Intermediate Accounting, 11th ed.

Kieso, Weygandt, and Warfield

Chapter 5: Balance Sheet
and Statement of Cash
Flows Systems
Prepared by
Jep Robertson
New Mexico State University
 Chapter 5: Balance Sheet
and Statement of Cash
Flows Systems
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.
 Chapter 5: Balance Sheet
and Statement of Cash
Flows Systems
5. Identify 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
flows.
Part 1: The Balance Sheet
Balance Sheet: Usefulness

The balance sheet provides information for

evaluating:
 Capital structure
 Rates of return
 Analyzing an enterprise’s:
Liquidity
Solvency
Financial flexibility
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.
 Balance Sheet:
Classification
Guidelines for reporting assets and
liabilities separately:
• Type or expected function in the
central operations
• Implications for the enterprise’s
financial flexibility
• Liquidity characteristics
 Balance Sheet:
Classification
Assets Liabilities and Equity
• Current Assets • Current liabilities
• Long-term • Long-term debt
investments • Owners’ equity
• Property, plant, and Capital stock
equipment • Additional paid-in
• Intangible assets capital
• Other assets • Retained earnings
 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:
1 Short-term investments at fair value
2 Accounts receivable at net realizable value
 Long-Term Investments

Long-term investments may be:

1 Investments in securities (bonds, stock)
2 Investments in fixed assets (land not used
in operations)
3 Investments set aside in special funds
(e.g., sinking fund)
4 Investments in non-consolidated
subsidiaries or affiliated companies
 Current Liabilities

Current liabilities are liquidated:

1 Either through the use of current assets, or
2 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
 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)
Balance Sheet: Additional
Information Reported
Additional information may be:
1 Information not presented elsewhere, or
2 Information that qualifies items in the
balance sheet
Supplemental information examples:
• Material events having an uncertain
outcome
• Explanations regarding accounting policies
• Covenant restrictions
Balance Sheet: Techniques
of Disclosure

• Parenthetical explanations
• Notes
• Cross references and contra items
• Supporting schedules
Part 1: The Statement of
Cash Flows
 The Cash Flow Statement

The cash flow statement provides

information about:
• cash receipts (cash inflows)
• uses of cash (cash outflows)
• during a period of time
Inflows and outflows are reported for:
• operating
• investing
• financing activities
Cash Inflows and Outflows
 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
 The Statement of Cash
Flows: Indirect Method
Accrual Based Statements Cash Flow Statement
Income Statement Operating activities:
items & Changes in Adjust net income for accruals
Current Assets and and non-cash charges to get
Current Liabilities cash flows
Investing activities:
Balance Sheet: Changes in Inflows from sale of assets and
Non-Current Assets Outflows from purchases of
assets
Balance Sheet: Changes in Financing activities:
Non-Current Liabilities Inflows and outflows
and from loan and equity
Equity transactions
 Ratio Analysis

Ratio analysis expresses the relationship

between selected financial data.

These relationships can be expressed as:

• percentages
• rates, or
• proportions
 Types of Ratios

Type What is measured Examples

Short-term ability to Current ratio
Liquidity ratios pay maturing Quick assets ratio
obligations

Activity ratios Effectiveness in using Receivables turnover

assets employed Inventory turnover
Degree of success or Rate of return on assets
Profitability failure for a given Earnings per share
ratios period
Degree of protection for
Debt to total assets
Coverage
05/24/19 ratios long-term
Intermediate creditors
Accounting, and
10th Edition, Times interest earned
21
investors
Ch. 5 (Kieso et al.)
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