Balance Sheet and Statement of Cash Flows: Learning Objectives

5 Balance Sheet and
Statement of Cash Flows
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
balance sheet. 7. Understand the usefulness of the
2. Identify the major classifications of the statement of cash flows.
balance sheet. 8. Determine which balance sheet
3. Prepare a classified balance sheet using information requires supplemental
the report and account formats. disclosure.
4. Indicate the purpose of the statement of 9. Describe the major disclosure techniques
cash flows. for the balance sheet.
5. Identify the content of the statement of
cash flows
5-1
Balance
Balance Sheet
Sheet
Balance Sheet, sometimes referred to as the statement of

financial position:
1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to

creditors, and equity in net resources.
3. Helps in predicting amounts, timing, and uncertainty of

future cash flows.
5-2 LO 1 Explain the uses and limitations of a balance sheet.

Balance
Balance Sheet
Sheet
Usefulness of the Balance Sheet

 Computing rates of return.
 Evaluating the capital structure.
 Assess risk and future cash flows.
 Analyze the company’s:
► Liquidity,
► Solvency, and
► Financial flexibility.

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.

5 Balance Sheet and
LEARNING OBJECTIVES
cash flows
5-5
Balance
Balance Sheet
Sheet
Classification in the Balance Sheet
5-6 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet

Illustration 5-1
In practice you usually see little departure from these major subdivisions.

Balance
Balance Sheet
Sheet

Illustration 5-1
In practice you usually see little departure from these major subdivisions.

Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Question
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.
Order of Liquidity

Balance
Balance Sheet
Sheet –– “Current
“CurrentAssets”
Assets”
Cash
 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.
Illustration 5-3
Balance Sheet—Restricted Cash
5-10 LO 2
Balance
Balance Sheet
“CurrentAssets”
Assets”
Cash
Illustration 5-4
Balance Sheet—Restricted Cash

Balance
Balance Sheet
“CurrentAssets”
Assets”
Short-Term Investments
Portfolios Type Valuation Classification
Held-to- Amortized Current or

Debt
Maturity Cost Noncurrent
Debt or
Trading Fair Value Current
Equity
Available- Debt or Current or

Fair Value
for-Sale Equity Noncurrent

Balance
Balance Sheet
“CurrentAssets”
Assets”
Short-Term Investments
Illustration 5-5
Balance Sheet Presentation of
Investments in Securities

Balance
Balance Sheet
“CurrentAssets”
Assets”
Receivables
Major categories of receivables should be shown in the
balance sheet or the related notes.
A company should clearly identify

 Anticipated loss due to uncollectibles.
 Amount and nature of any nontrade receivables.
 Receivables used as collateral.

Balance
Balance Sheet
“CurrentAssets”
Assets”
Receivables
Illustration 5-6
Balance Sheet Presentation
of Receivables
5-15 LO 2
Balance
Balance Sheet
“CurrentAssets”
Assets”
Inventories
Disclose:
► Basis of valuation (e.g., lower-of-cost-or-market).
► Cost flow assumption (e.g., FIFO or LIFO).
Illustration 5-7
Balance Sheet Presentation of Inventories
5-16 LO 2
Balance
Balance Sheet
“CurrentAssets”
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  taxes
 advertising

Balance
Balance Sheet
“CurrentAssets”
Assets”
Prepaid Expenses
Illustration 5-9
of Prepaid Expenses

Balance
Balance Sheet
“CurrentAssets”
Assets”
Summary Balance Sheet (in thousands)
Cash and other assets Current assets

Cash $ 285,000
a company expects to
ST Investments 140,000
 convert into cash, Accounts receivable 777,000
Inventory 402,000
 sell, or Prepaid expenses 170,000
 consume Total current assets 1,774,000
Investments:
either in one year or in Invesment in ABC bonds 321,657
the operating cycle, Investment in UC Inc. 253,980
whichever is longer.

Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Noncurrent Assets
Long-term Investments
1. Securities (bonds, common stock, or long-term notes).
2. Tangible fixed assets not currently used in operations

(land held for speculation).
3. Special funds (sinking fund, pension fund, plant expansion

fund, or cash surrender value of life insurance).
4. Nonconsolidated subsidiaries or affiliated companies.

