Chapter 5

Balance Sheet and Statement of Cash Flow

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1. Introduction to Balance SheetHow important is the balance

sheet?Is the balance sheet useful?What are the limitations of the

balance sheet?What information is available on

the balance sheet?

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2. Important ConceptsLiquidity

◦ the speed with which the firm’s assets or liabilities are converted into cash or paid

Financial flexibility◦ the ability of an enterprise to take effective

actions to alter the amounts and timing of cash flows

Solvency◦ the ability of an enterprise to pay its debts

as they matureACCT-3030 3

2. Important Concepts (con’t)Operating capability

◦the entity’s ability to maintain a given physical level of operations

Capital maintenance◦a method of measuring income by

comparing beginning capital with ending capital

Capital Structure◦shows the sources of capital provided to the

entityACCT-3030 4

3. Recognition in the Bal. SheetRecognition means recording the

item in the AIS or disclosing it in the notes to the financial statements

General Recognition Criteria◦meet the definition of an element◦be measurable◦be relevant◦have faithful representation

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4. Balance Sheet ClassificationsAssets

◦ Current cash and cash equivalents (3 months or less maturity) investments accountants receivable inventories prepaid assets

◦ Noncurrent investments property, plant, and equipment intangible assets other assets

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4. Balance Sheet ClassificationsLiabilities

◦Current accounts payable notes payable unearned revenues accrued liabilities current portion of long-term debt

◦Long-term liabilities notes payable bonds payable ACCT-3030 7

4. Balance Sheet ClassificationsStockholders’ Equity

◦Contributed capital preferred stock common stock paid-in capital…

◦Retained earnings

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5. DisclosuresNotes

◦summary of significant accounting policies

◦contingencies◦contractual situations◦related party transactions◦subsequent events

MD&AManagement’s responsibilitiesACCT-3030 9

6. OtherComparative financial statementsInterim financial statementsSEC reports

◦10-K◦10-Q◦ 8-K◦proxy statement

EDGARXBRL

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7. Alternative Valuation MethodsTo be recognized an item m/b measurable

◦ alternative bases of measurability could be usedHistorical cost (input value)

◦ the exchange price of the asset when it was acquiredReplacement cost (current cost) (input value)

◦ the amount of cash necessary to currently obtain the same asset

Current market value(current exit value)(output value)◦ the amount of cash that could be obtained from

selling the asset in an orderly transaction between market participants

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7. Alternative Valuation MethodsNet realizable value (output value)

◦ the amount of cash that may result when the asset is sold in the future in the ordinary course of business

Present value (discounted cash flows)◦considers the time value of money - values

items at the present value of all future cash flows

Price level adjusted (constant dollar) reporting

What is current GAAP?ACCT-3030 12

8. Financial Statement AnalysisHorizontal analysisVertical analysisLiquidity ratios

◦working capital◦current ratio◦quick ratio

Financing (coverage) ratios◦debt to equity◦debt to assets◦ times interest earned

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8. Financial Statement AnalysisActivity ratios

◦receivables turnover◦inventory turnover◦asset turnover

Profitability ratios◦profit margin◦return on assets◦return on equity

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9. Cash Flow StatementOnly basics now - More in 3040Required statementClassifications on statement

◦operating activities direct method indirect method

◦investing activities◦financing activities

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9. Cash Flow Statement

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