5-1 prepared by coby harmon university of california, santa barbara intermediate accounting
TRANSCRIPT
5-1
Prepared by Coby Harmon
University of California, Santa Barbara
Intermediate Accounting
5-2
Intermediate Accounting
14th Edition
5Balance Sheet and Statement of Cash Flows
Kieso, Weygandt, and Warfield
5-3
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 ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
5-4
Balance SheetAdditional
Information
Usefulness
Limitations
Classification
Supplemental disclosures
Techniques of disclosure
Balance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash FlowsBalance Sheet and Statement of Cash Flows
Statement of Cash Flows
Purpose
Content and format
Preparation
Usefulness
5-5
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 SheetBalance SheetBalance SheetBalance Sheet
LO 1 Explain the uses and limitations of a balance sheet.
5-6
Computing rates of return.
Evaluating the capital structure.
Assess risk and future cash flows.
Analyze the company’s:
► Liquidity,
► Solvency, and
► Financial flexibility.
Balance SheetBalance SheetBalance SheetBalance Sheet
Usefulness of the Balance Sheet
LO 1 Explain the uses and limitations of a balance sheet.
5-7
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 SheetBalance SheetBalance SheetBalance Sheet
LO 1 Explain the uses and limitations of a balance sheet.
5-8
Classification
LO 2 Identify the major classifications of the balance sheet.
Balance SheetBalance SheetBalance SheetBalance Sheet
5-9
Illustration 5-1
In practice you usually see little departure from these major subdivisions.
Balance SheetBalance SheetBalance SheetBalance Sheet
Classification
LO 2 Identify the major classifications of the balance sheet.
5-10
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 SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
Illustration 5-2
LO 2 Identify the major classifications of the balance sheet.
5-11
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.
Classification in the Balance SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
LO 2 Identify the major classifications of the balance sheet.
5-12
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 Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-13
Illustration 5-4Balance Sheet—Restricted Cash
Cash
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-14
Portfolios Type Valuation Classification
Held-to-Maturity
DebtAmortized
CostCurrent or Noncurrent
TradingDebt or Equity
Fair Value Current
Available- for-Sale
Debt or Equity
Fair ValueCurrent or Noncurrent
Short-Term Investments
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-15
Illustration 5-5Balance Sheet Presentation of Investments in Securities
Short-Term Investments
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-16
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
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-17
ReceivablesIllustration 5-6Balance Sheet Presentationof Receivables
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-18
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
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-19
Payment of cash, that is recorded as an asset because service or benefit will be received in the future.
insurance
supplies
advertising
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
rent
taxes
Prepayments often occur in regard to:
Prepaid Expenses
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-20
Prepaid Expenses
Illustration 5-9
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-21
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 1,774,000
Investments:
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 or in
the operating cycle,
whichever is longer.
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”
5-22
Long-term Investments
1. Securities (bonds, common stock, or long-term notes).
2. Tangible fixed assets not currently used in operations
(land held for speculation).
3. Special funds (sinking fund, pension fund, or plant
expansion fund.
4. Non-consolidated subsidiaries or affilated companies.
Classification in the Balance SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
Non-Current Assets
LO 2 Identify the major classifications of the balance sheet.
5-23
Portfolios Type Valuation Classification
Held-to-Maturity
DebtAmortized
CostCurrent or Noncurrent
TradingDebt or Equity
Fair Value Current
Available- for-Sale
Debt or Equity
Fair ValueCurrent or Noncurrent
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Long-Term Investments
LO 2 Identify the major classifications of the balance sheet.
5-24
Long-Term Investments
Securities Securities Securities Securities Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment 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, management’s intent determines current or noncurrent classification.
