CHAPTER 5
THE BALANCE SHEET AND
STATEMENT OF CASH FLOWS
Sommers – ACCT 3311
The Balance Sheet
• Reports a company’s financial position on a particular date.
Limitations:
• The balance sheet does not directly measure the market value of
the entity nor its liquidation value, but it provides valuable
information that can be used to help judge market value.
• Resources such as employee skills and reputation are not recorded
in the balance sheet.
Usefulness:
• The balance sheet describes many of the resources a company has
for generating future cash flows.
• It provides liquidity information useful in assessing a company’s
ability to pay its current obligations.
• It provides long-term solvency information relating to the riskiness of
a company with regard to the amount of liabilities in its capital
structure.
Discussion Question
Q5-2 What is meant by solvency? What information in the
balance sheet can be used to assess a company’s
solvency?
Balance Sheet Classification
Classification
Illustration 5-1
In practice you usually see little departure from these major subdivisions.
Classification in the Balance Sheet
Current Assets
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.
Illustration 5-2
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.
Balance Sheet (in thousands)
Current assets
Cash
$ 285,000
ST Investments
140,000
Accounts receivable
777,000
Inventory
402,000
Prepaid expenses
170,000
Total current assets
1,774,000
Investments:
Invesment in ABC bonds
321,657
Investment in UC Inc.
253,980
Balance Sheet – Current 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 – Current Assets
Short-Term and Long-Term Investments
Portfolios
Type
Held-toMaturity
Debt
Trading
Debt or
Equity
Availablefor-Sale
Debt or
Equity
Valuation
Amortized
Cost
Fair Value
Classification
Current or
Noncurrent
Current
Adj on Inc Stmt
Fair Value
Adj is OCI
Current or
Noncurrent
Balance Sheet – Current 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 Sheet – Current Assets
Inventories
Disclose:
►
Basis of valuation (e.g., lower-of-cost-or-market).
►
Cost flow assumption (e.g., FIFO or average cost).
Illustration 5-7
Classification in the Balance Sheet
Non-Current 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, or plant
expansion fund).
4. Non-consolidated subsidiaries or affiliated companies.
Balance Sheet – Noncurrent Assets
Long-Term
Investments
Securities
Balance Sheet (in thousands)
Current assets
Cash
$ 285,000
Investments:
Invesment in ABC bonds
321,657
Investment in UC Inc.
253,980
Notes receivable
150,000

bonds,

stock, and
Land held for speculation
550,000

long-term notes
Sinking fund
225,000
Pension fund
653,798
For marketable securities,
management’s intent
determines current or
noncurrent classification.
Cash surrender value
Investment in Uncon. Sub.
Total investments
84,321
457,836
2,696,592
Property, Plant, and Equip.
Building
Land
1,375,778
975,000
Balance Sheet – Noncurrent Assets
Long-Term
Investments
Balance Sheet (in thousands)
Current assets
Cash
$ 285,000
Investments:
Fixed Assets

Land held for
speculation
Invesment in ABC bonds
321,657
Investment in UC Inc.
253,980
Notes receivable
150,000
Land held for speculation
550,000
Sinking fund
225,000
Pension fund
653,798
Cash surrender value
Investment in Uncon. Sub.
Total investments
84,321
457,836
2,696,592
Property, Plant, and Equip.
Building
Land
1,375,778
975,000
Balance Sheet – Noncurrent Assets
Long-Term
Investments
Balance Sheet (in thousands)
Current assets
Cash
$ 285,000
Investments:
Special Funds
Invesment in ABC bonds
321,657
Investment in UC Inc.
253,980
Notes receivable
150,000
Land held for speculation
550,000

Sinking fund

Pensions fund
Sinking fund
225,000

Cash surrender
value of life
insurance
Pension fund
653,798
Cash surrender value
Investment in Uncon. Sub.
Total investments
84,321
457,836
2,696,592
Property, Plant, and Equip.
Building
Land
1,375,778
975,000
Balance Sheet – Noncurrent Assets
Long-Term
Investments
Balance Sheet (in thousands)
Current assets
Cash
$ 285,000
Investments:
Nonconsolidated
Subsidiaries or
Affiliated
Companies
Invesment in ABC bonds
321,657
Investment in UC Inc.
253,980
Notes receivable
150,000
Land held for speculation
550,000
Sinking fund
225,000
Pension fund
653,798
Cash surrender value
Investment in Uncon. Sub.
Total investments
84,321
457,836
2,696,592
Property, Plant, and Equip.
Building
Land
1,375,778
975,000
Balance Sheet – Noncurrent Assets
Long-Term Investments
Illustration 5-10
Balance Sheet
Presentation of
Long-Term Investments
Balance Sheet – Noncurrent 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 Sheet – Noncurrent Assets
Balance Sheet (in thousands)
Property, Plant, and
Equipment
Tangible assets used
in the regular
operations of the
business.
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
Balance Sheet – Noncurrent Assets
Illustration 5-11
Balance Sheet Presentation of
Property, Plant, and Equipment
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.
Current assets
Cash
Total PP&E
Intangibles
Goodwill
Patents
Trademark
Franchises
Copyright
Total intangibles
Other assets
Prepaid pension costs
Deferred income tax
Total other
Total Assets
$ 285,000
2,170,386
2,000,000
177,000
40,000
125,000
55,000
2,397,000
133,000
40,000
173,000
$ 9,210,978
Balance Sheet – Noncurrent Assets
Other Assets
Items vary in practice. Can include:

