Chapter 5-1

Chapter 5-2

C H A P T E R C H A P T E R 55

BALANCE SHEET AND BALANCE SHEET AND STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS

Intermediate Accounting13th Edition

Kieso, Weygandt, and Warfield

Chapter 5-3

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

2.2. Identify the major classifications of the balance sheet.Identify the major classifications of the balance sheet.

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

formats.formats.

4.4. Determine which balance sheet information requires Determine which balance sheet information requires

supplemental disclosure.supplemental disclosure.

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

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

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

8.8. Prepare a statement of cash flows.Prepare a statement of cash flows.

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

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter 5-4

Balance SheetBalance Sheet Statement of Cash Statement of Cash FlowsFlows

UsefulnessUsefulness

LimitationsLimitations

ClassificationClassification

Additional information Additional information

reportedreported

Techniques of Techniques of

disclosuredisclosure

PurposePurpose

Content and formatContent and format

PreparationPreparation

UsefulnessUsefulness

Balance Sheet and Statement of Cash Balance Sheet and Statement of Cash FlowsFlows

Balance Sheet and Statement of Cash Balance Sheet and Statement of Cash FlowsFlows

Chapter 5-5

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

Chapter 5-6

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

Chapter 5-7

Three General Classifications

Assets, Liabilities, and Stockholders’ Equity

Companies further divide these classifications:

Classification in the Balance Sheet

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance SheetBalance SheetBalance SheetBalance Sheet

Illustration 5-1Illustration 5-1

Chapter 5-8

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

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance SheetBalance SheetBalance SheetBalance Sheet

Illustration 5-2Illustration 5-2

Chapter 5-9

ReviewReview

The correct order to present current assets isThe correct order to present current assets is

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

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

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

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

Balance SheetBalance SheetBalance SheetBalance Sheet

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Chapter 5-10

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

Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”

Illustration 5-Illustration 5-33

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Chapter 5-11

Portfolios

Short-Term Investments

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

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 – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”

Chapter 5-12

Short-Term Investments

LO 2 Identify the major classifications of the balance sheet.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”

Illustration 5-5Illustration 5-5Balance Sheet Presentationof Investments in Securities

Chapter 5-13

Claims held against customers and others for money, goods, or services.

Accounts receivable – oral promises

Notes receivable – written promises

Major categories of receivables should be shown in the balance sheet or the related notes.

Receivables

LO 2 Identify the major classifications of the balance sheet.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”

Chapter 5-14

Accounts Receivable – Presentation Options

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Current Assets:Current Assets:

Cash Cash $ 346$ 346

Accounts receivableAccounts receivable 500 500

Less allowance for doubtful accountsLess allowance for doubtful accounts 25 25 475 475

Inventory Inventory 812812

Total current assets Total current assets $1,633$1,633

Current Assets:Current Assets:

Cash Cash $ 346$ 346

Accounts receivable, Accounts receivable, net of $25 allowancenet of $25 allowance 475475

Inventory Inventory 812812

Total current assets Total current assets $1,633$1,633

11

22

Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”

Chapter 5-15

Receivables

LO 2 Identify the major classifications of the balance sheet.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”

Illustration 5-6Illustration 5-6Balance Sheet Presentationof Receivables

Chapter 5-16

Inventories

LO 2 Identify the major classifications of the balance sheet.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”

Company discloses:

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

Method of pricing (e.g., FIFO or LIFO). Illustration 5-Illustration 5-

77

Chapter 5-17

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

insuranceinsurance

suppliessupplies

advertisingadvertising

Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE

rentrent

maintenance on maintenance on equipmentequipment

Prepayments often occur in regard to:Prepayments often occur in regard to:

Prepaid Expenses

LO 2 Identify the major classifications of the balance sheet.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”

Chapter 5-18

Prepaid Expenses

LO 2 Identify the major classifications of the balance sheet.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”

Illustration 5-Illustration 5-99

Chapter 5-19

Current Assets - “Summary”

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance Sheet (in thousands)

Current assets

Cash 285,000$

ST I nvestments 140,000

Accounts receivable 777,000

I nventory 402,000

Prepaid expenses 170,000

Total current assets 1,774,000

Investments:

I nvesment in ABC bonds 321,657

I nvestment in UC I nc. 253,980

Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”Balance Sheet – “Current Assets”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.

Chapter 5-20

Generally consists of four types:

SecuritiesSecurities

Fixed assetsFixed assets

Special fundsSpecial funds

Nonconsolidated subsidiariesNonconsolidated subsidiaries or affiliated companies.

