Learning
Learning Objectives
Objectives
Balance
Sheet &
Statement of
Cash Flows
Slide
5-1
Chapter
5
UCSB, Anderson
1.
2.
3.
4.
5.
6.
7.
8.
9.
Slide
5-2
Balance Sheet Basics

What
Whatis
isaabalance
balancesheet?
sheet?
–– Tells
Tellswhere
wherethe
theentity
entitystands
standsfinancially;
financially;
–– “AS
“ASOF”;
OF”;
–– Better
way
to
think
of
it
is
as
a
Better way to think of it is as a“Statement
“Statementof
ofFinancial
FinancialPosition”
Position”

Transaction
Transaction based.
based.

Important
ImportantFact:
Fact: Inherently
Inherentlyrelies
reliesupon
uponestimates.
estimates.
Example:
Example:
–– Something
Somethinghas
hasto
toactually
actuallyHAPPEN
HAPPENfirst
first
–– Historical
Historicalcost
costbasis
basis
–– Valuation
Valuationof
ofreceivables
receivablesand
andinventories;
inventories;
–– Goodwill
Goodwillvaluation;
valuation;
–– Completeness
Completenessof
ofreported
reportedimpairments;
impairments;

Slide
5-3
Comparative
Comparative balance
balancesheet
sheet analysis
analysisis
isaasubstantial
substantial
tool
toolin
inunderstanding
understandingwhether
whetherthe
theCompany
Companyis
is
improving
improvingor
ordeteriorating.
deteriorating.
UCSB, Anderson
Identify the uses and limitations of a balance sheet.
Identify the major classifications on the balance sheet.
Prepare a classified balance sheet using the account
format. (Not using the report format from the text)
Identify balance sheet information requiring supplemental
disclosure.
Identify major balance sheet disclosure techniques.font
Explain the purpose of the statement of cash flows.
Identify the content of the statement of cash flows.
Not preparing a statement of cash flows as per text.
Understand the usefulness of the statement of cash flows.
UCSB, Anderson
No Statement Stands on it’
it’s Own
ALL OF THE STATEMENTS AND NOTES ARE
INTERDEPENDANT
The balance sheet needs an income statement and a statement of cash
cash
flows and note disclosure to tell a complete picture…
picture… Think of the
“self balancing”
balancing” aspect. If you debit a/r and credit sales, then you
need to see the balance sheet AND the income statement to have the
the
complete picture.
For instance if a Company generates $1,000,000 of net income, and
and
their total average equity for the year was $1.75, would you be
impressed?.... What about if their average equity was $100 billion?
billion?
What if a Company had operating income on the income statement but
but
showed negative cash flows from operating activities on the statement
statement
of cash flows–
flows– might you want to know why?
Slide
5-4
UCSB, Anderson
Balance Sheet Limitations
Some important balance sheet tools and terms
 LiquidityLiquidity- How
How fast
fast can
can an
an asset
asset turn
turn
into
into cash?
cash?
 SolvencySolvency- How
How able
able is
is the
the Company
Company to
to
pay
it’s
debts?
pay it’s debts?
 Combined
Combined (Liquidity
(Liquidity and
and Solvency)
Solvency)
represents
the
Company’s
represents the Company’s “financial
“financial
flexibility”
flexibility”
–– IfIf aa company
company is
is dependant
dependant upon
upon lenders
lenders
for
for working
working capital,
capital, they
they typically
typically must
must
comply
comply with
with “restrictive
“restrictive covenants”
covenants”
Slide
5-5
UCSB, Anderson

Historical
HistoricalCost
Cost Based.
Based.

Transaction-based:
Transaction-based: something
something has
hasto
tohappen
happenfirst
first
SUCH
SUCH AS:
AS: Most
Most current
current assets
assets and
and
liabilities
liabilities and
and Debt.
Debt.
NOT:
NOT: Fixed
Fixed assets,
assets, intangible
intangible assets.
assets.
Slide
5-7
UCSB, Anderson
–– Omits
Omitsmany
manyitems
itemsthat
thathave
havevalue
value(but
(butare
arenot
notbased
basedon
onaa
past
pasttransactiontransaction-remember
rememberthe
thestatements
statementsare
aretransactiontransactionbased)
based)Example:
Example:
»» Human
Humanresource
resource
»» Technological
Technologicaldiscoveries
discoveries

