Kế toán, kiểm toán - A further look at financial statements

A Further Look at FinancialStatementsKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition2Use ratios to evaluate a company’s profitability, liquidity, and solvency.CHAPTER OUTLINEIdentify the sections of a classified balance sheet.12LEARNING OBJECTIVESDiscuss financial reporting concepts.3Presents a snapshot at a point in time.To improve understanding, companies group similar assets and similar liabilities together.Standard ClassificationsLEARNING OBJECTIVELO 1 Identify the sections of a classified balance sheet.1 Assets Liabilities and Stockholders’ Equity Current assets Current liabilities Long-term investments Long-term liabilities Property, plant, and equipment Stockholders’ equity Intangible assetsILLUSTRATION 2-1Standard balance sheet classificationsLO 1ILLUSTRATION 2-2Classified balance sheetLO 1ILLUSTRATION 2-2Classified balance sheetAssets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer.Operating cycle is the average time it takes from the purchase of inventory, to the sale of goods, and then to the collection of cash from customers.Common types of current assets are (1) cash, (2) investments, (3) receivables, (4) inventories, and (5) prepaid expenses.Current AssetsTHE CLASSIFIED BALANCE SHEETLO 1 Companies list current asset accounts in the order they expect to convert them into cash.Illustration 2-3Current assets sectionCurrent AssetsTHE CLASSIFIED BALANCE SHEETLO 1 Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called:Current assets.Intangible assets.Long-term investments.Property, plant, and equipment.THE CLASSIFIED BALANCE SHEETReview QuestionLO 1 LO 1 Investments in stocks and bonds of other corporations that are held for more than one year. Long-term assets such as land or buildings that a company is not currently using in its operating activities.Long-term notes receivable.Long-Term InvestmentsTHE CLASSIFIED BALANCE SHEETILLUSTRATION 2-4Long-term investments sectionProperty, Plant, and EquipmentLong useful lives.Currently used in operations.Includes land, buildings, equipment, delivery vehicles, and furniture.Depreciation - allocating the cost of assets to a number of years.Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life.Alternative TerminologyProperty, plant, and equipment is sometimes called fixed assets or plant assets.THE CLASSIFIED BALANCE SHEETLO 1 Property, Plant, and EquipmentILLUSTRATION 2-5Property, plant, and equipment sectionLO 1 Intangible AssetsAssets that do not have physical substance.Includes goodwill, patents, copyrights, and trademarks or trade names.▼Helpful Hint Sometimes intangible assets are reportedunder a broader heading called “Other assets.”THE CLASSIFIED BALANCE SHEETLO 1 Intangible AssetsIllustration 2-6THE CLASSIFIED BALANCE SHEETILLUSTRATION 2-6Intangible assets sectionLO 1 Review QuestionPatents and copyrights areCurrent assets.Intangible assets.Long-term investments.Property, plant, and equipment.THE CLASSIFIED BALANCE SHEETLO 1 Assets Section of Classified Balance SheetBaxter Hoffman recently received the following information related to Hoffman Corporation’s December 31, 2017, balance sheet.Prepaid insurance $ 2,300 Inventory $3,400Cash 800 Accumulated depreciation—Equipment 10,700 equipment 2,700Accounts receivable 1,100Prepare the assets section of Hoffman Corporation’s classified balance sheet.DO IT!1aLO 1 Prepare the assets section of the classified balance sheet.Prepaid insurance $ 2,300 Inventory $3,400Cash 800 Accumulated depreciation—Equipment 10,700 equipment 2,700Accounts receivable 1,100Obligations the company is to pay within the next year or operating cycle, whichever is longer.Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable.Also included as current liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations.Current LiabilitiesTHE CLASSIFIED BALANCE SHEETLO 1 Current LiabilitiesTHE CLASSIFIED BALANCE SHEETILLUSTRATION 2-7Current liabilities sectionLO 1 Obligations a company expects to pay after one year.Include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.Long-Term LiabilitiesTHE CLASSIFIED BALANCE SHEETILLUSTRATION 2-8Long-term liabilities sectionLO 1 Review QuestionWhich of the following is not a long-term liability?Bonds payable.Current maturities of long-term debt.Long-term notes payable.Mortgages payable.THE CLASSIFIED BALANCE SHEETLO 1 Illustration 2-2Common stock - investments of assets into the business by the stockholders. Retained earnings - income retained for use in the businessStockholders’ EquityTHE CLASSIFIED BALANCE SHEETStockholders’ Equity section for Franklin CorporationLO 1 CL Salaries and wages payable LTI Investment in real estateNA Service revenue PPE Equipment CL Interest payable PPE Accumulated depreciation IA Goodwill CA Debt investments (short-term) NA Depreciation expense SE Retained earningsLTL Mortgage payable CL Unearned service revenue (due in 3 years) Match each of the items to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.” Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Stockholders’ equity (SE) Intangible assets (IA)SolutionLO 1Balance Sheet ClassificationsDO IT!1bRatio AnalysisRatio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another.A single ratio by itself is not very meaningful.LEARNING OBJECTIVELO 2 Use ratios to evaluate a company’s profitability, liquidity, and solvency.2ILLUSTRATION 2-9 Financial ratio classificationsRATIO ANALYSISLO 2 Illustration 2-10USING THE INCOME STATEMENTILLUSTRATION 2-10Best Buy’s income statementLO 2 Illustration: Earnings per share (EPS) measures the net income earned on each share of common stock. Earnings per ShareProfitability RatioLO 2 For 2017 Stoneland Corporation reported net income $26,000; net sales $400,000; and average shares outstanding 6,000. There were preferred stock dividends of $2,000. What was the 2017 earnings per share?$4.00$0.06$16.67$66.67$26,000- $2,0006,000= $4.00 Review QuestionUSING THE INCOME STATEMENTLO 2 Illustration 2-12Best Buy’s balance sheetUSING A CLASSIFIED BALANCE SHEETLiquidity—the ability to pay obligations expected to become due within the next year or operating cycle.Working capital is the difference between the amounts of current assets and current liabilities. Best Buy had working capital in 2014 of $3,049 million ($10,485 million − $7,436 million).USING A CLASSIFIED BALANCE SHEETILLUSTRATION 2-13Working capitalLO 2 Liquidity ratios measure the short-term ability to pay maturing obligations and to meet unexpected needs for cash.For every dollar of current liabilities, Best Buy has $1.41 of current assets.USING A CLASSIFIED BALANCE SHEETILLUSTRATION 2-14Current ratioLO 2 2014ACCOUNTING ACROSS THE ORGANIZATIONCan a Company Be Too Liquid?There actually is a point where a company can be too liquid—that is, it can have too much working capital. While it is important to be liquid enough to be able to pay short-term bills as they come due, a company does not want to tie up its cash in extra inventory or receivables that are not earning the company money. By one estimate from the REL Consultancy Group, the thousand largest U.S. companies had cumulative excess working capital of $1.017 trillion in a recent year. This was an 18% increase, which REL said represented a“ deterioration in the management of operations.” Given that managers throughout a company are interested in improving profitability, it is clear that they should have an eye toward managing working capital. They need to aim for a “Goldilocks solution”—not too much, not too little, but just right. Source: Maxwell Murphy, “The Big Number,” Wall Street Journal (November 9, 2011).LO 2 Solvency—the ability to pay interest as it comes due and to repay the balance of a debt due at its maturity. Solvency ratios measure the ability of the company to survive over a long period of time.▼Helpful Hint Some users evaluate solvency using a ratio of liabilities divided by stockholders’ equity. The higher this “debt to equity” ratio, the lower is a company’s solvency.USING A CLASSIFIED BALANCE SHEETLO 2 The 2014 ratio means that every dollar of assets was financed by 72 cents of debt.Debt to assets ratio measures the percentage of total financing provided by creditors rather than stockholders.USING A CLASSIFIED BALANCE SHEETILLUSTRATION 2-15Debt to assets ratioLO 2 INVESTOR INSIGHTWhen Debt Is GoodDebt financing differs greatly across industries and companies. Here are some debt to assets ratios for selected companies in a recent year: Debt to Assets Ratio Google 23% Nike 41% Microsoft 48% ExxonMobil 48% General Motors 74%LO 2 In the Statement of Cash Flows, cash provided by operating activities fails to take into account that a company must invest in new property, plant, and equipment and must maintain