Long-Term Investments

LO 2 Identify the major classifications of the balance sheet.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”

Chapter 5-21

Long-Term Investments

Securities Securities Securities Securities I nvestments:

I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Cash surrender value 84,321 I nvestment in Uncon. Sub. 457,836

Total investments 2,696,592 Property, Plant, and Equip.

Building 1,375,778 Land 975,000

LO 2 Identify the major classifications of the balance sheet.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”

bonds,

stock, and

long-term notesFor marketable securities,

management’s intent determines current or noncurrent classification.

Balance Sheet (in thousands)

Current assets

Cash 285,000$

Chapter 5-22

Fixed Assets Fixed Assets Fixed Assets Fixed Assets

I nvestments:

I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Cash surrender value 84,321 I nvestment in Uncon. Sub. 457,836

Total investments 2,696,592 Property, Plant, and Equip.

Building 1,375,778 Land 975,000

LO 2 Identify the major classifications of the balance sheet.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”

Land held for speculation

Long-Term Investments

Balance Sheet (in thousands)

Current assets

Cash 285,000$

Chapter 5-23

Special Funds Special Funds Special Funds Special Funds

I nvestments:

I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Cash surrender value 84,321 I nvestment in Uncon. Sub. 457,836

Total investments 2,696,592 Property, Plant, and Equip.

Building 1,375,778 Land 975,000

LO 2 Identify the major classifications of the balance sheet.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”

Sinking fund

Pensions fund

Cash surrender value of life insurance

Long-Term Investments

Balance Sheet (in thousands)

Current assets

Cash 285,000$

Chapter 5-24

NonconsolidatNonconsolidated ed

Subsidiaries Subsidiaries or Affiliated or Affiliated Companies Companies

NonconsolidatNonconsolidated ed

Subsidiaries Subsidiaries or Affiliated or Affiliated Companies Companies

I nvestments:

I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Cash surrender value 84,321 I nvestment in Uncon. Sub. 457,836

Total investments 2,696,592 Property, Plant, and Equip.

Building 1,375,778 Land 975,000

LO 2 Identify the major classifications of the balance sheet.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”

Long-Term Investments

Balance Sheet (in thousands)

Current assets

Cash 285,000$

Chapter 5-25

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 I ntangibles

Goodwill 3,000,000 Patents 177,000 Trademarks 40,000

LO 2 Identify the major classifications of the balance sheet.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”

Assets of a durable nature used in the regular operations of the business.

Balance Sheet (in thousands)

Current assets

Cash 285,000$

Chapter 5-26

Intangibles

Accumulated depreciation (975,000) Total PP&E 2,170,386

I ntangibles

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 Def erred income tax 40,000

Total other 173,000

LO 2 Identify the major classifications of the balance sheet.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”

Lack physical substance and are not financial instruments.

Limited life intangibles amortized.

Indefinite-life intangibles tested for impairment.

Balance Sheet (in thousands)

Current assets

Cash 285,000$

Chapter 5-27 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Exercise”Balance Sheet – “Exercise”Balance Sheet – “Exercise”Balance Sheet – “Exercise”

Intangibles (BE5-6): KC’s adjusted trial balance contained the following asset accounts at December 31, 2010: 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

$140,000

Chapter 5-28

Other Assets

I ntangibles

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 Def erred income tax 40,000

Total other 173,000 Total Assets 9,210,978$

LO 2 Identify the major classifications of the balance sheet.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”

This section should include only unusual items sufficiently different from assets in the other categories.

Balance Sheet (in thousands)

Current assets

Cash 285,000$

Chapter 5-29

“Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance SheetBalance SheetBalance SheetBalance 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

I ncome 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

Def erred income taxes 77,909

Total long-term liabilities 1,403,209

Stockholders' equity

Chapter 5-30 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance SheetBalance SheetBalance SheetBalance Sheet

Balance Sheet (in thousands)

Current liabilities

Notes payable 233,450$

Accounts payable 131,800

Accrued compensation 43,000

Unearned revenue 17,000

I ncome 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

Def erred income taxes 77,909

Total long-term liabilities 1,403,209

Stockholders' equity

“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

Chapter 5-31 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance Sheet – “Exercise”Balance Sheet – “Exercise”Balance Sheet – “Exercise”Balance Sheet – “Exercise”

Long-Term Liabilities (BE5-9): Included in Adams Company’s December 31, 2010, trial balance are the following accounts: Accounts Payable $220,000; Pension Liability $375,000; Discount on Bonds Payable $29,000; Advances from Customers $41,000; Bonds Payable $400,000; 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 liability

$375,000Bonds payable

400,000Discount on bonds payable

(29,000)Total

746,000

Chapter 5-32

Three parts, (1) Capital Stock,

(2) Additional Paid-In Capital, and

(3) Retained Earnings.