Balance Sheet (in thousands)
Current assets
Cash 285,000$
LO 2
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
5-25
Long-Term Investments
Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836
Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Fixed Assets Fixed Assets Fixed Assets Fixed Assets
Land held for speculation
LO 2
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Long-Term Investments
Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836
Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Special Funds Special Funds Special Funds Special Funds
Sinking fund Pensions fund Cash surrender
value of life insurance
LO 2
5-27
Long-Term Investments
Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836
Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Nonconsolidated Nonconsolidated Subsidiaries or Subsidiaries or
Affiliated Affiliated Companies Companies
Nonconsolidated Nonconsolidated Subsidiaries or Subsidiaries or
Affiliated Affiliated Companies Companies
LO 2
5-28
Long-Term Investments Illustration 5-10Balance Sheet Presentation ofLong-Term Investments
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
5-29
Tangible long-lived assets used in the regular operations
of the business.
Physical property such 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) these
assets.
Property, Plant, and Equipment
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
5-30 LO 2 Identify the major classifications of the balance sheet.
Property, Plant, and Equipment
Total investments 2,696,592
Property, Plant, and Equip.
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 2,170,386
Intangibles
Goodwill 3,000,000
Patents 177,000
Trademarks 40,000
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Tangible assets used
in the regular
operations of the
business.
Balance Sheet (in thousands)
Current assets
Cash 285,000$
5-31
Illustration 5-11Balance Sheet Presentation of Property, Plant, and Equipment
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
5-32
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$
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Intangibles
Lack physical substance and are not financial instruments.
Limited life intangibles amortized.
Indefinite-life intangibles tested for impairment.
LO 2
5-33
Intangibles (BE5-6): Patrick Corporation adjusted trial balance
contained 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 section of the balance sheet.
Intangibles
Goodwill
$ 50,000Franchises
47,000Patents
33,000Trademarks
10,000Total
$140,000LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
5-34
Intangible Assets
Illustration 5-12Balance Sheet Presentation ofIntangible Assets
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
5-35
Items vary in practice. Can include:
Long-term prepaid expenses
Non-current receivables
Assets in special funds
Property held for sale
Restricted cash or securities
Other Assets
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
5-36
Total PP&E 2,170,386
Intangibles
Goodwill 2,000,000
Patents 177,000
Trademark 40,000
Franchises 125,000
Copyright 55,000
Total intangibles 2,397,000
Other assets
Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000
Total Assets 9,210,978$
Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Other Assets
This section should
include only unusual items
sufficiently different from
assets in the other
categories.
LO 2
5-37
“Obligations that a
company reasonably
expects to liquidate either
through the use of current
assets or the creation of
other current liabilities.”
Classification in the Balance SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
Current Liabilities Balance Sheet (in thousands)
Current liabilities
Notes payable 233,450$
Accounts payable 131,800
Accrued compensation 43,000
Unearned revenue 17,000
Income 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
LO 2 Identify the major classifications of the balance sheet.
5-38
Current LiabilitiesIllustration 5-13Balance Sheet Presentation of Current Liabilities
LO 2 Identify the major classifications of the balance sheet.
Classification in the Balance SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
5-39
“Obligations that a
company does not
reasonably expect to
liquidate within the normal
operating cycle.”
All covenants and
restrictions 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 17,000
Income 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
LO 2 Identify the major classifications of the balance sheet.
Classification in the Balance SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
5-40
Long-Term Liabilities (BE5-9): Included in Adams Company’s
December 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-term liabilities section of the balance sheet.