Balance
Balance Sheet
Sheet –– “Noncurrent
“NoncurrentAssets”
Assets”
Long-Term Investments
Portfolios Type Valuation Classification
Held-to- Amortized Current or

Debt
Maturity Cost Noncurrent
Debt or
Trading Fair Value Current
Equity
Available- Debt or Current or

Fair Value
for-Sale Equity Noncurrent

Balance
Balance Sheet
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
 Stock, and Land held for speculation 550,000
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
determines current or
Property, Plant, and Equip.
noncurrent classification.
Building 1,375,778
Land 975,000
5-22 LO 2
Balance
Balance Sheet
Assets”
Investments:
Fixed Assets Invesment in ABC bonds 321,657
 Land held for Notes receivable 150,000
speculation Land held for speculation 550,000
Building 1,375,778
Land 975,000
5-23 LO 2
Balance
Balance Sheet
Assets”
Investments:
Special Funds Invesment in ABC bonds 321,657
 Sinking fund Notes receivable 150,000
 Pensions fund Land held for speculation 550,000
 Cash surrender
value of life Cash surrender value 84,321
insurance Investment in Uncon. Sub. 457,836
Building 1,375,778
Land 975,000
5-24 LO 2
Balance
Balance Sheet
Assets”
Investments:
Nonconsolidated Invesment in ABC bonds 321,657
Subsidiaries or
Notes receivable 150,000
Affiliated Land held for speculation 550,000
Companies Sinking fund 225,000
Building 1,375,778
Land 975,000
5-25 LO 2
Balance
Balance Sheet
Assets”
Long-Term Investments Illustration 5-10

Balance Sheet
Presentation of
Long-Term Investments

Balance
Balance Sheet
Assets”
Property, Plant, and Equipment

Tangible long-lived assets used in the regular operations
of the business.
 Physical property such as land, buildings, machinery,
furniture, tools, and wasting resources (minerals).
 With the exception of land, a company either depreciates
(e.g., buildings) or depletes (e.g., oil reserves) these
assets.

Balance
Balance Sheet
Assets”
Property, Plant, and Current assets
Equipment Cash $ 285,000

A company discloses the Property, Plant, and Equip.
basis it uses to value Building 1,375,778
Land 975,000
property, plant, and Machinery and equipment 234,958
equipment. Capital leases 384,650
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
Balance
Balance Sheet
Assets”

Illustration 5-11
Balance Sheet Presentation of

Balance
Balance Sheet
Assets”
Intangible Assets Current assets
Cash $ 285,000
Lack physical substance
and are not financial
Intangibles
instruments. Goodwill 2,000,000
Patents 177,000
 Limited life intangibles
Trademark 40,000
amortized. Franchises 125,000
 Indefinite-life Copyright 55,000
intangibles tested for Total intangibles 2,397,000
Other assets
impairment.
Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000
Total Assets $ 9,210,978
5-30
LO 2
Balance
Balance Sheet
Assets”
Illustration: Patrick Corporation adjusted trial balance contained the

following asset accounts at December 31, 2014: 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.
Intangible Assets
Goodwill
Franchises
$ 50,000
Patents
47,000
Trademarks
33,000
Total
10,000
5-31 $140,000
LO 2 Identify the major classifications of the balance sheet.
Balance
Balance Sheet
Assets”
Intangible Assets
Illustration 5-12
Balance Sheet
Presentation of
Intangible Assets

Balance
Balance Sheet
Assets”
Other Assets
Items vary in practice. Can include
 Long-term prepaid expenses
 Non-current receivables
 Assets in special funds
 Deferred income taxes
 Property held for sale
 Restricted cash or securities

Balance
Balance Sheet
Assets”
Other Assets Current assets
Cash $ 285,000
This section should
include only unusual items Intangibles
sufficiently different from Goodwill 2,000,000
Patents 177,000
assets in the other Trademark 40,000
categories. Franchises 125,000
Copyright 55,000
Total intangibles 2,397,000
Other assets
Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000
Total Assets $ 9,210,978
5-34
LO 2
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Liabilities Balance Sheet (in thousands)