dividends at current levels to satisfy investors.Free cash flow describes the net cash provided by operating activities after adjusting for capital expenditures and dividends paid.USING THE STATEMENT OF CASH FLOWSILLUSTRATION 2-16Free cash flowLO 2 Illustration: MPC produced and sold 10,000 personal computers this year. It reported $100,000 cash provided by operating activities. In order to maintain production at 10,000 computers, MPC invested $15,000 in equipment. It chose to pay $5,000 in dividends. Calculate free cash flow.Cash provided by operating activities $100,000Less: Expenditures on property, plant, and equipment -15,000Dividends paid 5,000Free cash flow $ 80,000USING THE STATEMENT OF CASH FLOWSLO 2 Ratio AnalysisThe following information is available for Ozone Inc. 2017 2016Current assets $ 88,000 $ 60,800Total assets 400,000 341,000Current liabilities 40,000 38,000Total liabilities 120,000 150,000Net income 100,000 50,000Net cash provided by operating activities 110,000 70,000Preferred dividends 10,000 10,000Common dividends 5,000 2,500Expenditures on PP&E 45,000 20,000Shares outstanding at beginning of year 60,000 40,000Shares outstanding at end of year 120,000 60,000DO IT!2LO 2 Ratio Analysis(a) Compute earnings per share for 2017 and 2016 for Ozone. Ozone’s primary competitor, Frost Corporation, had earnings per share of $2 in 2017. DO IT!2SOLUTIONEarnings per shareLO 2 Ratio AnalysisCompute the current ratio and debt to assets ratio for 2017.DO IT!2SOLUTIONCurrentRatioDebt to Assets ratioLO 2 Net cash provided by operating activities $110,000 $70,000 Expenditures on PP&E − 45,000 − 20,000 Preferred dividend − 10,000 − 10,000Common dividends − 5,000 − 2,500 $ 50,000 $ 37,500Ratio AnalysisCompute free cash flow for each year.DO IT!2SOLUTION20172016LO 2 The Standard-Setting EnvironmentGenerally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes.Standard-setting bodies determine these guidelines:Securities and Exchange Commission (SEC)Financial Accounting Standards Board (FASB)International Accounting Standards Board (IASB)Public Company Accounting Oversight Board (PCAOB)International Note Over 115 countries use international standards (called IFRS). LEARNING OBJECTIVELO 3 Discuss financial reporting concepts.3Generally accepted accounting principles are:a set of standards and rules that are recognized as a general guide for financial reporting.usually established by the Internal Revenue Service.the guidelines used to resolve ethical dilemmas.fundamental truths that can be derived from the laws of nature.Review QuestionTHE STANDARD-SETTING ENVIRONMENTLO 3 INTERNATIONAL INSIGHTThe Korean DiscountIf you think that accounting standards don’t matter, consider recent events in South Korea. For many years, international investors complained that the financial reports of South Korean companies were inadequate and inaccurate. Accounting practices there often resulted in huge differences between stated revenues and actual revenues. Because investors did not have faith in the accuracy of the numbers, they were unwilling to pay as much for the shares of these companies relative to shares of comparable companies in different countries. This difference in share price was often referred to as the “Korean discount.” In response, Korean regulators decided that companies would have to comply with international accounting standards. This change was motivated by a desire to “make the country’s businesses more transparent” in order to build investor confidence and spur economic growth. Many other Asian countries, including China, India, Japan, and Hong Kong, have also decided either to adopt international standards or to create standards that are based on the international standards. Source: Evan Ramstad, “End to ‘Korea Discount’?” Wall Street Journal (March 16, 2007).LO 3 According to the FASB, useful information should possess two fundamental qualities, relevance and faithful representation.Relevance Accounting information has relevance if it would make a difference in a business decision. Information is considered relevant if it provides information that has predictive value, that is, helps provide accurate expectations about the future, and has confirmatory value, that is, confirms or corrects prior expectations. Materiality is a company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor.QUALITIES OF USEFUL INFORMATIONLO 