Long-term liabilities
Pension Asset/liability
$375,000Bonds payable
400,000Discount on bonds payable
(29,000)Total
746,000LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Long-Term Liabilities”Balance Sheet – “Long-Term Liabilities”Balance Sheet – “Long-Term Liabilities”Balance Sheet – “Long-Term Liabilities”
5-41
Non-Current LiabilitiesIllustration 5-14Balance Sheet Presentation of Non-Current Liabilities
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Long-Term Liabilities”Balance Sheet – “Long-Term Liabilities”Balance Sheet – “Long-Term Liabilities”Balance Sheet – “Long-Term Liabilities”
5-42
Owners’ Equity
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Owner’s Equity”Balance Sheet – “Owner’s Equity”Balance Sheet – “Owner’s Equity”Balance Sheet – “Owner’s Equity”
5-43
Illustration 5-15Balance Sheet Presentation of Stockholders’ Equity
Owners’ Equity
LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – “Owner’s Equity”Balance Sheet – “Owner’s Equity”Balance Sheet – “Owner’s Equity”Balance Sheet – “Owner’s Equity”
5-44
(a) Investment in preferred stock
Classification in the Balance SheetClassification in the Balance SheetClassification in the Balance SheetClassification in the Balance Sheet
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
LO 2 Identify the major classifications of the balance sheet.
5-45
Classified Balance Sheet
Account form
Report form
Balance Sheet FormatBalance Sheet FormatBalance Sheet FormatBalance Sheet Format
Accounting Trends and Techniques—2009 (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 classified balance sheet using the report and account formats.
5-46 LO 3 Prepare a classified balance sheet using the report and account formats.
Balance Sheet FormatBalance Sheet FormatBalance Sheet FormatBalance Sheet Format
Account FormIllustration 5-16
5-47LO 3
Balance Sheet Balance Sheet FormatFormat
Balance Sheet Balance Sheet FormatFormat
Report Form
Illustration 5-16
5-48
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
LO 4 Indicate the purpose of the statement of cash flows.
One of the three basic objectives of financial reporting is
“assessing the amounts, timing, and uncertainty of cash flows.”
5-49
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?
Purpose of the Statement of Cash Flows
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
LO 4 Indicate the purpose of the statement of cash flows.
5-50
Three different activities:
Operating,
Content and Format
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
LO 5 Identify the content of the statement of cash flows.
Investing, Financing
Illustration 5-17Basic Format of CashFlow Statement
5-51
FinancingFinancing
Cash inflows and
outflows from
non-current
liabilities and
equity.
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
OperatingOperating
Cash inflows and
outflows that
enter into the
determination of
net income.
InvestingInvesting
Cash inflows and
outflows from
non-current
assets.
The statement’s value is that it helps users evaluate liquidity, solvency,
and financial flexibility.
LO 5 Identify the content of the statement of cash flows.
Content and Format
5-52
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
LO 5 Identify the content of the statement of cash flows.
Illustration 5-18
5-53
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 FlowsPreparation of the Statement of Cash FlowsPreparation of the Statement of Cash FlowsPreparation of the Statement of Cash Flows
LO 6 Prepare a basic statement of cash flows.
5-54
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
Statement of Cash Flows: On January 1, 2012, in its first
year 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 the
first year. In June 2012 the company purchased land for
$15,000. Illustration 5-19 shows the company’s comparative
balance sheets at the beginning and end of 2012.
LO 6 Prepare a basic statement of cash flows.
5-55
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
LO 6
Illustration 5-19
Illustration 5-20
5-56
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
Preparing the Statement of Cash Flows
Determine:
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.
LO 6 Prepare a basic statement of cash flows.
5-57
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
Cash provided by operating activities Illustration 5-21
Illustration 5-19Illustration 5-20
LO 6 Prepare a basic statement of cash flows.
5-58
Statement of Statement of Cash FlowsCash Flows
Statement of Statement of Cash FlowsCash Flows
Illustration 5-21
Next, the company determines its investing and financing activities.
Illustration 5-19Illustration 5-20
5-59
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
Statement of Cash Flows (BE 5-12): Keyser Beverage Company 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 $40,000
Dividends paid 5,000
Increase in accounts receivable 10,000
Increase in accounts payable 7,000
Purchase of equipment 8,000
Depreciation expense 4,000
Issue of notes payable 20,000
LO 6 Prepare a basic statement of cash flows.
