Balance

Balance Sheet
Sheet and
and
Statement
Statement of
of Cash
Cash Flows
Flows

Chapter
5
Intermediate Accounting
12th Edition
Kieso, Weygandt, and Warfield

Chapter
5-1 Prepared by Coby Harmon, University of California, Santa Barbara
 Learning
Learning Objectives
Objectives
1. Explain the uses and limitations of a balance sheet.
2. Identify the major classifications of the balance sheet.
3. Prepare a classified balance sheet using the report and
account formats.
4. Determine which balance sheet information requires
supplemental disclosure.
5. Describe the major disclosure techniques for the balance
sheet.
6. Indicate the purpose of the statement of cash flows.
7. Identify the content of the statement of cash flows.
8. Prepare a statement of cash flows.
9. Understand the usefulness of the statement of cash
Chapter
flows.
5-2
 Balance
Balance Sheet
Sheet and
and Statement
Statement of
of Cash
Cash Flows
Flows

Balance Statement of
Sheet Cash Flows

Usefulness Purpose
Limitations Content and
Classification format
Additional Preparation
information Usefulness
reported
Techniques of
disclosure

Chapter
5-3
 Balance
Balance Sheet
Sheet

Usefulness of the Balance Sheet

Evaluating the capital structure.
Assess risk and future cash flows.
Analyze the company’s:
 Liquidity,
 Solvency, and
 Financial flexibility.

Chapter
5-4 LO 1 Explain the uses and limitations of a balance sheet.
 Balance
Balance Sheet
Sheet

Limitations of the Balance Sheet

Most assets and liabilities are reported at
historical cost.
Use of judgments and estimates.
Many items of financial value are omitted.

Chapter
5-5 LO 1 Understand the uses and limitations of an income statement.
 Balance
Balance Sheet
Sheet

Classification in the Balance Sheet

Three General Classifications
Assets, Liabilities, and Stockholders’ Equity
Companies further divide these classifications:

Illustration 5-1
Balance Sheet
Classification

Chapter
5-6 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
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.
Illustration 5-2
Accounts and
basis of valuation

Chapter
5-7 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet

Review
The 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.

Chapter
5-8 LO 8 Explain how to report other comprehensive income.
 Balance
Balance Sheet
Sheet –– “Current
“Current Assets”
Assets”

Cash
Generally any monies available “on demand.”
Cash equivalents are short-term highly liquid
investments that will mature within three
months or less.
Any restrictions or commitments must be
disclosed. Illustration 5-3

Chapter
5-9 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Current
“Current Assets”
Assets”

Short-Term Investments

Portfolios Type Valuation Classification

Held-to- Amortized Current or

Debt
Maturity Cost Noncurrent

Trading Debt or Equity Fair Value Current

Available- Current or
Debt or Equity Fair Value
for-Sale Noncurrent

Chapter
5-10 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Current
“Current Assets”
Assets”

Receivables
Claims held against customers and others for
money, goods, or services.
Accounts receivable – oral promises
Notes receivable – written promises
Major categories of receivables should be shown in
the balance sheet or the related notes.

Chapter
5-11 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Current
“Current Assets”
Assets”
Accounts Receivable – Presentation Options
Current Assets:
11
Cash $ 346
Accounts receivable 500
Less allowance for doubtful accounts 25 475
Inventory 812
Total current assets $1,633

Current Assets:
22
Cash $ 346
Accounts receivable, net of $25 allowance 475
Inventory 812
Total current assets $1,633

Chapter
5-12 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Current
“Current Assets”
Assets”

Inventories
Company discloses:
basis of valuation (e.g., lower-of-cost-or-
market) and
the method of pricing (e.g., FIFO or LIFO).

Chapter
5-13 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Current
“Current Assets”
Assets”

Prepaid Expenses
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

insurance rent
supplies maintenance on equipment
advertising
Chapter
5-14 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”

Long-Term Investments
Generally consists of four types:
Securities
Fixed assets
Special funds
Nonconsolidated subsidiaries or
affiliated companies.

Chapter
5-15 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”
Balance Sheet (in thousands)
Long-Term Current assets

Investments Cash $ 285,000

Investments:
Securities Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
bonds, Notes receivable 150,000
Land held for speculation 550,000
stock, and Sinking fund 225,000
long-term notes Pension fund 653,798
Cash surrender value 84,321
For marketable securities, Investment in Uncon. Sub. 457,836
management’s intent Total investments 2,696,592
Property, Plant, and Equip.
determines current or
Building 1,375,778
noncurrent classification.
Land 975,000
Chapter
5-16 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”
Balance Sheet (in thousands)
Long-Term Current assets