3 According to the FASB, useful information should possess two fundamental qualities, relevance and faithful representation.Faithful Representation Faithful representation means that information accurately depicts what really happened. To provide a faithful representation, information must be complete (nothing important has been omitted), neutral (is not biased toward one position or another), and free from error.QUALITIES OF USEFUL INFORMATIONLO 3 Enhancing QualitiesComparability results when different companies use the same accounting principles.Consistency means that a company uses the same accountingprinciples and methods from year to year.Information is verifiable if independentobservers, using the same methods, obtain similar results.For accounting information to have relevance, it must be timely.Information has the quality of understandabilityif it is presented in a clear and concise fashion.QUALITIES OF USEFUL INFORMATIONLO 3 ACCOUNTING ACROSS THE ORGANIZATIONWhat Do These Companies Have in Common?Another issue related to comparability is the accounting time period. An accounting period that is one-year long is called a fiscal year. But a fiscal year need not match the calendar year. For example, a company could end its fiscal year on April 30 rather than on December 31. Why do companies choose the particular year-ends that they do? For example, why doesn’t every company use December 31 as its accounting year-end? Many companies choose to end their accounting year when inventory or operations are at a low point. This is advantageous because compiling accounting information requires much time and effort by managers, so they would rather do it when they aren’t as busy operating the business. Also, inventory is easier and less costly to count when its volume is low. Some companies whose year-ends differ from December 31 are Delta Air Lines, June 30; The Walt Disney Company, September 30; and Dunkin’ Donuts, Inc., October 31. In the notes to its financial statements, Best Buy states that its accounting year-end is the Saturday nearest the end of January.LO 3 Monetary UnitEconomic EntityRequires that only those things that can be expressed in money are included in the accounting records.States that every economic entity can be separately identified and accounted for.ASSUMPTIONS IN FINANCIAL REPORTINGILLUSTRATION 2-19Key assumptions in financial reportingLO 3 Going ConcernThe business will remain in operation for the foreseeable future.PeriodicityStates that the life of a business can be divided into artificial time periods.ASSUMPTIONS IN FINANCIAL REPORTINGLO 3 Measurement PrinciplesHistorical CostOr cost principle, dictates that companies record assets at their cost.PRINCIPLES IN FINANCIAL REPORTINGFair ValueIndicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).Full Disclosure PrincipleRequires that companies disclose all circumstances and events that would make a difference to financial statement users.LO 3 Cost ConstraintAccounting standard-setters weigh the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.PRINCIPLES IN FINANCIAL REPORTINGLO 3 ComparabilityGoing concernMateriality The following items guide the FASB when it creates accounting standards. Relevance Periodicity assumption Faithful representation Going concern assumption Comparability Historical cost principle Consistency Full disclosure principle Monetary unit assumption Materiality Economic entity assumptionMatch each item above with a description below.Ability to easily evaluate one company’s results relative to another’s.Belief that a company will continue to operate for the foreseeable future.The judgment concerning whether an item is large enough to matter to decision-makers.Financial Accounting Concepts and PrinciplesDO IT!3LO 3 The following items guide the FASB when it creates accounting standards. Relevance Periodicity assumption Faithful representation Going concern assumption Comparability Historical cost principle Consistency Full disclosure principle Monetary unit assumption Materiality Economic entity assumptionFinancial Accounting Concepts and PrinciplesDO IT!3Full disclosurePeriodicityRelevanceMatch each item above with a description below.The reporting of all information that would make a difference to financial statement users.The practice of preparing financial statements at regular intervals.The quality of information