CHAPTER 5

BALANCE SHEET AND

STATEMENT OF CASH FLOWS

Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield

Chapter Chapter
5-1 5-2

Balance
Balance Sheet
Sheet and
and Statement
Statement of
of Cash
Cash Flows
Flows Balance
Balance Sheet
Sheet

Usefulness of the Balance Sheet

Balance Sheet
Statement of Cash Evaluating the capital structure.
Flows
Assess risk and future cash flows.
Usefulness Purpose
Analyze the company’s:
Limitations Content and format
Classification Preparation ¾ Liquidity,
Additional information Usefulness ¾ Solvency, and
reported
¾ Financial flexibility.
Techniques of
disclosure

Chapter Chapter
5-3 5-4 LO 1 Explain the uses and limitations of a balance sheet.
 Balance
Balance Sheet
Sheet Balance
Balance Sheet
Sheet

Limitations of the Balance Sheet Classification in the Balance Sheet

Most assets and liabilities are reported at Three General Classifications
historical cost. Assets, Liabilities, and Stockholders’ Equity
Use of judgments and estimates. Companies further divide these classifications:
Illustration 5-
5-1
Many items of financial value are omitted.

Chapter Chapter
5-5 LO 1 Explain the uses and limitations of a balance sheet. 5-6 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet Balance
Balance Sheet
Sheet

Current Assets Review

Cash and other assets a company expects to The correct order to present current assets is
convert into cash, sell, or consume either in one a. Cash, accounts receivable, prepaid items,
year or in the operating cycle, whichever is longer. inventories.
Illustration 5-
5-2 b. Cash, accounts receivable, inventories, prepaid
items.
c. Cash, inventories, accounts receivable, prepaid
items.
d. Cash, inventories, prepaid items, accounts
receivable.

Chapter Chapter
5-7 LO 2 Identify the major classifications of the balance sheet. 5-8 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets””

Cash Short-Term Investments

Generally any monies available “on demand.” Portfolios Type Valuation Classification
Cash equivalents - short-term highly liquid
Held-to- Amortized Current or
investments that mature within three months or less. Debt
Maturity Cost Noncurrent
Restrictions or commitments must be disclosed.
Debt or
Illustration 5-
5-3 Trading Fair Value Current
Equity

Available- Debt or Current or

Fair Value
for-Sale Equity Noncurrent

Chapter Chapter
5-9 LO 2 Identify the major classifications of the balance sheet. 5-10 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets””

Short-Term Investments Receivables

Illustration 5-
5-5
Balance Sheet Presentation
of Investments in Securities
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.

Chapter Chapter
5-11 LO 2 Identify the major classifications of the balance sheet. 5-12 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets””

Accounts Receivable – Presentation Options Receivables

Illustration 5-
5-6
Current Assets:
11 Balance Sheet Presentation
of Receivables
Cash $ 346
Accounts receivable 500
Less allowance for doubtful accounts 25 475
Inventory 812
Total current assets $1,633

Current Assets:
22
Cash $ 346
Accounts receivable, net of $25 allowance 475
Inventory 812
Total current assets $1,633

Chapter Chapter
5-13 LO 2 Identify the major classifications of the balance sheet. 5-14 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets””

Inventories Prepaid Expenses

Company discloses: Payment of cash, that is recorded as an asset because
Basis of valuation (e.g., lower-of-cost-or-market). service or benefit will be received in the future.
Method of pricing (e.g., FIFO or LIFO).
Cash Payment BEFORE Expense Recorded
Illustration 5-
5-7

Prepayments often occur in regard to:

insurance rent
supplies maintenance on equipment
advertising
Chapter Chapter
5-15 LO 2 Identify the major classifications of the balance sheet. 5-16 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Current
Current Assets
Assets””

Prepaid Expenses Current Assets - “Summary”

Illustration 5-
Cash and other assets a Balance Sheet (in thousands)
5-9
company expects to Current assets
¾ convert into cash, Cash $ 285,000
ST Investments 140,000
¾ sell, or Accounts receivable 777,000
Inventory 402,000
¾ consume
Prepaid expenses 170,000
either in one year or in Total current assets 1,774,000
the operating cycle, Investments:
Invesment in ABC bonds 321,657
whichever is longer.
Investment in UC Inc. 253,980

Chapter Chapter
5-17 LO 2 Identify the major classifications of the balance sheet. 5-18 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets””
Balance Sheet (in thousands)
Long-Term Investments Long-Term Current assets