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance SheetBalance SheetBalance SheetBalance Sheet

Owners’ Equity

Illustration 5-Illustration 5-1515

Chapter 5-33

(a) Investment in preferred stock

LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.

Balance Sheet Classification ExerciseBalance Sheet Classification ExerciseBalance Sheet Classification ExerciseBalance Sheet Classification Exercise

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

Chapter 5-34

Classified Balance Sheet

Account form

Report form

Balance Sheet - FormatBalance Sheet - FormatBalance Sheet - FormatBalance Sheet - Format

Accounting Trends and Techniques—2007 (New York: AICPA) indicates that all of the 600 companies surveyed use either the “report form” (524) or the “account form” (76), sometimes collectively referred to as the “customary form.”

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

Chapter 5-35 LO 3 Prepare a classified balance sheet using the report and LO 3 Prepare a classified balance sheet using the report and

account formats.account formats.

Balance Sheet - FormatBalance Sheet - FormatBalance Sheet - FormatBalance Sheet - Format

Account FormIllustration 5-Illustration 5-

1616

Chapter 5-36

Balance Sheet Balance Sheet -Format-Format

Balance Sheet Balance Sheet -Format-Format

LO 3LO 3

Report Form

Illustration 5-Illustration 5-1616

Chapter 5-37

Contingencies

Accounting Policies

Contractual Situations

Fair Values

Additional Information ReportedAdditional Information ReportedAdditional Information ReportedAdditional Information Reported

There are normally four types of information that are supplemental to account titles and amounts presented in the balance sheet:

LO 4 Determine which balance sheet LO 4 Determine which balance sheet information requires supplemental information requires supplemental disclosure.disclosure.

Chapter 5-38

Parenthetical Explanations

Notes

Cross-Reference and Contra Items

Supporting Schedules

Terminology

Techniques of DisclosureTechniques of DisclosureTechniques of DisclosureTechniques of Disclosure

LO 5 Describe the major disclosure techniques for the balance LO 5 Describe the major disclosure techniques for the balance sheet.sheet.

Chapter 5-39

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 6 Indicate the purpose of the statement of cash flows.LO 6 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.”

Chapter 5-40

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

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 6 Indicate the purpose of the statement of cash flows.LO 6 Indicate the purpose of the statement of cash flows.

Chapter 5-41

Three different activities:

Operating,

Content and Format

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 7 Identify the content of the statement of cash flows.LO 7 Identify the content of the statement of cash flows.

Investing, Financing

Illustration 5-Illustration 5-2424

Chapter 5-42

Content and Format

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

OperatingOperatingOperatingOperating

Cash inflows and outflows from operations.

InvestingInvestingInvestingInvesting

Cash inflows and outflows from non-current assets.

FinancingFinancingFinancingFinancing

Cash inflows and outflows from non-current liabilities and equity.

The statement’s value is that it helps users evaluate liquidity, solvency, and financial flexibility.

LO 7 Identify the content of the statement of cash flows.LO 7 Identify the content of the statement of cash flows.

Chapter 5-43

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 7 Identify the content of the statement of cash flows.LO 7 Identify the content of the statement of cash flows.

Illustration 5-Illustration 5-2525

Chapter 5-44

Information obtained from several sources:

(1) comparative balance sheets,

(2) the current income statement, and

(3) selected transaction data.

Preparation

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Chapter 5-45

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Statement of Cash Flows: On January 1, 2010, 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 2010 the company purchased land for $15,000. Illustration 5-26 shows the company’s comparative balance sheets at the beginning and end of 2010.

Chapter 5-46

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 8LO 8

Illustration 5-Illustration 5-2626

Illustration 5-Illustration 5-2727

Chapter 5-47

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 8LO 8

Preparing the Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a 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.

Reconcile the change in cash with the beginning and the ending cash balances.

Chapter 5-48

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Cash provided by operating activities

Illustration 5-Illustration 5-2828

Illustration 5-Illustration 5-2626

Illustration 5-27Illustration 5-27

Solution on notes page

Chapter 5-49

The The Statement of Statement of Cash FlowsCash Flows

The The Statement of Statement of Cash FlowsCash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Illustration 5-Illustration 5-2929

Illustration 5-26Illustration 5-26

Solution on notes page

Illustration 5-Illustration 5-2727

Next, the company determines its investing and financing activities.