that indicates the information makes a difference in a decision.LO 3 The following items guide the FASB when it creates accounting standards. Relevance Periodicity assumption Faithful representation Going concern assumption Comparability Historical cost principle Consistency Full disclosure principle Monetary unit assumption Materiality Economic entity assumptionFinancial Accounting Concepts and PrinciplesDO IT!3Historical costConsistencyEconomic entityMatch each item above with a description below.Belief that items should be reported on the balance sheet at the price that was paid to acquire the item.A company’s use of the same accounting principles and methods from year to year. Tracing accounting events to particular companies.LO 3 The following items guide the FASB when it creates accounting standards. Relevance Periodicity assumption Faithful representation Going concern assumption Comparability Historical cost principle Consistency Full disclosure principle Monetary unit assumption Materiality Economic entity assumptionFinancial Accounting Concepts and PrinciplesDO IT!3Faithful representationMonetary unitMatch each item above with a description below.The desire to minimize errors and bias in financial statements.Reporting only those things that can be measured in dollars.LO 3 What is the primary criterion by which accounting information can be judged?Consistency.Predictive value.Usefulness for decision making.Comparability.Review QuestionTHE STANDARD-SETTING ENVIRONMENTLO 3 KEY POINTSA Look at IFRSLEARNING OBJECTIVECompare the classified balance sheet format under GAAP and IFRS.4SimilaritiesIFRS generally requires a classified statement of financial position similar to the classified balance sheet under GAAP. IFRS follows the same guidelines as this textbook for distinguishing between current and noncurrent assets and liabilities.LO 4 A Look at IFRSKEY POINTSDifferencesIFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet.The format of statement of financial position information is often presented differently under IFRS. Although no specific format is required, many companies that follow IFRS present statement of financial position information in this order: Non-current assetsCurrent assetsEquityNon-current liabilitiesCurrent liabilitiesLO 4 A Look at IFRSKEY POINTSDifferencesUnder IFRS, current assets are usually listed in the reverse order of liquidity. For example, under GAAP cash is listed first, but under IFRS it is listed last. IFRS has many differences in terminology from what are shown in your textbook.Both GAAP and IFRS are increasing the use of fair value to report assets. However, at this point IFRS has adopted it more broadly. As examples, under IFRS companies can apply fair value to property, plant, and equipment, and in some cases intangible assets.LO 4 A Look at IFRSLOOKING TO THE FUTUREThe IASB and the FASB are working on a project to converge their standards related to financial statement presentation. A key feature of the proposed framework is that each of the statements will be organized in the same format, to separate an entity’s financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors. Thus, the same classifications used in the statement of financial position would also be used in the income statement and the statement of cash flows. The project has three phases. You can follow the joint financial presentation project at the following link: 4 IFRS PracticeA company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:land expense.property, plant, and equipment.an intangible asset.a long-term investment.A Look at IFRSLO 4 IFRS PracticeCurrent assets under IFRS are listed generally:by importance.in the reverse order of their expected conversion to cash.by longevity.alphabetically.A Look at IFRSLO 4 IFRS PracticeCompanies that use IFRS:may report all their assets on the statement of financial position at fair value.may offset assets against liabilities and show net assets and net liabilities on their statements of financial position, rather than the underlying detailed line items. may report non-current assets before current assets on the statement of financial position.do not have any guidelines as to what should be reported on the statement of financial position.A Look at IFRSLO 4 “Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. 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