Investments Cash $ 285,000

Investments:
Invesment in ABC bonds 321,657
Fixed
Fixed Assets
Assets Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for Land held for speculation 550,000
Sinking fund 225,000
speculation
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836
Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
Chapter
5-17 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”
Balance Sheet (in thousands)
Long-Term Current assets

Investments Cash $ 285,000

Investments:
Invesment in ABC bonds 321,657
Special Funds Investment in UC Inc. 253,980
Notes receivable 150,000
Sinking fund Land held for speculation 550,000
Sinking fund 225,000
Pensions fund Pension fund 653,798
Cash surrender value 84,321
Cash surrender
Investment in Uncon. Sub. 457,836
value of life Total investments 2,696,592
insurance Property, Plant, and Equip.
Building 1,375,778
Land 975,000
Chapter
5-18 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”
Balance Sheet (in thousands)
Long-Term Current assets

Investments Cash $ 285,000

Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Nonconsolidated Pension fund 653,798
Cash surrender value 84,321
Subsidiaries or Investment in Uncon. Sub. 457,836
Affiliated Total investments 2,696,592
Property, Plant, and Equip.
Companies Building 1,375,778
Land 975,000
Chapter
5-19 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”
Balance Sheet (in thousands)
Property, Plant, and Current assets
Cash $ 285,000
Equipment
Total investments 2,696,592
Property, Plant, and Equip.
Assets of a durable Building 1,375,778
nature used in the Land 975,000
Machinery and equipment 234,958
regular operations Capital leases 384,650
of the business. Leasehold improvements 175,000
Accumulated depreciation (975,000)
Total PP&E 2,170,386
Intangibles
Goodwill 3,000,000
Patents 177,000
Trademarks 40,000
Chapter
5-20 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”
Balance Sheet (in thousands)
Intangibles Current assets
Cash $ 285,000
Lack physical Accumulated depreciation (975,000)
substance and are not Total PP&E 2,170,386
financial instruments. Intangibles
Goodwill 2,000,000
Limited life Patents 177,000
intangibles amortized. Trademark 40,000
Franchises 125,000
Indefinite-life Copyright 55,000
Total intangibles 2,397,000
intangibles tested for
Other assets
impairment. Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000
Chapter
5-21 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Exercise”
“Exercise”
BE5-6 Mickey Snyder Corporation’s adjusted trial balance
contained the following asset accounts at December 31, 2007:
Prepaid Rent $12,000; Goodwill $40,000; 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
Franchises
$ 40,000
Patents
47,000
Trademarks
33,000
Total
10,000

Chapter
$130,000
5-22 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Noncurrent
“Noncurrent Assets”
Assets”
Balance Sheet (in thousands)
Other Assets Current assets
Cash $ 285,000

This section should Intangibles

Goodwill 2,000,000
include only unusual
Patents 177,000
items sufficiently Trademark 40,000
different from assets Franchises 125,000
Copyright 55,000
in the other Total intangibles 2,397,000
categories. Other assets
Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000
Total Assets $ 9,210,978

Chapter
5-23 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet

Current Liabilities Balance Sheet (in thousands)

Current liabilities
Notes payable $ 233,450
“Obligations that a Accounts payable 131,800
company reasonably Accrued compensation 43,000
Unearned revenue 17,000
expects to liquidate Income tax payable 23,400
either through the use Current maturities LT debt 121,000
Total current liabilities 569,650
of current assets or the Long-term liabilities
creation of other Long-term debt 979,500
current liabilities.” Obligations capital lease 345,800
Deferred income taxes 77,909
Total long-term liabilities 2,093,859
Stockholders' equity

Chapter
5-24 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet

Long-Term Liabilities Balance Sheet (in thousands)

Current liabilities
Notes payable $ 233,450
“Obligations that a Accounts payable 131,800
company does not Accrued compensation 43,000
Unearned revenue 17,000
reasonably expect to Income tax payable 23,400
liquidate within the Current maturities LT debt 121,000
Total current liabilities 569,650
normal operating cycle.” Long-term liabilities
Long-term debt 979,500
Obligations capital lease 345,800
All covenants and
Deferred income taxes 77,909
restrictions must be Total long-term liabilities 2,093,859
disclosed. Stockholders' equity

Chapter
5-25 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– “Exercise”
“Exercise”
BE5-9 Included in Ewing Company’s December 31, 2007, trial
balance are the following accounts: Accounts Payable $240,000;
Pension Liability $375,000; Discount on Bonds Payable $24,000;
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
Bonds payable
$375,000
Discount on bonds payable
400,000
Total
(24,000)
751,000
Chapter
5-26 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet

Owners’ Equity
Companies usually divide equity into three parts,
(1) Capital Stock, (2) Additional Paid-In Capital,
and (3) Retained Earnings.
Illustration 5-15

Chapter
5-27 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet Classification
Classification Exercise
Exercise
Account Classification
(a) Investment in preferred stock (a) Current asset/Investment
(b) Treasury stock (b) Equity
(c) Common stock (c) Equity
(d) Cash dividends payable (d) Current liability
(e) Accumulated depreciation (e) Contra-asset
(f) Interest payable (f) Current liability
(g) Deficit (g) Equity
(h) Trading securities (h) Current asset
(i) Unearned revenue (i) Current liability

Chapter
5-28 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet -- Format
Format

Classified Balance Sheet

Account form
Report form

Accounting Trends and Techniques—2004 (New York:

AICPA) indicates that all of the 600 companies surveyed
use either the “report form” (506) or the “account
form” (94), sometimes collectively referred to as the
“customary form.”

