Chapter 5-1 Balance Sheet Statement of Cash Flows UsefulnessLimitationsClassification Additional information reported Techniques of disclosure Purpose Content and format PreparationUsefulness Balance Sheet and Statement of Cash Flows

Chapter 5-2 Evaluating the capital structure. Assess risk and future cash flows. Analyze the company’s:  Liquidity,  Solvency, and  Financial flexibility. Balance Sheet Usefulness of the Balance Sheet LO 1 Explain the uses and limitations of a balance sheet.

Chapter 5-3 Most assets and liabilities are reported at historical cost. Use of judgments and estimates. Many items of financial value are omitted. Limitations of the Balance Sheet Balance Sheet LO 1 Explain the uses and limitations of a balance sheet.

Chapter 5-4 Three General Classifications Assets, Liabilities, and Stockholders’ Equity Companies further divide these classifications: Classification in the Balance Sheet LO 2 Identify the major classifications of the balance sheet. Balance Sheet Illustration 5-1

Chapter 5-5 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. Current Assets LO 2 Identify the major classifications of the balance sheet. Balance Sheet Illustration 5-2

Chapter 5-6 Review The correct order to present current assets is a. Cash, accounts receivable, prepaid items, inventories. a. Cash, accounts receivable, prepaid items, inventories. b. Cash, accounts receivable, inventories, prepaid items. b. Cash, accounts receivable, inventories, prepaid items. c. Cash, inventories, accounts receivable, prepaid items. c. Cash, inventories, accounts receivable, prepaid items. d. Cash, inventories, prepaid items, accounts receivable. d. Cash, inventories, prepaid items, accounts receivable. Balance Sheet LO 2 Identify the major classifications of the balance sheet.

Chapter 5-7 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. Cash Balance Sheet – “Current Assets” Illustration 5-3 LO 2 Identify the major classifications of the balance sheet.

Chapter 5-8 Portfolios Short-Term Investments LO 2 Identify the major classifications of the balance sheet. TypeValuationClassification Held-to- Maturity Debt Amortized Cost Current or Noncurrent TradingDebt or EquityFair ValueCurrent Available- for-Sale Debt or EquityFair Value Current or Noncurrent Balance Sheet – “Current Assets”

Chapter 5-9 Short-Term Investments LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 5-5 Balance Sheet Presentation of Investments in Securities

Chapter 5-10 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. Receivables LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets”

Chapter 5-11 Accounts Receivable – Presentation Options LO 2 Identify the major classifications of the balance sheet. Current Assets: Cash $ 346 Accounts receivable500 Less allowance for doubtful accounts Inventory 812 Total current assets $1,633 Current Assets: Cash $ 346 Accounts receivable, net of $25 allowance475 Inventory 812 Total current assets $1, Balance Sheet – “Current Assets”

Chapter 5-12 Receivables LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 5-6 Balance Sheet Presentation of Receivables

Chapter 5-13 Inventories LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Company discloses: Basis of valuation (e.g., lower-of-cost-or-market). Method of pricing (e.g., FIFO or LIFO). Illustration 5-7

Chapter 5-14 Payment of cash, that is recorded as an asset because service or benefit will be received in the future. insurancesuppliesadvertising Cash Payment Expense Recorded BEFORE rent maintenance on equipment Prepayments often occur in regard to: Prepaid Expenses LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets”

Chapter 5-15 Prepaid Expenses LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Current Assets” Illustration 5-9

Chapter 5-16 Current Assets - “Summary” LO 2 Identify the major classifications of the balance sheet. 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.

Chapter 5-17 Generally consists of four types:Securities Fixed assets Special funds Nonconsolidated subsidiaries Nonconsolidated subsidiaries or affiliated companies. Long-Term Investments LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets”

Chapter 5-18 Long-Term Investments SecuritiesSecurities LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” bonds, stock, and long-term notes For marketable securities, management’s intent determines current or noncurrent classification.

Chapter 5-19 Fixed Assets LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Land held for speculation Long-Term Investments

Chapter 5-20 Special Funds LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Sinking fund Pensions fund Cash surrender value of life insurance Long-Term Investments

Chapter 5-21 Nonconsolidated Subsidiaries or Affiliated Companies LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Long-Term Investments

Chapter 5-22 Property, Plant, and Equipment LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Assets of a durable nature used in the regular operations of the business.

Chapter 5-23 Intangibles LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” Lack physical substance and are not financial instruments. Limited life intangibles amortized. Indefinite-life intangibles tested for impairment.

Chapter 5-24 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Exercise” Intangibles (BE5-6): KC’s adjusted trial balance contained the following asset accounts at December 31, 2010: Prepaid Rent $12,000; Goodwill $50,000; Franchise Fees Receivable $2,000; Franchises $47,000; Patents $33,000; Trademarks $10,000. Prepare the intangible assets section of the balance sheet. Intangibles Goodwill $ 50,000 Franchises 47,000 Patents 33,000 Trademarks 10,000 Total $140,000

Chapter 5-25 Other Assets LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Noncurrent Assets” This section should include only unusual items sufficiently different from assets in the other categories.

Chapter 5-26 “Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.” LO 2 Identify the major classifications of the balance sheet. Balance Sheet Current Liabilities

Chapter 5-27 LO 2 Identify the major classifications of the balance sheet. Balance Sheet “Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.” All covenants and restrictions must be disclosed. Long-Term Liabilities

Chapter 5-28 LO 2 Identify the major classifications of the balance sheet. Balance Sheet – “Exercise” Long-Term Liabilities (BE5-9): Included in Adams Company’s December 31, 2010, trial balance are the following accounts: Accounts Payable $220,000; Pension Liability $375,000; Discount on Bonds Payable $29,000; Advances from Customers $41,000; Bonds Payable $400,000; Wages Payable $27,000; Interest Payable $12,000; Income Taxes Payable $29,000. Prepare the long-term liabilities section of the balance sheet. Long-term liabilities Pension liability $375,000 Bonds payable 400,000 Discount on bonds payable (29,000) Total 746,000

Chapter 5-29 Three parts, (1) Capital Stock, (2) Additional Paid-In Capital, and (3) Retained Earnings. LO 2 Identify the major classifications of the balance sheet. Balance Sheet Owners’ Equity Illustration 5-15

Chapter 5-30 (a)Investment in preferred stock LO 2 Identify the major classifications of the balance sheet. Balance Sheet Classification Exercise Account (b)Treasury stock (c)Common stock (d)Cash dividends payable (e)Accumulated depreciation (f)Interest payable (g)Deficit (h)Trading securities (i)Unearned revenue (a)Current asset/Investment (b)Stockholders’ Equity (c)Stockholders’ Equity (d)Current liability (e)Contra-asset (f)Current liability (g)Stockholders’ Equity (h)Current asset (i)Current liability Classification

Chapter 5-31 Classified Balance Sheet Account form Report form Balance Sheet - Format 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.” LO 3 Prepare a classified balance sheet using the report and account formats.

Chapter 5-32 LO 3 Prepare a classified balance sheet using the report and account formats. Balance Sheet - Format Account Form Illustration 5-16

Chapter 5-33 Balance Sheet - Format LO 3 Report Form Illustration 5-16

Chapter 5-34 Contingencies Accounting Policies Contractual Situations Fair Values Additional Information Reported There are normally four types of information that are supplemental to account titles and amounts presented in the balance sheet: LO 4 Determine which balance sheet information requires supplemental disclosure.

Chapter 5-35 Parenthetical Explanations Notes Cross-Reference and Contra Items Supporting Schedules Terminology Techniques of Disclosure LO 5 Describe the major disclosure techniques for the balance sheet.