Long-term prepaid expenses

Non-current receivables

Assets in special funds

Property held for sale

Restricted cash or securities
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.
Total PP&E
Intangibles
Goodwill
Patents
Trademark
Franchises
Copyright
Total intangibles
Other assets
Prepaid pension costs
Deferred income tax
Total other
Total Assets
$ 285,000
2,170,386
2,000,000
177,000
40,000
125,000
55,000
2,397,000
133,000
40,000
173,000
$ 9,210,978
Classification in the Balance Sheet
Current Liabilities
“Obligations that a
company reasonably
expects to liquidate either
through the use of current
assets or the creation of
other current liabilities.”
Balance Sheet (in thousands)
Current liabilities
Notes payable
Accounts payable
Accrued compensation
Unearned revenue
Income tax payable
Current maturities LT debt
Total current liabilities
Long-term liabilities
Long-term debt
Obligations capital lease
Deferred income taxes
Total long-term liabilities
Stockholders' equity
$ 233,450
131,800
43,000
17,000
23,400
121,000
569,650
979,500
345,800
77,909
1,403,209
Classification in the Balance Sheet
Current Liabilities
Illustration 5-13
Balance Sheet Presentation
of Current Liabilities
Classification in the Balance Sheet
Long-Term Liabilities
“Obligations that a
company does not
reasonably expect to
liquidate within the normal
operating cycle.”
All covenants and
restrictions must be
disclosed.
Balance Sheet (in thousands)
Current liabilities
Notes payable
Accounts payable
Accrued compensation
Unearned revenue
Income tax payable
Current maturities LT debt
Total current liabilities
Long-term liabilities
Long-term debt
Obligations capital lease
Deferred income taxes
Total long-term liabilities
Stockholders' equity
$ 233,450
131,800
43,000
17,000
23,400
121,000
569,650
979,500
345,800
77,909
1,403,209
Balance Sheet – Owners Equity
Owners’ Equity
Illustration 5-15
Balance Sheet Presentation
of Stockholders’ Equity
Balance Sheet Format
Classified Report Form
Illustration 5-16
Discussion Question
Q5-4 Discuss at least two situations in which estimates
could affect the usefulness of information in the balance
sheet.
E5-1 Balance Sheet Classification
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
n)
Investment in Preferred Stock
Treasury Stock
Common Stock
Dividends Payable
Accumulated Depreciation – Equipment
Construction in Process
Petty Cash
Interest Payable
Deficit
Equity Investments (trading)
Income Tax Payable
Unearned Subscription Revenue
Work in Process
Salaries and Wages Payable
Ratio Analysis
Categories
• Liquidity – Measures of the company’s shortterm ability to pay its maturing obligations.
• Activity – Measures of how effectively the
company uses its assets.
• Profitability – Measures of the degree of success
or failure of a given company or division for a
given period of time.
• Coverage – Measures of the degree of
protection for long-term creditors and investors.
Calculating Ratios
Current cash debt coverage ratio
Net cash provided by operating activities
Average current liabilities
Inventory turnover
Cost of goods sold
Average inventory
Profit margin on sales
Net income
Net sales
Debt to total assets
Total debts
Total assets
Calculating Ratios
Big Lots
• Current cash debt coverage ratio
Family Dollar
0.52
• Inventory turnover
5.05
• Profit margin on sales
4.54%
• Debt to total assets
0.64
Additional information: 1. Net loss for the year was $2,500. 2. No
dividends were declared during 2014. Prepare a classified balance
sheet as of December 31, 2014.
Debits
Credits
Accounts Payable
$10,000
Accumulated Depreciation— Equipment
4,000
Bonds Payable (due 2021)
9,000
Cash
$
?
Common Stock
10,000
Equipment
48,000
Insurance Expense
1,400
Interest Expense
900
Prepaid Insurance
1,000
Rent Expense
1,200
Retained Earnings
25,000
Salaries and Wages Expense
9,000
Salaries and Wages Payable
500
Service Revenue
10,000
Supplies (inventory)
1,200
Trademarks
950
Unearned Service Revenue
2,000
Total
$
?
$
?
E5-11
Presented above is the adjusted trial balance of Kelly Corp at December 31, 2014.
E5-11
E5-11