Current liabilities
Companies classify Notes payable $ 233,450
Accounts payable 131,800
liabilities as current or Accrued compensation 43,000
long-term. Unearned revenue 17,000
Income tax payable 23,400
Current maturities LT debt 121,000
Total current liabilities 569,650
Long-term liabilities
Long-term debt 979,500
Obligations capital lease 345,800
Deferred income taxes 77,909
Total long-term liabilities 1,403,209
Stockholders' equity

Balance
Balance Sheet
Sheet –– “Liabilities”
“Liabilities”
Current Liabilities Balance Sheet (in thousands)

Current liabilities
Obligations that a Notes payable $ 233,450
company reasonably
Accrued compensation 43,000
expects to liquidate either Unearned revenue 17,000
through the use of Income tax payable 23,400
current assets or the Total current liabilities 569,650
creation of other current Long-term liabilities
liabilities. Long-term debt 979,500
Obligations capital lease 345,800
Total long-term liabilities 1,403,209

Balance
Balance Sheet
“Liabilities”
Current Liabilities
Illustration 5-13
of Current Liabilities

Balance
Balance Sheet
“Liabilities”
Long-Term Liabilities Balance Sheet (in thousands)

Current liabilities
Obligations that a Notes payable $ 233,450
company does not Accrued compensation 43,000
reasonably expect to Unearned revenue 17,000
Income tax payable 23,400
liquidate within the normal
operating cycle. Total current liabilities 569,650
All covenants and Long-term debt 979,500
restrictions must be Obligations capital lease 345,800
disclosed. Total long-term liabilities 1,403,209

Balance
Balance Sheet
“Liabilities”
Illustration: Included in Adams Company’s December 31, 2014, trial

balance are the following accounts: Accounts Payable $220,000;
Pension Asset/Liability $375,000; Discount on Bonds Payable
$29,000; Unearned Revenue $41,000; Bonds Payable $400,000;
Salaries and Wages Payable $27,000; Interest Payable $12,000;
Income Taxes Payable $29,000. Prepare the long-term liabilities
section of the balance sheet.
Pension Asset/liability
Bonds payable
$375,000
Discount on bonds payable
400,000
Total
(29,000)
5-39 $746,000
LO 2 Identify the major classifications of the balance sheet.
Balance
Balance Sheet
“Liabilities”
Long-Term Liabilities
Illustration 5-14
of Long-Term Liabilities
5-40 LO 2
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Owners’ Equity

Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Owners’ Equity
Illustration 5-15
of Stockholders’ Equity

Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Account Classification
(a) Investment in preferred stock (a) Current asset/Investment
(b) Treasury stock (b) Stockholders’ Equity
(c) Common stock (c) Stockholders’ Equity
(d) Cash dividends payable (d) Current liability
(e) Accumulated depreciation (e) Contra-asset
(f) Interest payable (f) Current liability
(g) Deficit (g) Stockholders’ Equity
(h) Trading securities (h) Current asset
(i) Unearned revenue (i) Current liability

5 Balance Sheet and
LEARNING OBJECTIVES
cash flows
5-44
Balance
Balance Sheet
Sheet Format
Format
Classified Balance Sheet

 Account form
 Report form
Accounting Trends and Techniques—2011 (New York: AICPA)

indicates that all of the 500 companies surveyed use either the
“report form” (4848) or the “account form” (16), sometimes
collectively referred to as the “customary form.”
5-45 LO 3 Prepare a classified balance sheet using the report and account formats.
Balance
Balance Sheet
Sheet
Format
Format
Report Form
Illustration 5-16
5-46
LO 3
WHAT’S
WARNINGYOUR PRINCIPLE
SIGNALS
5-47 LO 3 Prepare a classified balance sheet using the report and account formats.
5 Balance Sheet and
LEARNING OBJECTIVES
cash flows
5-48
Additional
Additional Information
Information
Supplemental Disclosures
Four types of information that are supplemental to account
titles and amounts presented in the balance sheet:
LO 8 Determine which balance sheet information

5-49 requires supplemental disclosure.
5 Balance Sheet and
LEARNING OBJECTIVES
cash flows
5-50
Additional
Additional Information
Information
Techniques of Disclosure
 Parenthetical Explanations
 Notes
 Cross-Reference and Contra Items
 Supporting Schedules
5-51 LO 9 Describe the major disclosure techniques for the balance sheet.
APPENDIX 5A Ratio Analysis—A Reference
Using Ratios to Analyze Performance

