpose of the Statement of Cash Flows


LO 4 Indicate the purp ose of the statement of cash f lows.


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Three different activities:

Operating,

Content and Format


LO 5 Ident i fy the content of the statement of cash f lows.

Investing, Financing

Illustration 5-17

Basic Format of Cash

Flow Statement


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Financing

Cash inflows and

outflows from

non-current

liabilities and

equity.


Operating

Cash inflows and

outflows that

enter into the

determination of

net income.

Investing

Cash inflows and

outflows from

non-current

assets.

The statements value is that it helps users evaluate liquidity, solvency,

and financial flexibility.


Content and Format


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Illustration 5-18


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Information obtained from several sources:

(1) comparative balance sheets,

(2) the current income statement, and

(3) selected transaction data.

Sources of Information

Preparation of the Statement of Cash Flows

LO 6 Prepare a basic statement o f cash f lows.


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Statement of Cash Flow s: On January 1, 2012, in its firstyear of operations, Telemarketing Inc. issued 50,000 shares of

$1 par value common stock for $50,000 cash. The company

rented its office space, furniture, and telecommunications

equipment and performed marketing services throughout thefirst year. In June 2012 the company purchased land for

$15,000. Illustration 5-19 shows the companys comparative

balance sheets at the beginning and end of 2012.



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LO 6

Illustration 5-19

Illustration 5-20


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Preparing the Statement of Cash FlowsDetermine:

1. Cash provided by (or used in) operating activities.

2. Cash provided by or used in investing and financing

activities.

3. Determine the change (increase or decrease) in cash

during the period.4. Reconcile the change in cash with the beginning and the

ending cash balances.


St t t f C h Fl


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Cash provided by operating activitiesIllustration 5-21

Illustration 5-19

Illustration 5-20


Illustration 5-19


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Statement of

Cash Flows

Illustration 5-21

Next, the company

determines its investingand financing activities.

Illustration 5-20


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Statement o f Cash Flow s (BE 5-12): Keyser BeverageCompany reported the following items in the most recent year.

Activity

Operating

Financing

Operating

Operating

Investing

Operating

Financing

Required:Compute net cash provided by operating activities.

Net income $40,000

Dividends paid 5,000

Increase in accounts receivable 10,000

Increase in accounts payable 7,000

Purchase of equipment 8,000

Depreciation expense 4,000

Issue of notes payable 20,000



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Statement of Cash Flow (in thousands)

Operating activities

Net income 40,000$

Increase in accounts receivable (10,000)

Increase in accounts payable 5,000Depreciation expense 40,000

Cash flow from operations 75,000

Investing activities

Purchase of equipment (8,000)

Financing activitiesProceeds from notes payable 20,000

Dividends paid (5,000)

Cash flow from financing 15,000

Increase in cash 82,000$


Noncash charge toexpenses.

Statement o f Cash Flows (BE 5-12)


Noncash credit torevenues.


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ReviewIn preparing a statement of cash flows, which of the following

transactions would be considered an investing activity?

a. Sale of equipment at book value

b. Sale of merchandise on credit

c. Declaration of a cash dividend

d. Issuance of bonds payable at a discount receivable.




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Issuance of common stock to purchase assets.

Conversion of bonds into common stock. Issuance of debt to purchase assets.

Exchanges on long-lived assets.


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:

Significant Noncash Activities


Statement of Cash Flo s


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Illustration 5-23

Comprehensive



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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.

Usefulness of the Statement of Cash Flows

Without cash, a company will not survive.

Cash flow from Operations:

LO 7 Understand the usefulness of the statement of cash f lows .


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Ratio indicates whether the company can pay off its current

liabilities from its operations. A ratio near 1:1 is good.


Financial Liquidity

Net Cash Provided byOperating Activities

Average Current Liabilities

Current Cash

Debt Coverage

Ratio=


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This ratio indicates a companys ability to repay its liabilities

from net cash provided by operating activities, without havingto liquidate the assets employed in its operations.


Net Cash Provided byOperating Activities

Average Total Liabilities

Cash Debt

Coverage

Ratio=

Financial Liquidity


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The amount of discretionary cash flow a company has forpurchasing additional investments, retiring its debt, purchasing

treasury stock, or simply adding to its liquidity.


Illustration 5-28Free Cash Flow


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ReviewThe current cash debt coverage ratio is often used to assess

a. financial flexibility.

b. liquidity.

c. profitability.

d. solvency.




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Supplemental Disclosures

Four types of information that are supplemental to accounttitles and amounts presented in the balance sheet:

LO 8 Determine which balance sheet inform at ion

requires supp lemental disclo sure.


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Parenthetical Explanations

Notes

Cross-Reference and Contra Items

Supporting Schedules

Terminology

Techniques of Disclosure

LO 9 Descr ibe the major disc losure techniqu es for the balance sheet.


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5-71 LO 10 Ident i fy the major types of f inancial rat ios and wh at they measure.

Using Ratios to Analyze PerformanceAnalysts and other interested parties can gather qualitative

information from financial statements by examining

relationships between items on the statements and identifying

trends in these relationships.

APPENDIX5A Ratio AnalysisA Reference


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Using Ratios to Analyze Performance Illustration 5A-1A Summary of Financial Ratios



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Specimen Financial Statements:


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APPENDIX5BSpecimen Financial Statements:

The Procter & Gamble Company

Specimen Financial Statements:


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5BSpecimen Financial Statements:


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RELEVANT FACTS IFRS recommends but does not require the use of the title

statement of financial position rather than balance sheet.

IFRS requires a classified statement of financial position except in

very limited situations. IFRS follows the same guidelines as thistextbook for distinguishing between current and noncurrent assets

and liabilities. However under GAAP, public companies must follow

SEC regulations, which require specific line items. In addition,

specific GAAP standards mandate certain forms of reporting this

information.

Under IFRS, current assets are usually listed in the reverse order of

liquidity. For example, under GAAP cash is listed first, but under

IFRS it is listed last.


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RELEVANT FACTS IFRS has many differences in terminology that you will notice in this

textbook.

Both IFRS and GAAP require disclosures about (1) accounting

policies followed, (2) judgments that management has made in theprocess of applying the entitys accounting policies, and (3) the key

assumptions and estimation uncertainty that could result in a

material adjustment to the carrying amounts of assets and liabilities

within the next financial year. Comparative prior period information

must be presented and financial statements must be preparedannually.

Use of the term reserve is discouraged in GAAP, but there is no

such prohibition in IFRS.


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Current assets under IFRS are listed generally:

a. by importance.

b. in the reverse order of their expected conversion to cash.

c. by longevity.

d. alphabetically.

IFRS SELF-TEST QUESTION


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Companies that use IFRS:

a. may report all their assets on the statement of financial position

at fair value.

b. are not allowed to net assets (assets 2 liabilities) on their

statement of financial positions.

c. may report noncurrent assets before current assets on the

statement of financial position.

d. do not have any guidelines as to what should be reported on the

statement of financial position.



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A company has purchased a tract of land and expects to build a

production plant on the land in approximately 5 years. During the 5

years before construction, the land will be idle. Under IFRS, the land

should be reported as:

a. land expense.

b. property, plant, and equipment.

c. an intangible asset.

d. a long-term investment.


Copyright


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Copyright

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Intermed Acc 1 Ppt Ch05