Kế toán, kiểm toán - Chương 5: Balance sheet and statement of cash flows

C H A P T E R 5BALANCE SHEET AND STATEMENT OF CASH FLOWSIntermediate Accounting13th EditionKieso, Weygandt, and Warfield Explain 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.Determine which balance sheet information requires supplemental disclosure.Describe the major disclosure techniques for the balance sheet.Indicate the purpose of the statement of cash flows.Identify the content of the statement of cash flows.Prepare a statement of cash flows.Understand the usefulness of the statement of cash flows.Learning ObjectivesBalance SheetStatement of Cash FlowsUsefulnessLimitationsClassificationAdditional information reportedTechniques of disclosurePurposeContent and formatPreparationUsefulnessBalance Sheet and Statement of Cash FlowsEvaluating the capital structure.Assess risk and future cash flows.Analyze the company’s: Liquidity, Solvency, and Financial flexibility.Balance SheetUsefulness of the Balance SheetLO 1 Explain the uses and limitations of a balance sheet.Most assets and liabilities are reported at historical cost.Use of judgments and estimates.Many items of financial value are omitted.Limitations of the Balance SheetBalance SheetLO 1 Explain the uses and limitations of a balance sheet.Three General Classifications Assets, Liabilities, and Stockholders’ EquityCompanies further divide these classifications:Classification in the Balance SheetLO 2 Identify the major classifications of the balance sheet.Balance SheetIllustration 5-1Cash 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 AssetsLO 2 Identify the major classifications of the balance sheet.Balance SheetIllustration 5-2ReviewThe correct order to present current assets is a. Cash, accounts receivable, prepaid items, inventories. b. Cash, accounts receivable, inventories, prepaid items. c. Cash, inventories, accounts receivable, prepaid items. d. Cash, inventories, prepaid items, accounts receivable.Balance SheetLO 2 Identify the major classifications of the balance sheet.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. CashBalance Sheet – “Current Assets”Illustration 5-3LO 2 Identify the major classifications of the balance sheet.PortfoliosShort-Term InvestmentsLO 2 Identify the major classifications of the balance sheet.TypeValuationClassificationHeld-to-MaturityDebtAmortized CostCurrent or NoncurrentTradingDebt or EquityFair ValueCurrentAvailable- for-SaleDebt or EquityFair ValueCurrent or NoncurrentBalance Sheet – “Current Assets”Short-Term InvestmentsLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Current Assets”Illustration 5-5Balance Sheet Presentationof Investments in SecuritiesClaims held against customers and others for money, goods, or services.Accounts receivable – oral promisesNotes receivable – written promisesMajor categories of receivables should be shown in the balance sheet or the related notes.ReceivablesLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Current Assets”Accounts Receivable – Presentation OptionsLO 2 Identify the major classifications of the balance sheet.Current Assets: Cash $ 346 Accounts receivable 500 Less allowance for doubtful accounts 25 475 Inventory 812 Total current assets $1,633Current Assets: Cash $ 346 Accounts receivable, net of $25 allowance 475 Inventory 812 Total current assets $1,63312Balance Sheet – “Current Assets”ReceivablesLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Current Assets”Illustration 5-6Balance Sheet Presentationof ReceivablesInventoriesLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Current Assets”Company discloses: Basis of valuation (e.g., lower-of-cost-or-market). Method of pricing (e.g., FIFO or LIFO). Illustration 5-7Payment of cash, that is recorded as an asset because service or benefit will be received in the future.insurancesuppliesadvertisingCash PaymentExpense RecordedBEFORErentmaintenance on equipmentPrepayments often occur in regard to:Prepaid ExpensesLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Current Assets”Prepaid ExpensesLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Current Assets”Illustration 5-9Current Assets - “Summary” LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Current 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. Generally consists of four types: Securities Fixed assetsSpecial fundsNonconsolidated subsidiaries or affiliated companies.Long-Term InvestmentsLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”Long-Term Investments Securities LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”bonds, stock, and long-term notesFor marketable securities, management’s intent determines current or noncurrent classification.Fixed Assets LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”Land held for speculationLong-Term Investments Special Funds LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”Sinking fundPensions fundCash surrender value of life insuranceLong-Term Investments Nonconsolidated Subsidiaries or Affiliated Companies LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”Long-Term Investments Property, Plant, and EquipmentLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”Assets of a durable nature used in the regular operations of the business.IntangiblesLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”Lack physical substance and are not financial instruments.Limited life intangibles amortized.Indefinite-life intangibles tested for impairment.LO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Exercise”Intangibles (BE5-6): KC’s adjusted trial balance contained the following asset accounts at December 31, 2010: Prepaid Rent $12,000; Goodwill $50,000; 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 $ 50,000Franchises 47,000Patents 33,000Trademarks 10,000Total $140,000Other AssetsLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Noncurrent Assets”This section should include only unusual items sufficiently different from assets in the other categories.