structure of the balance sheet and statement of cash flows revsine/collins/johnson/mittelstaedt:...
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Learning objectives Concluded 7.The distinction between operating, investing, and financing sources and uses of cash. 8.How changes in current asset and current liability accounts can be used to compute “cash flows from operations” from accrual earnings. 9.Key changes under the FASB/IASB proposed exposure draft on financial statement presentation. 4-3TRANSCRIPT
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Structure of the Balance Sheet and Statement of Cash
Flows
Revsine/Collins/Johnson/Mittelstaedt: Chapter 4
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning objectives
1. How balance sheet accounts are measured and classified.
2. How balance sheet information is used.
3. Balance sheet terminology and format outside the U.S.
4. How footnotes aid your understanding of the firm’s accounting policies, subsequent events, and related-party transactions.
5. How successive balance sheet and the income statement can be used to identify cash inflows and outflows.
6. How the cash flow statements can be used to explain changes in successive balance sheets.
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Learning objectivesConcluded
7. The distinction between operating, investing, and financing sources and uses of cash.
8. How changes in current asset and current liability accounts can be used to compute “cash flows from operations” from accrual earnings.
9. Key changes under the FASB/IASB proposed exposure draft on financial statement presentation.
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Elements of the balance sheet
• Probable future economic benefits• Obtained from past transactions or events
• Probable future sacrifices of economic benefits• Arising from present obligations• To transfer assets or provide services in the future• As a result of past transactions or events
• The residual interest in net assets.
ASSETS LIABILITIES EQUITY= +
How the money is invested Where the money came from
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Balance sheet information
LIABILITIES+
EQUITY
ASSETS
Rates of return
Capital structure
Liquidity
Solvency
Flexibility
ROA and ROCE
Debt vs. Equity
Cash conversion
Ability to pay debt
Operating and financial
Helpsassess
Balance Sheet
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Balance sheet measurement conventions
LIABILITIES+
EQUITY
ASSETS
Historical cost
Current cost (fair value)
Net realizable value
Discounted present value
Measurementmethods
Balance Sheet
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Balance sheet classification:Overview
• Current assets• Property, plant and equipment• Investments• Other assets
• Current liabilities• Long-term debt• Other liabilities
• Preferred and common stock• Additional paid-in capital• Retained earnings
ASSETS LIABILITIES EQUITY= +
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Balance sheet presentation:International differences
Current Assets
Long-lived Assets
Current Liabilities
Non-current Liabilities
Stockholders’ Equity
Fixed Assets
Current Assets
Current Liabilities
Non-current Liabilities
Capital Employed
U.S. Format: U.K. Format:
+
=
+
+
+
-
-
=
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Financial statement footnotes
Footnotes are an integral part of companies’ financial reports.
These “notes” help users better understand and interpret the numbers presented in the body of the financial statements.
Three important notes:1. Summary of significant accounting policies.2. Subsequent event disclosures.3. Related party transactions
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Statement of cash flows
Explains why a firm’s cash position changed between successive balance sheet dates. Here’s a balance sheet equation:Cash Non-cash assets Stockholders’ equityLiabilities+ = +
Cash Non-cash assetsLiabilities= +- Stockholder’s equity
ΔCash Δ Stockholders’ equity= +
At the same time, it explains why non-cash assets, liabilities, and stockholders’ equity have changed.
Δ Non-cash assetsΔ Liabilities -
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Cash flow statement format
Operating Activities
Investing Activities
Financing Activities
Δ Cash
Cash inflows and outflows from transactions and events that affect operating income
Cash inflows and outflows from loaning money to others, investing in securities, or in assets (e.g., equipment) used to produce goods and services.
Cash inflows and outflows from borrowing money, selling stock, and paying dividends
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Deriving cash flows from operations:Indirect approach
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Deriving cash flow information:Overview
BeginningBalance sheet
EndingBalance sheet
Incomestatement
Cash flowstatement
You can always derive any one financial statement from information available in the other three statements.
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Global Vantage PointThe proposed Exposure Draft issue by the FASB and the IASB recommends that
the statement of financial position and statement of cash flows be broken down into the distinct sections, categories, and subcategories shown in Exhibit 4.15.
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Summary
1. The balance sheet shows the assets owned by a company at a given point in time, and how those assets are financed (debt vs. equity).
2. Be alert for differences in balance sheet measurement bases, account titles, and statement format.
3. Financial statement footnotes provide important information.
4. The cash flow statement shows the change in cash for a given period, broken down into operating, investing, and financing activities.
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Summary concluded
5. Changes in certain balance sheet accounts help explain why operating cash flows differ from accrual income.
6. Conversely, the cash flow statement helps to explain changes in balance sheet accounts
7. T-accounts are a useful analytical device for deriving cash flow and accrual income information from successive balance sheets
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