Slide
3-1
Balance Sheet and Statement of Cash
Flows
Chapter 5
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-2
Balance 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.
McGraw-Hill/Irwin
LO 1 Explain the uses
and limitations of a balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-3
Balance 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.
LO 1 Understand the uses and limitations of an income statement.
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-4
Balance Sheet
Claims against
resources (Liabilities)
Resources
(Assets)
McGraw-Hill/Irwin
Remaining claims
accruing to owners
(Owners’ Equity)
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-5
Current Assets
Current
Assets
Cash
Receivables
Inventories
Prepayments
Will be converted
to cash or
consumed within
one year or the
operating cycle,
whichever is
longer.
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-6
Balance Sheet – “Current Assets”
Current Assets - “Summary”
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.
McGraw-Hill/Irwin
Balance Sheet (in thousands)
Current assets
Cash
ST Investments
Accounts receivable
Inventory
Prepaid expenses
Total current assets
$ 285,000
140,000
777,000
402,000
170,000
1,774,000
Investments:
Invesment in ABC bonds
Investment in UC Inc.
321,657
253,980
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-7
Balance Sheet – “Current 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.
McGraw-Hill/Irwin
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-8
Balance Sheet – “Current Assets”
Accounts Receivable – Presentation Options
1
2
Current Assets:
Cash
Accounts receivable
Less allowance for doubtful accounts
Inventory
Total current assets
Current Assets:
Cash
Accounts receivable, net of $25 allowance
Inventory
Total current assets
McGraw-Hill/Irwin
$ 346
500
25
475
812
$1,633
$ 346
475
812
$1,633
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-9
Non-Current Assets
Noncurrent
Assets
Investments and
Funds
Property, Plant, &
Equipment
Intangibles
Other
Not expected to be
converted to cash
or consumed
within one year or
the operating
cycle, whichever is
longer
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-10
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Securities
bonds,
stock, and
long-term notes
For marketable securities,
management’s intent
determines current or
noncurrent classification.
McGraw-Hill/Irwin
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
$ 285,000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-11
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Fixed Assets
Land held for
speculation
McGraw-Hill/Irwin
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
$ 285,000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-12
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Special Funds
Sinking fund
Pensions fund
Cash surrender
value of life
insurance
McGraw-Hill/Irwin
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
$ 285,000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-13
Balance Sheet – “Noncurrent Assets”
Long-Term Investments
Nonconsolidated
Subsidiaries or
Affiliated
Companies
McGraw-Hill/Irwin
Balance Sheet (in thousands)
Current assets
Cash
Investments:
Invesment in ABC bonds
Investment in UC Inc.
Notes receivable
Land held for speculation
Sinking fund
Pension fund
Cash surrender value
Investment in Uncon. Sub.
Total investments
Property, Plant, and Equip.
Building
Land
$ 285,000
321,657
253,980
150,000
550,000
225,000
653,798
84,321
457,836
2,696,592
1,375,778
975,000
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-14
Balance Sheet – “Noncurrent Assets”
Property, Plant, and Equipment
Assets of a durable
nature used in the
regular operations
of the business.
McGraw-Hill/Irwin
Balance Sheet (in thousands)
Current assets
Cash
Total investments
Property, Plant, and Equip.
Building
Land
Machinery and equipment
Capital leases
Leasehold improvements
Accumulated depreciation
Total PP&E
Intangibles
Goodwill
Patents
Trademarks
$ 285,000
2,696,592
1,375,778
975,000
234,958
384,650
175,000
(975,000)
2,170,386
3,000,000
177,000
40,000
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-15
Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
Intangibles
Lack physical
substance and are not
financial instruments.
Limited life
intangibles amortized.
Indefinite-life
intangibles tested for
impairment.