Requires
Requires estimation/
estimation/Judgment.
Judgment.
–– INSTRUCTOR
INSTRUCTORNOTE:
NOTE: RP
RP
Slide
5-6
WHAT’
WHAT’S A FINANCIAL INSTRUMENT
DEFINITION:
DEFINITION: Cash,
Cash, an
an ownership
ownership
interest,
interest, or
or aa contractual
contractual right
right to
to receive
receive
or
or obligation
obligation to
to deliver
deliver cash
cash or
or another
another
financial
financial instrument.
instrument.
–– Newhall
NewhallLand
Landand
andFarming
FarmingCompany
Companypurchased
purchasedland
landin
inlate
late
1800’s.
1800’s. On
Ontheir
their2002
2002annual
annualreport,
report,their
theirNet
NetAssets,
Assets,at
at
historical
cost
were
$136,000,000
VS
conservative
appraisal
historical cost were $136,000,000 VS conservative appraisal
value
valueof
of$389,000,000.
$389,000,000. They
Theywere
werelater
laterpurchased
purchasedby
byLennar
Lennar
for
for$1
$1billion!
billion!
UCSB, Anderson
FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB
FASBNo.
No.157:
157:
 Provides
Providesguidance
guidanceon
onHOW
HOWto
tomeasure
measurefair
fair value
value
–– Uses
Usesaamarket
marketparticipant
participantapproach
approach
»» Results
Resultsin
inmore
morecomparable
comparable(potentially
(potentiallyless
lessaccurate)
accurate)data
data
–– NOT
NOTWhen
Whento
toapply...
apply...Only
Onlyapplicable
applicableififother
otherliterature
literaturerequires
requires
measurement
measurementat
atfair
fairvalue.
value.
FASB
FASBNo.
No.159:
159:
 Makes
Makespresentation
presentationof
offinancial
financial instruments
instrumentsat
atfair
fair value
value
optionaloptional- very
veryunusual
unusualand
and very
verycontradictory
contradictoryto
tothe
the
notion
notionof
of“comparability”
“comparability”
NOTE:
NOTE: IfIfpresented
presentedat
atcost
coston
onthe
thebalance
balancesheet,
sheet,then
thenfair
fair
value
valueis
isdisclosed
disclosedin
inthe
thenotes.
notes. Therefore
Therefore the
thefair
fair value
value
of
all
financial
instruments
is
presented
somewhere
of all financial instruments is presented somewhere
within
withinthe
thefinancial
financialstatements!
statements!
Slide
5-8
UCSB, Anderson

INTERESTING ABOUT FAIR VALUES
− How long have fair value measurements been in f/s’s?
− How many people will come to the same fair value est.?
− How many people will come to the same cost basis?

What impact does FAS 157 have on items previously accounted for
at cost?

These points add up to the need for FAS 157
− It “Blends” additional information of fair value with consistency of cost
basis.

If you remember one point, remember this:
− FAS 157 looks to use data which is going to result in two companies
coming to as close to the exact same valuation of fair value for similar
items as possible.
Fas 157…
157… levels of inputs
Which Data are they using?

stop

BALANCE SHEET SUMMARY
DEFINED:
Probable future economic
benefits obtained or
controlled by a particular
entity as a result of past
transactions or events.
events.
FLOW:
Current assets
Noncurrent assets
Intangibles
Other assets
Slide
5-11
=
Liabilities
Probable future sacrifices of
economic benefits arising from
present obligations of a
particular entity to transfer
assets or provide services to
other entities in the future as a
result of past transactions or
events.
FLOW:
Current liabilies
Noncurrent liabilites
UCSB, Anderson
UCSB, Anderson
CLASSIFICATIONCLASSIFICATION- CURRENT VS NONCURRENT
Equity
+
DEFINED:
LEVEL 3- Unobservable/ Company Generated
Slide
5-10
UCSB, Anderson
Assets
LEVEL 2- Quoted Market Price for the type of item
stop