“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.Balance SheetCurrent LiabilitiesLO 2 Identify the major classifications of the balance sheet.Balance Sheet“Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.”All covenants and restrictions must be disclosed.Long-Term LiabilitiesLO 2 Identify the major classifications of the balance sheet.Balance Sheet – “Exercise”Long-Term Liabilities (BE5-9): Included in Adams Company’s December 31, 2010, trial balance are the following accounts: Accounts Payable $220,000; Pension Liability $375,000; Discount on Bonds Payable $29,000; 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 (29,000)Total 746,000Three parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings.LO 2 Identify the major classifications of the balance sheet.Balance SheetOwners’ EquityIllustration 5-15(a) Investment in preferred stockLO 2 Identify the major classifications of the balance sheet.Balance Sheet Classification ExerciseAccount(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 liabilityClassificationClassified Balance SheetAccount formReport formBalance Sheet - FormatAccounting 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 account formats.LO 3 Prepare a classified balance sheet using the report and account formats.Balance Sheet - FormatAccount FormIllustration 5-16Balance Sheet -FormatLO 3Report FormIllustration 5-16ContingenciesAccounting PoliciesContractual SituationsFair ValuesAdditional Information ReportedThere 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 information requires supplemental disclosure.Parenthetical ExplanationsNotesCross-Reference and Contra ItemsSupporting SchedulesTerminologyTechniques of DisclosureLO 5 Describe the major disclosure techniques for the balance sheet.The Statement of Cash FlowsLO 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.”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:Where did the cash come from?What was the cash used for?What was the change in the cash balance?Purpose of the Statement of Cash FlowsThe Statement of Cash FlowsLO 6 Indicate the purpose of the statement of cash flows.Three different activities:Operating, Content and FormatThe Statement of Cash FlowsLO 7 Identify the content of the statement of cash flows.Investing,FinancingIllustration 5-24Content and FormatThe Statement of Cash FlowsOperatingCash inflows and outflows from operations.InvestingCash inflows and outflows from non-current assets.FinancingCash 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.The Statement of Cash FlowsLO 7 Identify the content of the statement of cash flows.Illustration 5-25Information obtained from several sources: (1) comparative balance sheets, (2) the current income statement, and (3) selected transaction data. PreparationThe Statement of Cash FlowsLO 8 Prepare a statement of cash flows.The Statement of Cash FlowsLO 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.The Statement of Cash FlowsLO 8Illustration 5-26Illustration 5-27The Statement of Cash FlowsLO 8Preparing the Statement of Cash FlowsLO 8 Prepare a statement of cash flows.Determine: Cash provided by (or used in) operating activities.Cash provided by or used in investing and financing activities.Determine the change (increase or decrease) in cash during the period.Reconcile the change in cash with the beginning and the ending cash balances.The Statement of Cash FlowsLO 8 Prepare a statement of cash flows.Cash provided by operating activitiesIllustration 5-28Illustration 5-26Illustration 5-27Solution on notes pageThe Statement of Cash FlowsLO 8 Prepare a statement of cash flows.Illustration 5-29Illustration 5-26Solution on notes pageIllustration 5-27Next, the company determines its investing and financing activities.The Statement of Cash FlowsLO 8 Prepare a statement of cash flows.Statement of Cash Flows (BE 5-12): Keyser Beverage Company reported the following items in the most recent year.ActivityOperatingFinancingOperatingOperatingInvestingOperatingFinancingRequired: Prepare a Statement of Cash FlowsNet income $40,000Dividends paid 5,000Increase in accounts receivable 10,000Increase in accounts payable 7,000Purchase of equipment 8,000Depreciation expense 4,000Issue of notes payable 20,000The Statement of Cash FlowsLO 8 Prepare a statement of cash flows.Noncash credit to revenues.Noncash charge to expenses.Statement of Cash Flows (BE 5-12)ReviewIn preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of equipment at book value b. Sale of merchandise on credit c. Declaration of a cash dividend d. Issuance of bonds payable at a discount receivable.LO 8 Prepare a statement of cash flows.The Statement of Cash FlowsIssuance 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 FlowsSignificant 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.Significant Noncash ActivitiesHigh 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 FlowsWithout cash, a company will not survive. Cash flow from Operations:LO 9 Understand the usefulness of the statement of cash flows.Usefulness of the Statement of Cash FlowsRatio 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.Financial LiquidityNet Cash Provided by Operating ActivitiesAverage Current Liabilities Current Cash Debt Coverage Ratio =Usefulness of the Statement of Cash FlowsThis 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.Financial FlexibilityNet Cash Provided by Operating ActivitiesAverage Total Liabilities Cash Debt Coverage Ratio =Usefulness of the Statement of Cash FlowsThe amount of discretionary cash flow a company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity.LO 9 Understand the usefulness of the statement of cash flows.Free Cash FlowIllustration 5-35ReviewThe current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.LO 9 Understand the usefulness of the statement of cash flows.Usefulness of the Statement of Cash FlowsiGAAP requires that specific items be reported on the balance sheet. No such general standard exists in U.S. GAAP. There are many similarities between U.S. and iGAAP related to balance sheet presentation. For example: IAS 1 specifies minimum note disclosures, similar to U.S. GAAP on accounting policies and judgments.Comparative prior-period information must be presented and financial statements must be prepared annually.Current/noncurrent classification for assets and liabilities is normally required. Interestingly, iGAAP statements may report property, plant, and equipment first in the balance sheet. Some companies report the subtotal “net assets,” which equals total assets minus total liabilities.While the use of the term “reserve” is discouraged in U.S. GAAP, there is no such prohibition in iGAAP.LO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceAnalysts and other interested parties can gather qualitative information from financial statements by examining relationships between items on the statements and identifying trends in these relationships.LO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial RatiosLO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial RatiosLO 10 Identify the major types of financial ratios and what they measure.Using Ratios to Analyze PerformanceIllustration 5A-1 A Summary of Financial RatiosCopyright © 2009 John Wiley & Sons, Inc. 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