Chapter
5-29 LO 3 Prepare a classified balance sheet using the report and account formats.
 Additional
Additional Information
Information Reported
Reported

There are normally four types of

information that are supplemental to
account titles and amounts presented in
the balance sheet:
Contingencies
Accounting Policies
Contractual Situations
Fair Values

Chapter LO 4 Determine which balance sheet information

5-30 requires supplemental disclosure.
 Techniques
Techniques of
of Disclosure
Disclosure

Parenthetical Explanations
Notes
Cross-Reference and Contra Items
Supporting Schedules
Terminology

Chapter
5-31 LO 5 Describe the major disclosure techniques for the balance sheet.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows

One of the three basic objectives of financial

reporting is

“assessing the amounts, timing, and

uncertainty of cash flows.”

Chapter
5-32 LO 6 Indicate the purpose of the statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows

Purpose of the Statement

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:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash balance?

Chapter
5-33 LO 6 Indicate the purpose of the statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows

Content and Format

Three different activities:
Operating, Investing, Financing

Illustration 5-24

Chapter
5-34 LO 7 Identify the content of the statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows

Content and Format

Operating Investing Financing
Cash inflows Cash inflows Cash inflows
and outflows and outflows and outflows
from from from
operations. non-current non-current
assets. liabilities and
equity.

The statement’s value is that it helps users evaluate

liquidity, solvency, and financial flexibility.
Chapter
5-35 LO 7 Identify the content of the statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows

Preparation
Information obtained from several sources:
(1) comparative balance sheets,
(2) the current income statement, and
(3) selected transaction data.

Chapter
5-36 LO 8 Prepare a statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows
Preparation
BE 5-12 Midwest Beverage Company reported the
following items in the most recent year.
Activity
Operating
Financing
Operating
Operating
Investing
Operating
Financing
Required: Prepare a Statement of Cash Flows
Chapter
5-37 LO 8 Prepare a statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows
Preparation
Statement of Cash Flow (in thousands)
Operating activities Noncash credit to
Net income $ 40,000 revenues.
Increase in accounts receivable (10,000)
Increase in accounts payable 5,000 Noncash charge to
Depreciation expense 40,000 expenses.
Cash flow from operations 75,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Proceeds from notes payable 20,000
Dividends paid (5,000)
Cash flow from financing 15,000
Increase in cash $ 82,000

Chapter
5-38 LO 8 Prepare a statement of cash flows.
 Balance
Balance Sheet
Sheet

Review
In 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.

Chapter
5-39 LO 8 Prepare a statement of cash flows.
 Additional
Additional Information
Information Reported
Reported

Significant 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:
Issuance of common stock to purchase assets.
Conversion of bonds into common stock.
Issuance of debt to purchase assets.
Exchanges on long-lived assets.

Chapter
5-40 LO 8 Prepare a statement of cash flows.
 Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Without cash, a company will not survive.

Cash flow from Operations:
High 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.

Chapter
5-41 LO 9 Understand the usefulness of the statement of cash flows.
 Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Financial Liquidity

Net Cash Provided by

Current Cash Operating Activities
Debt Coverage =
Ratio Average Current Liabilities

Ratio indicates whether the company can pay off its

current liabilities from its operations. A ratio near
1:1 is good.

Chapter
5-42 LO 9 Understand the usefulness of the statement of cash flows.
 Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Financial Flexibility

Net Cash Provided by

Cash Debt Operating Activities
Coverage =
Ratio Average Total Liabilities

This 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.

Chapter
5-43 LO 9 Understand the usefulness of the statement of cash flows.
 Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Free Cash Flow

Illustration 5-34

The amount of discretionary cash flow a company has

for purchasing additional investments, retiring its
debt, purchasing treasury stock, or simply adding to
its liquidity.
Chapter
5-44 LO 9 Understand the usefulness of the statement of cash flows.
 Balance
Balance Sheet
Sheet

Review
The current cash debt coverage ratio is often used to
assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

Chapter
5-45 LO 9 Understand the usefulness of the statement of cash flows.
 Copyright
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Chapter
5-46