McGraw-Hill/Irwin
Current assets
Cash
Accumulated depreciation
Total PP&E
Intangibles
Goodwill
Patents
Trademark
Franchises
Copyright
Total intangibles
Other assets
Prepaid pension costs
Deferred income tax
Total other
$ 285,000
(975,000)
2,170,386
2,000,000
177,000
40,000
125,000
55,000
2,397,000
133,000
40,000
173,000
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-16
Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
Other Assets
Current assets
Cash
This section should
include only unusual
items sufficiently
different from assets
in the other
categories.
McGraw-Hill/Irwin
Intangibles
Goodwill
Patents
Trademark
Franchises
Copyright
Total intangibles
Other assets
Prepaid pension costs
Deferred income tax
Total other
Total Assets
$ 285,000
2,000,000
177,000
40,000
125,000
55,000
2,397,000
133,000
40,000
173,000
$ 9,210,978
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-17
Current Liabilities
Current
Liabilities
Accounts Payable
Notes Payable
Accrued Liabilities
Current Maturities of
Long-Term Debt
Obligations
expected to be
satisfied through
current assets or
creation of other
current liabilities
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-18
Balance Sheet
Balance Sheet (in thousands)
Current Liabilities
Current liabilities
“Obligations that a
company reasonably
expects to liquidate
either through the use
of current assets or the
creation of other
current liabilities.”
Accounts payable
$ 233,450
Notes payable
131,800
Accrued compensation
43,000
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
Obligations capital lease
Deferred income taxes
Total long-term liabilities
979,500
345,800
77,909
1,403,209
Stockholders' equity
McGraw-Hill/Irwin
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-19
Non-Current Liabilities
Long-Term
Liabilities
Capital Leases
Bonds Payable
Long-Term Notes
Payable
Pension Liabilities
Obligations that
will not be satisfied
within one year or
operating cycle,
whichever is
longer
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-20
Balance Sheet
Long-Term Liabilities
Balance Sheet (in thousands)
Current liabilities
“Obligations that a
company does not
reasonably expect to
liquidate within the
normal operating cycle.”
All covenants and
restrictions must be
disclosed.
McGraw-Hill/Irwin
Accounts payable
$ 233,450
Notes payable
131,800
Accrued compensation
43,000
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
Obligations capital lease
Deferred income taxes
Total long-term liabilities
979,500
345,800
77,909
1,403,209
Stockholders' equity
LO 2 Identify the major
classifications of the balance sheet.
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-21
Shareholders’ Equity
Capital
Stock
Other
Contributed
Capital
Retained
Earnings
Treasury
Stock
Accumulated Other Comprehensive Income
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-22
Now, let’s look
at some
ratios!
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-23
Whole Foods Market, Inc.
Balance Sheet
For the Fiscal Year Ended September 30
In Thousands
2012
2011
Assets
Cash and Cash Equivalents
Short-Term Investments
Accounts Receivable
Merchandise Inventory
Deferred Taxes
Prepaid Expenses
Total Current Assets
$
191,889
1,131,213
196,503
374,269
132,246
76,511
2,102,631
$
303,960
442,320
175,310
336,799
121,176
73,579
1,453,144
Property and Equipment (Net)
Long-Term Investments
Goodwill
Other
2,192,683
221,426
662,938
114,538
1,997,212
52,815
662,938
125,966
Total Assets
5,294,216
4,292,075
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-24
Whole Foods Market, Inc.
Balance Sheet
For the Fiscal Year Ended September 30
In Thousands
2012
2011
Liabilities
Accounts Payable
Other Accrued Liabilities
Current Portion of Long Term Debt
Total Current Liabilities
Long-Term Debt
Deferred Lease Liabilities
Other Liabilities
Total Liabilities
247,089
729,087
1,012
977,188
236,913
641,982
466
879,361
23,110
440,822
50,627
1,491,747
17,439
353,776
50,194
1,300,770
2,592,369
0
(28,599)
1,233,433
5,266
3,802,469
$ 5,294,216
2,120,972
0
0
870,497
(164)
2,991,305
$ 4,292,075
Equity
Common Stock
Additional Paid in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income/(Loss)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-25
Whole Foods Market, Inc.
