c h a p t e r 5
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C H A P T E R 5. BALANCE SHEET AND STATEMENT OF CASH FLOWS. Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield. Learning Objectives. Explain the uses and limitations of a balance sheet. Identify the major classifications of the balance sheet. - PowerPoint PPT PresentationTRANSCRIPT
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 SheetStatement 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
Balance SheetBalance SheetBalance SheetBalance Sheet Analyze the companyAnalyze the company’’s: s:
LiquidityLiquidity “how quickly will my assets convert to cash ““how quickly will my assets convert to cash “
Creditor are interested in short term liquidity ratios .This ratios Creditor are interested in short term liquidity ratios .This ratios indicates whether a company will have the resources to pay its indicates whether a company will have the resources to pay its obligationsobligations
Greater Liquidity = lower risk of failureGreater Liquidity = lower risk of failure
SolvencySolvency: : the ability of a company to pay its debts as they the ability of a company to pay its debts as they
mature.mature. Companies with higher debt are more risky because Companies with higher debt are more risky because
they need more of their assets to meet their obligationsthey need more of their assets to meet their obligations
higher debt = Lower solvency higher debt = Lower solvency
Financial flexibilityFinancial flexibility: ability to respond to threats or take : ability to respond to threats or take
advantage of opportunities advantage of opportunities
Liquidity and Solvency affects a company's Financial flexibility.Liquidity and Solvency affects a company's Financial flexibility. Company with higher degree of Financial flexibility is better Company with higher degree of Financial flexibility is better
able to survive bad times and to take advantage of profitable able to survive bad times and to take advantage of profitable opportunitiesopportunities
Greater Financial flexibility = lower risk of failureGreater Financial flexibility = lower risk of failure
Chapter 5-7
Most assets and liabilities are reported at historical cost.
Use of judgments and estimates (e.g. useful life).
Many items of financial value are omitted, (when a company cannot record objectively). e.g. the knowledge and skills of the employees.
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 5-8
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 5-9
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 are presented in order of liquidity )
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 5-10
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 5-11
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 – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent 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.
e.g. a company restricted cash to meet an obligation due currently.
Chapter 5-12
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 – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Chapter 5-13
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 – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Illustration 5-5Illustration 5-5Balance Sheet Presentationof Investments in Securities
Chapter 5-14
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 – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Chapter 5-15
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 allowance475475
Inventory Inventory 812812
Total current assets Total current assets $1,633$1,633
11
22
Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Chapter 5-16
Receivables
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Illustration 5-6Illustration 5-6Balance Sheet Presentationof Receivables
Chapter 5-17
Inventories
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Company discloses:
Basis of valuation (e.g., lower-of-cost-or-market).
Method of pricing/ cash flow assupmtion (e.g., FIFO or LIFO). Illustration 5-Illustration 5-
77
Chapter 5-18
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 – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Chapter 5-19
Prepaid Expenses
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent Assets””
Illustration 5-Illustration 5-99
Chapter 5-20
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 – Balance Sheet – ““Current AssetsCurrent Assets””Balance Sheet – Balance Sheet – ““Current AssetsCurrent 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 5-21
Generally consists of four types:
SecuritiesSecurities e.g. bonds, common stock or long-term notes
Fixed assets Fixed assets not currently used in operation e.g. not currently used in operation e.g. land held for speculation.land held for speculation.
Special funds Special funds e.g. pension funde.g. pension fund
Nonconsolidated subsidiariesNonconsolidated subsidiaries or affiliated companies.
*Companies expect to hold long-term investments for many years. They usually present them on the balance sheet just below “current assets” in a separate section called “Investment”
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 – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””
Chapter 5-22
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 – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent 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 5-23
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 – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””
Land held for speculation
Long-Term Investments
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 5-24
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 – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””
Sinking fund
Pensions fund
Cash surrender value of life insurance
Long-Term Investments
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 5-25
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 – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””
Long-Term Investments
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 5-26
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 – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””
Assets of a durable nature used in the regular operations of the business.