Slide
5-9
LEVEL 1- Quoted Market Price for the item
DEFINED:
Residual interest in the
assets of an entity that
remains after deducting its
liabilities. In a business
enterprise, the equity is the
ownership interest.
 CurrentCurrent- expected
expected to
to “convert”
“convert” in
in one
one year
year or
or
operating
operating cycle
cycle (whichever
(whichever is
is longer).
longer).
Otherwise
Otherwise itit is
is non-current
non-current
 Some
Some company’s
company’s don’t
don’t need
need aa “classified”
“classified”
balance
balance sheet,
sheet, which
which means
means that
that the
the balance
balance
sheet
sheet does
does not
not distinguish
distinguish current
current from
from longlongterm
term
–– Real
Realestate
estate CompanyCompany- because
because the
themajority
majorityof
of
what
whatwould
wouldbe
betheir
their“operating”
“operating”assets
assetsare
arenonnoncurrent
currentin
in nature.
nature.
FLOW:
Capital stock
APIC
Retained earnings
AOCI
Treasurey Stock
 Don’t
Don’t forget
forget to
to check
check debt
debt for
for the
the “current
“current
portion”
portion”
Slide
5-12
UCSB, Anderson
Contra Account presentation
Certain
Certain assets
assets have
have reductions
reductions called
called
“contra-asset”
“contra-asset” accounts:
accounts:
–– Accounts
Accounts receivable/
receivable/ allowance
allowance
–– Fixed
Fixed assets/
assets/ accumulated
accumulated depreciation
depreciation
–– Intangible
Intangible assets/
assets/ accum.
accum. amortization.
amortization.
Can
Can present
present as
as aa line-item
line-item or
or as
as part
part of
of
the
description.
Examples
on
next
the description. Examples on next
slide.
slide.
Slide
5-13
UCSB, Anderson
ContraContra-Asset Presentation Examples
Accounts
Accountsreceivable
receivable
Allowance
Allowancefor
fordoubtful
doubtfulaccounts
accounts
Accounts
receivable,
Accounts receivable,net
net
OR
OR
Accounts
Accountsreceivable,
receivable,net
netof
of
$2,500
allowance
for
$2,500 allowance fordoubtful
doubtful
accounts
accounts
Slide
5-14
Based
Basedon
onthe
thefollowing
followinginformation,
information,prepare
preparethe
thebalance
balancesheet
sheetfor
forXYZ,
XYZ,
Inc.
Inc.::
 10,000
10,000shares
sharesoutstanding,
outstanding,$1
$1par
parwhich
whichwere
weresold
soldto
toinvestors
investorsfor
for
$110,000;
$110,000;
 Debt
in
the
amount
of
$1,000,000
outstanding.
Principal
matures
Debt in the amount of $1,000,000 outstanding. Principal maturesat
at
$250,000
$250,000per
peryear
yearuntil
untilrepaid;
repaid;
 Cash
Cashof
of$125,000;
$125,000;
 Accounts
Accountsreceivable
receivable$250,000,
$250,000,excluding
excludingthe
theallowance
allowancefor
fordoubtful
doubtful
accounts
accounts$25,000;
$25,000;
 Prepaid
insurance
of
$175,000
Prepaid insurance of $175,000
 PP&E
PP&E$2,000,000.
$2,000,000. Accumulated
Accumulateddepreciation
depreciationisis$200,000.
$200,000.
 Capitalized
Capitalizedcommissions
commissionspaid
paidto
toleasing
leasingagents
agents$115,000.
$115,000.
Accumulated
Accumulatedamortization
amortization$15,000.
$15,000.
 Accounts
Accountspayable
payable$58,000
$58,000
 Retained
Retainedearnings
earnings$757,000
$757,000
 Accumulated
Accumulatedother
othercomprehensive
comprehensiveincome
income$500,000
$500,000
PP&E
Accumulated depreciation
Net PP&E
Intangible asset, net of accumulated
amortization of $15,000
TOTAL ASSETS
2,000,000
(200,000)
1,800,000
100,000
LIABILITIES & STOCKHOLDERS EQUITY
Accounts payable
current maturities of LTD
Total current liabilities
58,000
250,000
308,000
Long-term debt, less current maturities
750,000
TOTAL LIABILITIES & EQUITY
UCSB, Anderson
125,000
225,000
175,000
525,000
2,425,000
EQUITY
Common stock (10,000 SHARES $1 PAR)
APIC
Retained Earnings
Accumulated Other Comp Income
Slide
5-16
$7,500
$7,500
UCSB, Anderson
ASSETS
Cash
Accounts receivable, net of $25,000 allowance
Prepaid expenses
Total current assets
InIn-Class Exercise
Slide
5-15
$10,000
$10,000
$$ (2,500)
(2,500)
$$ 7,500
7,500
UCSB, Anderson
10,000
100,000
757,000
500,000
1,367,000
2,425,000
Additional balance sheet information
 Disclosure
Disclosure may
may be
be parenthetical
parenthetical or
or in
in notes.
notes.
–– Parenthetical
Parentheticaldisclosure
disclosure example:
example:
Held for sale investments ($100,000 cost),
$128,000
Held for sale investments ($100,000 cost),
atatestimated
estimatedfair
fairvalue
value
$128,000
–– Note
Notedisclosure
disclosure example:
example:
Property, plant and equipment (Note 7)
Property, plant and equipment (Note 7)
$1,750,000
$1,750,000
Note
Note77Property
Propertyplant
plantand
andequipment
equipment
Property
Propertyplant
plantand
andequipment
equipmentare
arecarried
carriedatatcost,
cost,less
lessaccumulated
accumulateddepreciation.
depreciation. Plant
Plantisis
depreciated
depreciatedon
onaastraight
straightline
linebasis
basisover
over35
35years.
years. All
Allother
otherdepreciable
depreciableequipment
equipmentisis
depreciated
depreciatedon
onaastraight
straightline
linebasis
basisover
over77years.
years. Property,
Property,plant,
plant,equipment
equipmentand
and
accumulated
accumulateddepreciation
depreciationatatDecember
December31,
31,200X
200Xwas:
was:
Land
Land
Building
Building
Equipment
Equipment
Less
Lessaccumulated
accumulateddepreciation
depreciation
Property
Propertyplant
plant&&equipment,
equipment,net
net
Slide
5-17
$800,000
$800,000
$300,000
$300,000
$750,000
$750,000
$1,850,000
$1,850,000
$(100,000)
$(100,000)
$1,750,000
$1,750,000
UCSB, Anderson
Statement of Cash Flows

