CHAPTER
Balance Sheet
and
Statement
of
Cash
Flows
……..…………………………………………………………...
Assets, liabilities, & equity at a specific date.
Usefulness of the Balance Sheet
 helps predict amount &
uncertainty of future cash
flows
2003 2004 2005
5
 useful for analyzing a company’s …
ability to get
cash as needed
ability to
pay debts
ability to respond
to the unexpected
Limitations of the Balance Sheet
Historical cost
is not always
.
…
… but it’s more
.
than fair
value estimates.
$3 M
D LL
Omits items of
financial value.
Numbers not
completely
reliable.
When reliable
estimates cannot
be made.
Judgment is
frequently
involved.
?
$300 M
CLASSIFICATION IN THE BALANCE SHEET
Type or expected function

land for production vs.
land for investment
Financial flexibility
and liquidity
characteristics

petty cash vs.
bond sinking fund
Current Assets
Cash

restrictions
must be noted

restricted cash might
be non-current
Short-term
Investments



Receivables

trade vs. non-trade

pledged
held-to-maturity
trading
available-for-sale
Current Assets (cont.)
Inventories

valuation basis
disclosed

grouped by stage
of completion
Prepaid Expenses

benefits to be received
within 1 year
Long-Term Investments
Securities
$1,000

intended to be
held for more
than a year
8.0%
REGISTERED
Tangible
Fixed Assets

not currently used
in operations
Special Funds
Subsidiaries
(nonconsolidated)
Property, Plant, and Equipment

durable nature

used in operations

disclose accumulated
depreciation
Intangible Assets

lacking physical substance
Current Liabilities
 reasonably expected to be liquidated
within the normal business cycle
Unearned Revenue
Accounts
Payable
Current Portion
Long-Term Bonds
$1,000
8.0%
$1,000
$1,000
8.0%
Due 2003
REGISTERED
REGISTERED
8.0%
REGISTERED
Long-Term Liabilities
 not expected to be liquidated within a year
Bonds Payable
$1,000
8.0%
$1,000
8.0%
REGISTERED
REGISTERED
Product
Warranties
Pension
Obligations
Financial Instruments
 carrying value and estimated fair value
Owners’ Equity
 Capital Stock

par value

authorized, issued, and outstanding
 Additional Paid-In Capital
 Retained Earnings

unappropriated vs. restricted
 Treasury Stock
STATEMENT OF CASH FLOWS
 Operating activities

cash receipts from operations

cash expenditures from operations
 Investing activities

property, plant, & equipment

debt or equity securities
 Financing activities

issuance of stocks or bonds

payment of dividends
Net Income  Cash from Operations
 Adjust for non-cash expenses

add back

depreciation expense

amortization expense
 Adjust for non-cash gains and losses

add back


loss on sale of plant assets
subtract

gain on sale of securities
 Adjust for changes in operating assets

accounts receivable

inventory

prepaid expenses
 Adjust for changes operating liabilities

accounts payable

unearned revenues
Changes in Assets and Liabilities
Assets
Increase
Decrease
Liabilities
Usefulness of the Statement of Cash Flows
 “cash is the lifeblood of a company”
 the statement provides useful information:

whether the company is generating
sufficient cash through operations

reasons for positive or negative cash flow
Current cash debt
coverage ratio
Cash debt
coverage ratio
=
=
Net Cash from Operations
Average Current Liabilities
Net Cash from Operations
Average Total Liabilities
Free Cash Flow
Net cash from operations
- Capital expenditures
- Dividends
Free cash flow
 discretionary cash flow from operations
 cash flow from selling investment securities,
issuing stock, or taking out a loan doesn’t count!