Investments Cash $ 285,000

Generally consists of four types: Investments:

Securities Securities Invesment in ABC bonds 321,657

Investment in UC Inc. 253,980

Fixed assets bonds, Notes receivable 150,000

Land held for speculation 550,000
stock, and
Special funds Sinking fund 225,000
long-term notes Pension fund 653,798
Nonconsolidated subsidiaries or affiliated Cash surrender value 84,321
For marketable securities, Investment in Uncon. Sub. 457,836
companies. management’s intent Total investments 2,696,592
Property, Plant, and Equip.
determines current or
Building 1,375,778
noncurrent classification.
Land 975,000
Chapter Chapter
5-19 LO 2 Identify the major classifications of the balance sheet. 5-20 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets””
Balance Sheet (in thousands) Balance Sheet (in thousands)
Long-Term Current assets Long-Term Current assets

Investments Cash $ 285,000

Investments Cash $ 285,000

Investments: Investments:
Invesment in ABC bonds 321,657 Invesment in ABC bonds 321,657
Fixed Assets Investment in UC Inc. 253,980 Special Funds Investment in UC Inc. 253,980
Notes receivable 150,000 Notes receivable 150,000
Land held for Land held for speculation 550,000 Sinking fund Land held for speculation 550,000
Sinking fund 225,000 Sinking fund 225,000
speculation Pensions fund
Pension fund 653,798 Pension fund 653,798
Cash surrender value 84,321
Cash surrender Cash surrender value 84,321
Investment in Uncon. Sub. 457,836 Investment in Uncon. Sub. 457,836
Total investments 2,696,592 value of life Total investments 2,696,592
Property, Plant, and Equip. insurance Property, Plant, and Equip.
Building 1,375,778 Building 1,375,778
Land 975,000 Land 975,000
Chapter Chapter
5-21 LO 2 Identify the major classifications of the balance sheet. 5-22 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets””
Balance Sheet (in thousands) Balance Sheet (in thousands)
Long-Term Current assets Property, Plant, and Current assets

Investments Cash $ 285,000

Equipment
Cash $ 285,000

Investments: Total investments 2,696,592

Invesment in ABC bonds 321,657 Property, Plant, and Equip.
Investment in UC Inc. 253,980 Assets of a durable Building 1,375,778
Notes receivable 150,000 nature used in the Land 975,000
Land held for speculation 550,000 Machinery and equipment 234,958
Sinking fund 225,000 regular operations Capital leases 384,650
Nonconsolidated Pension fund 653,798 of the business. Leasehold improvements 175,000
Cash surrender value 84,321 Accumulated depreciation (975,000)
Subsidiaries or Investment in Uncon. Sub. 457,836 Total PP&E 2,170,386
Affiliated Total investments 2,696,592 Intangibles
Property, Plant, and Equip. Goodwill 3,000,000
Companies Building 1,375,778 Patents 177,000
Land 975,000 Trademarks 40,000
Chapter Chapter
5-23 LO 2 Identify the major classifications of the balance sheet. 5-24 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets”” Balance
Balance Sheet
Sheet –– ““Exercise”
Exercise”
Balance Sheet (in thousands)
Intangibles Current assets Intangibles (BE5-6): KC’s adjusted trial balance contained the
Cash $ 285,000 following asset accounts at December 31, 2010: Prepaid Rent
Lack physical $12,000; Goodwill $50,000; Franchise Fees Receivable $2,000;
Accumulated depreciation (975,000)
substance and are not Franchises $47,000; Patents $33,000; Trademarks $10,000.
Total PP&E 2,170,386
financial instruments. Intangibles Prepare the intangible assets section of the balance sheet.
Goodwill 2,000,000
Limited life Patents 177,000 Intangibles
intangibles amortized. Trademark 40,000
Franchises 125,000
Indefinite-life Copyright 55,000
intangibles tested for Total intangibles 2,397,000
Other assets
impairment.
Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000
Chapter Chapter
5-25 LO 2 Identify the major classifications of the balance sheet. 5-26 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet –– ““Noncurrent
Noncurrent Assets
Assets”” Balance
Balance Sheet
Sheet
Balance Sheet (in thousands)
Balance Sheet (in thousands)
Other Assets Current assets Current Liabilities Current liabilities
Cash $ 285,000
Notes payable $ 233,450
This section should Intangibles “Obligations that a Accounts payable 131,800

include only unusual Goodwill 2,000,000 company reasonably Accrued compensation 43,000
Unearned revenue 17,000
items sufficiently
Patents 177,000
expects to liquidate
Trademark 40,000 Income tax payable 23,400
different from assets Franchises 125,000 either through the use Current maturities LT debt 121,000
in the other Copyright 55,000 of current assets or the Total current liabilities 569,650
Total intangibles 2,397,000
categories. Other assets
creation of other Long-term liabilities
Long-term debt 979,500
Prepaid pension costs 133,000 current liabilities.” Obligations capital lease 345,800
Deferred income tax 40,000
Deferred income taxes 77,909
Total other 173,000
Total long-term liabilities 1,403,209
Total Assets $ 9,210,978
Stockholders' equity

