We’ll only do balance sheet here, and will discuss statement of Cash flows in Ch.23

1. Chapter 5: Balance Sheet and Statement of Cash Flows Systems We’ll only do balance sheet here, and will discuss statement of Cash flows in Ch.23

2. Chapter 5: Balance Sheet • Identify the uses and limitations of a balance sheet. • Identify the major classifications of the balance sheet. • Prepare a classified balance sheet using the report and account formats. • Identify balance sheet information requiring supplemental disclosure. • Identify major disclosure techniques for the balance sheet. After studying this chapter, you should be able to:

3. Balance Sheet: Usefulness The balance sheet provides information for evaluating: • Capital structure • Rates of return • Analyzing an enterprise’s: • Liquidity • Solvency • Financial flexibility

4. Balance Sheet: Limitations • Most assets and liabilities are stated at historical cost. • Judgments and estimates are used in determining many of the items. • The balance sheet does not report items that can not be objectively determined. • It does not report information regarding off-balance sheet financing.

5. Balance Sheet: Classification Guidelines for reporting assets and liabilities separately: • Type or expected function in the central operations • Implications for the enterprise’s financial flexibility • Liquidity characteristics

6. Current Assets Long-term investments Property, plant, and equipment Intangible assets Other assets Current liabilities Long-term debt Owners’ equity Capital stock Additional paid-in capital Retained earnings Assets Liabilities and Equity Balance Sheet: Classification

7. Current Assets Current assets are expected to be consumed, sold, or converted into cash: either in one year or in the operating cycle, whichever is longer. Current assets are presented in order of liquidity. The following valuation principles are used: • Short-term investments at fair value • Accounts receivable at net realizable value

8. Long-Term Investments Long-term investments may be: • Investments in securities (bonds, stock) • Investments in fixed assets (land not used in operations) • Investments set aside in special funds (e.g., sinking fund) • Investments in non-consolidated subsidiaries or affiliated companies

9. Current Liabilities Current liabilities are liquidated: • Either through the use of current assets, or • By creation of other current liabilities Examples of current liabilities include: • Payables resulting from acquisitions of goods and services • Collections received in advance of services • Other liabilities which will be paid in the short term

10. Long-Term Liabilities Long-term obligations are those not expected to be paid within the operating cycle. Examples are: • obligations arising from specific financing situations (issuance of bonds) • obligations arising from ordinary business operations (pension obligations) • obligations that are contingent (product warranties)

11. Balance Sheet: Additional Information Reported Additional information may be: • Information not presented elsewhere, or • Information that qualifies items in the balance sheet Supplemental information examples: • Material events having an uncertain outcome • Explanations regarding accounting policies • Covenant restrictions

12. Balance Sheet: Techniques of Disclosure • Parenthetical explanations • Notes • Cross references and contra items • Supporting schedules

13. Ratio Analysis Ratio analysis expresses the relationship between selected financial data. These relationships can be expressed as: • percentages • rates, or • proportions

14. Short-term ability to pay maturing obligations Current ratio Quick assets ratio Liquidity ratios Activity ratios Effectiveness in using assets employed Receivables turnover Inventory turnover Profitability ratios Degree of success or failure for a given period Rate of return on assets Earnings per share Degree of protection for long-term creditors and investors Coverage ratios Debt to total assets Times interest earned Types of Ratios Type What is measured Examples