Chapter 5: Balance Sheet

1
Chapter 5 Balance Sheet and Statement of Cash
Flows Systems
Well only do balance sheet here, and will
discuss statement of Cash flows in Ch.23
2
Chapter 5 Balance Sheet
After studying this chapter, you should be able
to

1. Identify 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. Identify balance sheet information requiring
   supplemental disclosure.
5. Identify major disclosure techniques for the
   balance sheet.

3
Balance Sheet Usefulness

• The balance sheet provides information for
  evaluating
• Capital structure
• Rates of return
• Analyzing an enterprises
• 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 enterprises financial
  flexibility
• Liquidity characteristics

6
Balance Sheet Classification

• 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

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
Types of Ratios
Type
What is measured
Examples