5-60
Statement of Cash Flow (in thousands)
Operating activities
Net income 40,000$
Increase in accounts receivable (10,000)
Increase in accounts payable 5,000
Depreciation expense 40,000
Cash flow from operations 75,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Proceeds from notes payable 20,000
Dividends paid (5,000)
Cash flow from financing 15,000
Increase in cash 82,000$
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
Noncash charge to expenses.
Statement of Cash Flows (BE 5-12)
LO 6 Prepare a basic statement of cash flows.
Noncash credit to revenues.
5-61
Review
In 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.
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
LO 6 Prepare a basic statement of cash flows.
5-62
Issuance of common stock to purchase assets.
Conversion of bonds into common stock.
Issuance of debt to purchase assets.
Exchanges on long-lived assets.
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
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
LO 6 Prepare a basic statement of cash flows.
5-63
Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
Illustration 5-23Comprehensive Statement of Cash Flows
5-64
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 FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness 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 flows.
5-65
Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash Flows
Ratio indicates whether the company can pay off its current
liabilities from its operations. A ratio near 1:1 is good.
LO 7 Understand the usefulness of the statement of cash flows.
Financial Liquidity
Net Cash Provided by Operating Activities
Average Current Liabilities
Current Cash Debt Coverage
Ratio =
5-66
Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash Flows
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.
LO 7 Understand the usefulness of the statement of cash flows.
Net Cash Provided by Operating Activities
Average Total Liabilities
Cash Debt Coverage
Ratio =
Financial Liquidity
5-67
Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash Flows
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.
LO 7 Understand the usefulness of the statement of cash flows.
Illustration 5-28
Free Cash Flow
5-68
Review
The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
LO 7 Understand the usefulness of the statement of cash flows.
Usefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash FlowsUsefulness of the Statement of Cash Flows
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Supplemental DisclosuresSupplemental DisclosuresSupplemental DisclosuresSupplemental Disclosures
Four types of information that are supplemental to account titles and amounts presented in the balance sheet:
LO 8 Determine which balance sheet information requires supplemental disclosure.
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Parenthetical Explanations
Notes
Cross-Reference and Contra Items
Supporting Schedules
Terminology
Techniques of DisclosureTechniques of DisclosureTechniques of DisclosureTechniques of Disclosure
LO 9 Describe the major disclosure techniques for the balance sheet.
5-71 LO 10 Identify the major types of financial ratios and what they measure.
Using Ratios to Analyze Performance
Analysts 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.
APPENDIXAPPENDIX 5A Ratio Analysis—A Reference
5-72 LO 10 Identify the major types of financial ratios and what they measure.
Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial Ratios
APPENDIXAPPENDIX 5A Ratio Analysis—A Reference
5-73 LO 10 Identify the major types of financial ratios and what they measure.
Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial Ratios
APPENDIXAPPENDIX 5A Ratio Analysis—A Reference
5-74 LO 10 Identify the major types of financial ratios and what they measure.
Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial Ratios
APPENDIXAPPENDIX 5A Ratio Analysis—A Reference
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APPENDIXAPPENDIX 5B Specimen Financial Statements:The Procter & Gamble Company
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APPENDIXAPPENDIX 5B Specimen Financial Statements:The Procter & Gamble Company
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APPENDIXAPPENDIX 5B Specimen Financial Statements:The Procter & Gamble Company
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APPENDIXAPPENDIX 5B Specimen Financial Statements:The Procter & Gamble Company
5-79
APPENDIXAPPENDIX 5B Specimen Financial Statements:The Procter & Gamble Company
5-80
APPENDIXAPPENDIX 5B Specimen Financial Statements:The Procter & Gamble Company
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APPENDIXAPPENDIX 5B Specimen Financial Statements:The Procter & Gamble Company
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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 this textbook 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 the process of applying the entity’s 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 prepared annually.
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.
IFRS SELF-TEST QUESTION
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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.
IFRS SELF-TEST QUESTION
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