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 5-27
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 – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent 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 5-28 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – Balance Sheet – ““ExerciseExercise””Balance Sheet – Balance Sheet – ““ExerciseExercise””
Intangibles (BE5-5): Mickey’s adjusted trial balance contained the following asset accounts at December 31, 2010: Prepaid Rent $12,000; Goodwill $40,000; 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
$ 40,000Franchises
47,000Patents
33,000Trademarks
10,000Total
$130,000
Chapter 5-29
Other Assets
I ntangibles
Goodwill 2,000,000 Patents 177,000 Trademark 40,000 Franchises 125,000 Copyright 55,000
Total intangibles 2,397,000 Other assets
Prepaid pension costs 133,000 Def erred income tax 40,000
Total other 173,000 Total Assets 9,210,978$
LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””Balance Sheet – Balance Sheet – ““Noncurrent AssetsNoncurrent Assets””
This section should include only unusual items sufficiently different from assets in the other categories (this section vary widely in practice) e.g. long-term prepaid expenses, prepaid pension cost, non-current receivables, deferred income tax, property held for sale, and restricted cash and security.
Balance Sheet (in thousands)
Current assets
Cash 285,000$
Chapter 5-30
“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 5-31 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 5-32 LO 2 Identify the major classifications of the balance sheet.LO 2 Identify the major classifications of the balance sheet.
Balance Sheet – Balance Sheet – ““ExerciseExercise””Balance Sheet – Balance Sheet – ““ExerciseExercise””
Long-Term Liabilities (BE5-8): Included in Adams Company’s December 31, 2010, trial balance are the following accounts: Accounts Payable $240,000; Pension Liability $375,000; Discount on Bonds Payable $24,000; 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
(24,000)Total
751,000
Chapter 5-33
Three parts, (1) Capital Stock,
(2) Additional Paid-In Capital, and
(3) Retained Earnings (undistributed 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 5-34
(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 5-35
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 5-36 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 5-37
Balance Sheet Balance Sheet -Format-Format
Balance Sheet Balance Sheet -Format-Format
LO 3LO 3
Report Form
Illustration 5-Illustration 5-1616
Chapter 5-38
Contingencies: material events that have an uncertain outcome
Accounting Policies: explanation of the valuation methods used or the basic assumptions made concerning inventory valuation, depreciation method, etc.
Contractual Situations: certain restrictions or covenant attached to specific assets or liabilities.
Fair Values: disclosures of FV, particularly for financial instruments
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 5-39
Parenthetical Explanations (in the body of the statement)
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.
*General rule: when in doubt, disclose. “ Its better to disclose too much information than not enough”
Chapter 5-40
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 5-41
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 5-42
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 5-43
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 5-44
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 5-45
Classification of Typical Inflows and Outflows
Chapter 5-46
Classification of Typical Inflows and Outflows
Chapter 5-47
Classification of Typical Inflows and Outflows
Chapter 5-48
Common adjustments to Net Income (Loss):Depreciation and amortization expense.Gain or loss on disposition of long-term assets.Change in current assets and current liabilities
التعديل المطلوب للتحويل
البند في قائمة الدخل البيـــــــــــــــــــــــــــــان النوع
يضافيضافيضاف
مصروف االهتالكمصروف اإلطفاء (االستنفاذ) مصروف النفاد
أعباء غير نقدية 1
تضافيطرح
خسارة بيعمكسب بيع
مكاسب وخسائر بيع األصول الثابتة
2
يطرحيضاف
زيادة في حساب األصلالمتداول
نقصان في حساب األصلالمتداول
تغيرات في األصول المتداولة
3
يضافيطرح
زيادة في حسابااللتزام المتداول
نقصان في حسابااللتزام المتداول
تغيرات في االلتزامات المتداولة
Chapter 5-49
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.
Three Major Steps:
Step 1. Determine change in cash.
Step 2. Determine net cash flow from operating activities.
Step 3. Determine net cash flows from 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: 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 5-51
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 5-52
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.
*Companies determine this amount (cash provided by operating activities) by converting net income on an accrual basis to a cash basis. To do so, they add to or deduct from net income those items in the income statement that do not affect cash.
Chapter 5-53
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 5-54
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 5-55
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.
BE 5-13 Midwest Beverage Company reported the following items in the most recent year.
Activity
OperatingFinancingOperatingOperatingInvesting
OperatingFinancing
Required: Prepare a Statement of Cash Flows
Chapter 5-56
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.
Noncash credit to revenues.
Noncash charge to expenses.
Chapter 5-57
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 5-58
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 ActivitiesAdditional Information Reported
Chapter 5-59
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 5-60
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 5-61
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 5-62
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
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 5-63
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