As
As stated
statedin
in previous
previouslectures,
lectures,the
thestatement
statementof
of cash
cash
flows
flowsfills
fillsin
inthe
thegap
gapcreated
created by
byapplying
applyingaccrual
accrual
accounting.
It
tells
the
users
where
the
cash
went
accounting. It tells the users where the cash wentto
to
and
andcame
camefrom.
from. ItItalso
alsobreaks
breaksthose
thosesources
sourcesand
and
uses
usesinto
intothree
three broad
broadcategories:
categories:
–– Cash
Cashflows
flowsfrom
fromoperations
operations
»» Net
Netincome
incomeand
andchanges
changesin
incurrent
currentassets
assets&&liabilities
liabilities
–– Cash
Cashflows
flowsfrom
frominvesting
investing
»» Cash
Cashflows
flowsfrom
frompurchase
purchaseand
andsale
saleof
oflong
longterm
termassets
assets
»» Presented
Presented“Gross”“Gross”-i.e
i.epurchase
purchaseand
andsale
saleseparate
separate
–– Cash
Cashflows
flowsfrom
fromfinancing
financing
»» Cash
Cashflows
flowsfrom
fromlong-term
long-termdebt
debtand
andequity
equityactivity
activity
»» Presented
Presented“Gross”–
“Gross”–i.e
i.eborrowing
borrowingand
andrepayment
repaymentseparate
separate
Covered
Covered in
ingreater
greaterdetail
detail in
inchapter
chapter23.
23.
Slide
5-19
UCSB, Anderson
Investments/ Securities
Long-term
Long-term investments
investments may
may be
be carried
carried at:
at:
 FAS
FAS 115115- ifif do
do not
not have
have significant
significant
influence
influence (generally
(generally <20%
<20% ownership)
ownership)
 EquityEquity- ifif have
have significant
significant influence
influence
(generally
(generally 20-50%
20-50% ownership)
ownership)
 Consolidated
Consolidated ifif “Controlled”“Controlled”- separate
separate
equity
equity item
item for
for “non-controlling
“non-controlling
interest”
interest” (generally
(generally >50%
>50% ownership)
ownership)
Slide
5-18
UCSB, Anderson