Income Statement
For the Fiscal Year Ended September 30
In Thousands
2012
2011
$ 11,698,828
7,543,054
4,155,774
$ 10,107,787
6,571,238
3,536,549
Direct Store Expenses
General and Administrative Expenses
Pre-Opening Expenses
Restructuring Costs
Operating Income/(Loss)
2,983,419
372,065
46,899
9,885
743,506
2,628,811
310,920
40,852
8,346
547,620
Interest Expense
Interest Revenue
Income/(Loss) before Income Taxes
(354)
8,892
752,044
(3,882)
7,974
551,712
Income Tax Expense/(Benefit)
Net Income/(Loss)
286,471
465,573
209,100
342,612
Net Sales
Cost of Goods Sold
Gross Profit
McGraw-Hill/Irwin
$
$
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-26
Liquidity Ratios
Current assets
Current ratio =
Current liabilities
Measures a company’s ability to satisfy its shortterm liabilities
2011
2012
2.15 =
$2,102,631
$977,188
1.65 =
$1,453,144
$879,361
Current ratio
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-27
Liquidity Ratios
Quick assets
Acid-test ratio =
Current liabilities
Provides a more stringent indication of a company’s
ability to pay its current liabilities
2011
2012
1.56 =
$1,519,605
1.05 =
$977,188
$921,590
$879,361
Acid-test ratio
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-28
Financing Ratios
Total liabilities
Debt to equity
=
Shareholders’ equity
ratio
Indicates the extent of reliance on creditors, rather
than owners, in providing resources
2012
.39
=
$1,491,747
$3,802,469
2011
$1,300,770
.43
=
$2,991,305
Debt to equity ratio
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-29
Financing Ratios
Times interest
=
earned ratio
Net income + Interest
expense + Taxes
Interest expense
Indicates the margin of safety provided to creditors
2012
2011
$752,398
2,125
=
$354
$555,594
143 =
$3,882
Times interest earned ratio
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-30
Now, let’s
move on to
a new
topic.
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-31
Statement of Cash Flows
The Statement of Cash Flows provides relevant information
about the cash receipts and cash payments of an enterprise during
a period. It provides answers to questions:
1. Where did the cash come from during the period?
2. What was the cash used for during the period?
3. What was the change in the cash balance during the
period?
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-32
The Statement of Cash Flows
Content and Format
Three different activities:
Investing,
Operating,
Financing
Illustration 5-24
LO 7 Identify the content of the statement of cash flows.
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-33
Statement of Cash Flows
Cash Flows from Operating Activities
Reports the cash effects of transactions that enter into
the determination of net income.
The direct method and indirect method are two
different approaches to report cash flows from
operations. Each has its advantages and
disadvantages, but each reconciles to the same
number for total cash flows from operating
activities.
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-34
Statement of Cash Flows
Cash Flows from Investing Activities
Reports cash effects of transactions that result in a
change in long-term assets. For example:
Buying or selling property, plant, or equipment
Buying or selling financial investment
instruments
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-35
Statement of Cash Flows
Cash Flows from Financing Activities
Reports cash effects of transactions that result in a
change in long-term liabilities and stockholder’s
equity. For example:
Acquiring or paying down borrowings
Issuing capital stock
Paying dividends to stockholders
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-36
Basic Format for the
Statement of Cash Flows
Cash flows from operating activities:
Involve the purchase and sale
of products or services
Cash flows from investing activities:
Involve the acquisition and sale
of long-term assets
Cash flows from financing activities:
Involve the issuance and payment
of long-term liabilities and stock
Net increase in cash
Cash at beginning of year
Cash at end of year
McGraw-Hill/Irwin
$$
$$
$$
$$
$$
$$
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Slide
3-38
The Statement of Cash Flows
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.
LO 8 Prepare a statement of cash flows.
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.