Chapter 5-50

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Statement of Cash Flows (BE 5-12): Keyser Beverage Company reported the following items in the most recent year. Activity

Operating

FinancingOperating

OperatingInvesting

Operating

Financing

Required: Prepare a Statement of Cash Flows

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

Chapter 5-51

Statement of Cash Flow (in thousands)

Operating activities

Net income 40,000$ I ncrease in accounts receivable (10,000) I ncrease in accounts payable 5,000 Depreciation expense 40,000

Cash flow f rom operations 75,000 I nvesting activities

Purchase of equipment (8,000) Financing activities

Proceeds f rom notes payable 20,000 Dividends paid (5,000)

Cash flow f rom financing 15,000 I ncrease in cash 82,000$

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Noncash credit to revenues.

Noncash charge to expenses.

Statement of Cash Flows (BE 5-12)

Chapter 5-52

ReviewReview

In preparing a statement of cash flows, which of the In preparing a statement of cash flows, which of the following transactions would be considered an following transactions would be considered an investing activity?investing activity?

a. a. Sale of equipment at book valueSale of equipment at book value

b. b. Sale of merchandise on creditSale of merchandise on credit

c. c. Declaration of a cash dividendDeclaration of a cash dividend

d. d. Issuance of bonds payable at a discountIssuance of bonds payable at a discountreceivable.receivable.

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

Chapter 5-53

Issuance of common stock to purchase assets.

Conversion of bonds into common stock.

Issuance of debt to purchase assets.

Exchanges on long-lived assets.

The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement 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:

LO 8 Prepare a statement of cash flows.LO 8 Prepare a statement of cash flows.

Significant Noncash Activities

Chapter 5-54

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 Usefulness of the Statement of Cash FlowsFlows

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Without cash, a company will not survive.

Cash flow from Operations:

LO 9 Understand the usefulness of the statement of cash flows.LO 9 Understand the usefulness of the statement of cash flows.

Chapter 5-55

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Ratio indicates whether the company can pay off its current liabilities from its operations. A ratio near 1:1 is good.

LO 9 Understand the usefulness of the statement of cash flows.LO 9 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

=

Chapter 5-56

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

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 9 Understand the usefulness of the statement of cash flows.LO 9 Understand the usefulness of the statement of cash flows.

Financial Flexibility

Net Cash Provided by Operating Activities

Average Total Liabilities

Cash Debt Coverage

Ratio

=

Chapter 5-57

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

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 9 Understand the usefulness of the statement of cash flows.LO 9 Understand the usefulness of the statement of cash flows.

Free Cash FlowIllustration 5-Illustration 5-

3535

Chapter 5-58

ReviewReview

The current cash debt coverage ratio is often used to The current cash debt coverage ratio is often used to assessassess

a. financial flexibility.a. financial flexibility.

b. liquidity.b. liquidity.

c. profitability.c. profitability.

d. solvency.d. solvency.

LO 9 Understand the usefulness of the statement of cash flows.LO 9 Understand the usefulness of the statement of cash flows.

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Chapter 5-59

iGAAP requires that specific items be reported on the balance sheet. No such general standard exists in U.S. GAAP.

There are many similarities between U.S. and iGAAP related to balance sheet presentation. For example:

IAS 1 specifies minimum note disclosures, similar to U.S. GAAP on accounting policies and judgments.

Comparative prior-period information must be presented and financial statements must be prepared annually.

Current/noncurrent classification for assets and liabilities is

normally required.

Chapter 5-60

Interestingly, iGAAP statements may report property, plant, and equipment first in the balance sheet. Some companies report the subtotal “net assets,” which equals total assets minus total liabilities.

While the use of the term “reserve” is discouraged in U.S. GAAP, there is no such prohibition in iGAAP.

Chapter 5-61 LO 10 Identify the major types of financial ratios and what they measure.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.

Chapter 5-62 LO 10 Identify the major types of financial ratios and what they measure.LO 10 Identify the major types of financial ratios and what they measure.

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

Chapter 5-63 LO 10 Identify the major types of financial ratios and what they measure.LO 10 Identify the major types of financial ratios and what they measure.

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

Chapter 5-64 LO 10 Identify the major types of financial ratios and what they measure.LO 10 Identify the major types of financial ratios and what they measure.

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

Chapter 5-65

Chapter 5-66

Chapter 5-67

Chapter 5-68

Chapter 5-69

Chapter 5-70

Chapter 5-71

Chapter 5-72

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