Chapter Chapter
5-27 LO 2 Identify the major classifications of the balance sheet. 5-28 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet Balance
Balance Sheet
Sheet –– ““Exercise”
Exercise”

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) Long-Term Liabilities (BE5-9): Included in Adams Company’s
Current liabilities December 31, 2010, trial balance are the following accounts:
Notes payable $ 233,450 Accounts Payable $220,000; Pension Liability $375,000; Discount
Accounts payable 131,800
on Bonds Payable $29,000; Advances from Customers $41,000;
Accrued compensation 43,000
Bonds Payable $400,000; Wages Payable $27,000; Interest
Unearned revenue 17,000
Payable $12,000; Income Taxes Payable $29,000. Prepare the
Income tax payable 23,400
Current maturities LT debt 121,000 long-term liabilities section of the balance sheet.
Total current liabilities 569,650
Long-term liabilities Long-term liabilities
Long-term debt 979,500
Obligations capital lease 345,800
Deferred income taxes 77,909
Total long-term liabilities 1,403,209
Stockholders' equity

Chapter Chapter
5-29 LO 2 Identify the major classifications of the balance sheet. 5-30 LO 2 Identify the major classifications of the balance sheet.

Balance
Balance Sheet
Sheet Balance
Balance Sheet
Sheet Classification
Classification Exercise
Exercise

Owners’ Equity Account Classification

(a) Investment in preferred stock
Three parts, (1) Capital Stock,
(b) Treasury stock
(2) Additional Paid-In Capital, and
(c) Common stock
(3) Retained Earnings. (d) Cash dividends payable
Illustration 5-
5-15
(e) Accumulated depreciation
(f) Interest payable
(g) Deficit
(h) Trading securities
(i) Unearned revenue

Chapter Chapter
5-31 LO 2 Identify the major classifications of the balance sheet. 5-32 LO 2 Identify the major classifications of the balance sheet.
 Balance
Balance Sheet
Sheet -- Format
Format Balance
Balance Sheet
Sheet -- Format
Format

Classified Balance Sheet Account Form Illustration 5-

5-16

Account form
Report form

Accounting Trends and Techniques—2007 (New York:

AICPA) indicates that all of the 600 companies surveyed
use either the “report form” (524) or the “account
form” (76), sometimes collectively referred to as the
“customary form.”

Chapter Chapter
5-33 LO 3 Prepare a classified balance sheet using the report and account
account formats. 5-34 LO 3 Prepare a classified balance sheet using the report and account
account formats.

Illustration 5-
5-16

Balance
Balance Sheet
Sheet -- The
The Statement
Statement of
of Cash
Cash Flows
Flows
Format
Format
One of the three basic objectives of financial
reporting is

“assessing the amounts, timing, and

Report Form uncertainty of cash flows.”

Chapter Chapter
5-35 LO 3 5-36 LO 6 Indicate the purpose of the statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows The
The Statement
Statement of
of Cash
Cash Flows
Flows

Purpose of the Statement of Cash Flows Content and Format

To provide relevant information about the cash Three different activities:
receipts and cash payments of an enterprise during Operating, Investing, Financing
a period.
Illustration 5-
5-24
The statement provides answers to the following
questions:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash balance?

Chapter Chapter
5-37 LO 6 Indicate the purpose of the statement of cash flows. 5-38 LO 7 Identify the content of the statement of cash flows.

The
The Statement
Statement of
of Cash
Cash Flows
Flows The
The Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-
5-25

Content and Format

Operating Investing Financing

Cash inflows Cash inflows Cash inflows
and outflows and outflows and outflows
from from from
operations. non-current non-current
assets. liabilities and
equity.

