Chapter 5 Balance Sheet

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Chapter 5Balance Sheet
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Basic Elements of Financial Statements

• Assets
• Liabilities
• Equity
• Investment by Owners
• Distributions to Owners

• Comprehensive Income
• Revenues
• Expenses
• Gains
• Losses

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Recognition and Measurement Criteria
Basic Assumptions
Principles
Constraints
1. Historical cost 2. Revenue
recognition 3. Matching 4. Full disclosure
1. Cost benefit 2. Materiality 3. Industry
practices 4. Conservatism
1. Economic entity 2. Going concern
3. Monetary unit 4. Periodicity
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Balance Sheet Usefulness

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

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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.

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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

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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

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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

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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

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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)

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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

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Balance Sheet Techniques of Disclosure

• Parenthetical explanations
• Notes
• Cross references and contra items
• Supporting schedules

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The Statement of Cash Flows
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Cash Inflows and Outflows
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Preparing a Statement of Cash Flows

• There are two methods of preparing the statement
  of cash flows
• Indirect method derives cash flows from accrual
  based statements
• Direct method derives cash flows directly for
  each source or use of cash

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The Statement of Cash Flows Indirect Method