Analysts 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.
5-52 LO 10 Identify the major types of financial ratios and what they measure.
Using Ratios Illustration 5A-1

A Summary of Financial Ratios


Specimen Financial Statements:
APPENDIX 5B The Procter & Gamble Company
The following are the traditional financial portions of the annual

report:
• Letter to the Stockholders
• Financial Highlights
• Management’s Discussion and Analysis
• Management Certification of Financial Statements
• Management’s Report on Internal Control
• Auditor’s Reports
• Financial Statements
• Notes to the Financial Statements
• Supplementary Financial Information (e.g., 10-year financial
summary)
5-56
Consolidated Statement of Earnings
5-57
Consolidated Balance Sheets
5-58
Consolidated Balance Sheets
5-59
Consolidated Statement of Shareholders’ Equity

Dollars in millions/Shares in thousands
Statements for the year ended 2010 and 2009 not presented.
5-60
Consolidated Statement of Cash Flows
5-61

Balance Sheet and Statement of Cash Flows: Learning Objectives

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5 Balance Sheet and

Statement of Cash Flows

Balance Sheet, sometimes referred to as the statement of

1. Reports assets, liabilities, and equity at a specific date.

2. Provides information about resources, obligations to

3. Helps in predicting amounts, timing, and uncertainty of

5-2 LO 1 Explain the uses and limitations of a balance sheet.

Usefulness of the Balance Sheet

5-3 LO 1 Explain the uses and limitations of a balance sheet.

Limitations of the Balance Sheet

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

Classification in the Balance Sheet

5-6 LO 2 Identify the major classifications of the balance sheet.

Classification in the Balance Sheet

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

Classification in the Balance Sheet

5-8 LO 2 Identify the major classifications of the balance sheet.

5-9 LO 2 Identify the major classifications of the balance sheet.

5-11 LO 2 Identify the major classifications of the balance sheet.

Portfolios Type Valuation Classification

Held-to- Amortized Current or

Available- Debt or Current or

5-12 LO 2 Identify the major classifications of the balance sheet.

5-13 LO 2 Identify the major classifications of the balance sheet.

A company should clearly identify

5-14 LO 2 Identify the major classifications of the balance sheet.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

5-17 LO 2 Identify the major classifications of the balance sheet.

5-18 LO 2 Identify the major classifications of the balance sheet.

Summary Balance Sheet (in thousands)

Cash and other assets Current assets

5-19 LO 2 Identify the major classifications of the balance sheet.

2. Tangible fixed assets not currently used in operations

3. Special funds (sinking fund, pension fund, plant expansion

4. Nonconsolidated subsidiaries or affiliated companies.

5-20 LO 2 Identify the major classifications of the balance sheet.

Portfolios Type Valuation Classification

Held-to- Amortized Current or

Available- Debt or Current or

5-21 LO 2 Identify the major classifications of the balance sheet.

Investments Cash $ 285,000

Investments Cash $ 285,000

Investments Cash $ 285,000

Investments Cash $ 285,000

Long-Term Investments Illustration 5-10

5-26 LO 2 Identify the major classifications of the balance sheet.

Property, Plant, and Equipment

5-27 LO 2 Identify the major classifications of the balance sheet.

Equipment Cash $ 285,000

Total investments 2,696,592

Property, Plant, and Equipment

5-29 LO 2 Identify the major classifications of the balance sheet.

Illustration: Patrick Corporation adjusted trial balance contained the

5-32 LO 2 Identify the major classifications of the balance sheet.

5-33 LO 2 Identify the major classifications of the balance sheet.

Liabilities Balance Sheet (in thousands)

5-35 LO 2 Identify the major classifications of the balance sheet.

Current Liabilities Balance Sheet (in thousands)

5-36 LO 2 Identify the major classifications of the balance sheet.

5-37 LO 2 Identify the major classifications of the balance sheet.

Long-Term Liabilities Balance Sheet (in thousands)

5-38 LO 2 Identify the major classifications of the balance sheet.