The statement’s value is that it helps users evaluate

liquidity, solvency, and financial flexibility.
Chapter Chapter
5-39 LO 7 Identify the content of the statement of cash flows. 5-40 LO 7 Identify the content of the statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows The
The Statement
Statement of
of Cash
Cash Flows
Flows

Preparation Statement of Cash Flows (BE 5-12): Keyser Beverage

Company reported the following items in the most recent year.
Information obtained from several sources:
Activity
(1) comparative balance sheets, Net income $40,000
(2) the current income statement, and Dividends paid 5,000
(3) selected transaction data. Increase in accounts receivable 10,000
Increase in accounts payable 7,000
Purchase of equipment 8,000
Depreciation expense 4,000
Issue of notes payable 20,000

Required: Prepare a Statement of Cash Flows

Chapter Chapter
5-41 LO 8 Prepare a statement of cash flows. 5-42 LO 8 Prepare a statement of cash flows.

The
The Statement
Statement of
of Cash
Cash Flows
Flows The
The Statement
Statement of
of Cash
Cash Flows
Flows
Statement of Cash Flows (BE 5-12)
Statement of Cash Flow (in thousands)
Review
Operating activities Noncash credit to
Net income $ 40,000 revenues. In preparing a statement of cash flows, which of the
Increase in accounts receivable (10,000) following transactions would be considered an investing
Increase in accounts payable 5,000 Noncash charge to activity?
Depreciation expense 40,000 expenses.
Cash flow from operations 75,000 a. Sale of equipment at book value
Investing activities
Purchase of equipment (8,000) b. Sale of merchandise on credit
Financing activities
Proceeds from notes payable 20,000 c. Declaration of a cash dividend
Dividends paid (5,000)
Cash flow from financing 15,000
d. Issuance of bonds payable at a discount
Increase in cash $ 82,000 receivable.

Chapter Chapter
5-43 LO 8 Prepare a statement of cash flows. 5-44 LO 8 Prepare a statement of cash flows.
 The
The Statement
Statement of
of Cash
Cash Flows
Flows Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Significant Noncash Activities Without cash, a company will not survive.

Significant financing and investing activities that do Cash flow from Operations:
not affect cash are reported in either a separate
schedule at the bottom of the statement of cash High amount - company able to generate
flows or in the notes. sufficient cash to pay its bills.
Examples include: Low amount - company may have to borrow or
issue equity securities to pay bills.
Issuance of common stock to purchase assets.
Conversion of bonds into common stock.
Issuance of debt to purchase assets.
Exchanges on long-lived assets.
Chapter Chapter
5-45 LO 8 Prepare a statement of cash flows. 5-46 LO 9 Understand the usefulness of the statement of cash flows.

Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Financial Liquidity Financial Flexibility

Net Cash Provided by Net Cash Provided by

Current Cash Operating Activities Cash Debt Operating Activities
Debt Coverage = Coverage =
Ratio Average Current Liabilities Ratio Average Total Liabilities

Ratio indicates whether the company can pay off its This ratio indicates a company’s ability to repay its
current liabilities from its operations. A ratio near liabilities from net cash provided by operating
1:1 is good. activities, without having to liquidate the assets
employed in its operations.

Chapter Chapter
5-47 LO 9 Understand the usefulness of the statement of cash flows. 5-48 LO 9 Understand the usefulness of the statement of cash flows.
 Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows

Free Cash Flow

Illustration 5-
5-35
Review
The current cash debt coverage ratio is often used to
assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
The amount of discretionary cash flow a company has
for purchasing additional investments, retiring its
debt, purchasing treasury stock, or simply adding to
its liquidity.
Chapter Chapter
5-49 LO 9 Understand the usefulness of the statement of cash flows. 5-50 LO 9 Understand the usefulness of the statement of cash flows.

¾ iGAAP requires that specific items be reported on the balance
sheet. No such general standard exists in U.S. GAAP.
¾ There are many similarities between U.S. and iGAAP related to
balance sheet presentation. For example:
9 IAS 1 specifies minimum note disclosures, similar to U.S. GAAP on
accounting policies and judgments.
¾ Interestingly, iGAAP statements may report property, plant, and
equipment first in the balance sheet. Some companies report the
subtotal “net assets,” which equals total assets minus total
liabilities.
¾ While the use of the term “reserve” is discouraged in U.S. GAAP,
there is no such prohibition in iGAAP.

9 Comparative prior-period information must be presented and financial

statements must be prepared annually.
9 Current/noncurrent classification for assets and liabilities is normally
required.
Chapter Chapter
5-51 5-52
 Copyright
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Chapter
5-53