1. Chapter 5: The Balance Sheet and The Statement of Cash Flows
Intermediate Accounting, 10th Edition
Kieso, Weygandt, and Warfield
Chapter 5: The Balance Sheet and The Statement of Cash Flows
Prepared by
Krishnan Ranganathan, Angelo State University,
San Angelo, Texas 2

2. Part 1: The Balance Sheet
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

3. Balance Sheet: Usefulness
The balance sheet provides information
for evaluating the capital structure and
for computing rates of return.
It is also useful for analyzing an enterprise’s
liquidity (to pay current & maturing debt)
solvency (to pay debt as it matures)
financial flexibility (responding to unexpected needs and opportunities)
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

4. Balance Sheet: Limitations
Most assets and liabilities are stated at historical cost.
Judgments and estimates are used in determining many of the items.
The balance sheet does not report items that can not be objectively determined.
It does not report information regarding off- balance sheet financing.
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

5. Balance Sheet: Classification
Guidelines for reporting items separately:
Assets and liabilities that differ in their type or expected function in the central operations
Assets and liabilities that have different implications for the enterprise’s financial flexibility
Assets and liabilities with different general liquidity characteristics
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

6. Balance Sheet: Classification
Assets
Liabilities and Equity
Current Assets
Long-term investments
Property, plant, and equipment
Intangible assets
Other assets
Current liabilities
Long-term debt
Owners’ equity Capital stock Additional paid-in capital Retained earnings
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

7. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Current Assets
Current assets are expected to be consumed, sold, or converted into cash:
either in one year or
in the operating cycle, whichever is longer.
Current assets are presented in order of liquidity.
The following valuation principles are used:
short term investments at fair value
accounts receivable at net realizable value
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

8. Long-Term Investments
Long term investments may be:
investments in securities (bonds, stock)
investments in fixed assets (land not used in operations)
investments set aside in special funds (sinking fund)
investments in nonconsolidated subsidiaries or affiliated companies
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

9. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Current Liabilities
Current liabilities are liquidated
either through the use of current assets, or
by creation of other current liabilities
Examples of current liabilities include:
payables resulting from acquisitions of goods and services
collections received in advance of services
other liabilities which will be paid in the short term
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

10. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Long Term Liabilities
Long-term obligations are those not expected to be paid within the operating cycle.
Examples are:
obligations arising from specific financing situations (issuance of bonds)
obligations arising from ordinary business operations (pension obligations)
obligations that are contingent (product warranties)
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

11. Balance Sheet: Additional Information Reported
Additional information may be:
information not presented elsewhere, or
information that qualifies items in the balance sheet
Supplemental information includes:
material events having an uncertain outcome
explanations regarding accounting policies
covenant restrictions
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

12. Balance Sheet: Techniques of Disclosure
Parenthetical explanations (following the items in the balance sheet)
Notes (to the balance sheet)
Cross references and contra items (where assets and liabilities may be cross referenced)
Supporting schedules (as for fixed assets depreciation)
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

13. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Statement of
Cash Flows
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

14. The Cash Flow Statement
The cash flow statement provides information about:
the cash receipts (cash inflows) and
uses of cash (cash outflows) during the year
Inflows and outflows are reported for:
operating,
investing and
financing activities during the year.
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

15. Statement of Cash Flows
Operating
activities
Investing
Financing
inflows
Cash
Pool
Operating
activities
Investing
Financing
outflows
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

16. Preparing a Statement of Cash Flows
There are TWO methods of preparing the statement of cash flows:
the indirect method and
the direct method
The indirect method (discussed in Chapter 5) derives cash flows from accrual basis statements.
The direct method determines cash flows directly for each source or use of cash
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

17. The Statement of Cash Flows: Indirect method
Accrual Basis Statements
Cash Flow Statement
Income Statement
items & Changes in
Current Assets and
Current Liabilities
Operating activities:
Adjust net income for accruals
and non cash charges to get
cash flows
Balance Sheet: Changes in
Non-Current Assets
Investing activities:
Inflows from sale of assets and
Outflows from purchases of
assets
Balance Sheet: Changes in
Non-Current Liabilities
and
Equity
Financing activities:
Inflows and outflows
from loan and equity
transactions
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

18. Indirect Method: Example
Intelmarkets begins operations on The income statement
and balance sheet for year 2000 are as follows:
Income Statement
Revenues: $ 200,000
Less: Expenses ($150,000)
Net Income before Tax: $ 50,000
less: Income Tax ($ 15,000)
Net Income after Tax $ 35,000
Balance Sheet (see next slide)
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

19. Indirect Method: Example
Balance Sheet
Dec 31, 2000 Jan 1, 2000
Assets:
Cash $ 25,000 $ -0-
Accounts Receivable $ 32,000 $ -0-
Inventory $ 29,000 $ -0-
Land $110,000 $ -0-
Total $196,000 $ -0-
Liabilities and Equity:
Accounts Payable $ 24,000 $ -0-
Common Stock $147,000 $ -0-
Retained Earnings $ 25,000 $ -0-
Total $196,000 $ -0-
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

20. Operations: Net Outflow 2,000
Operating Activities
Net Income after Tax $35,000
Accounts Receivable +$ 32,000
Inventory +$ 29,000
Accounts Payable +$ 24,000
Accrual Basis
Net Income after Tax $35,000
Less: Increase in A/Rec ($ 32,000)
Less: Increase in Inventory($ 29,000)
Add: Increase in Accounts
Payable $ 24,000
Cash Flow
Changes between beginning
and ending balances
Operations: Net Outflow 2,000
See explanations next slide
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

21. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Operating Activities
A/Rec increased
by $32,000
Cash collections are
less than revenue
recognized
Reduce net income
by $32,000 to derive
cash flows from
operations
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

22. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Operating Activities
Inventory increased
by $29,000
Cost of goods sold
for the year decreases
by $29,000.
Reduce net income
by $29,000 to derive
cash flows from
operations
Net income for the year
increases by $29,000
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

23. Investing and Financing Activities
Land $110,000
Accrual Basis
Investing Activities:
Purchase of Land: ($110,000)
Outflow ($110,000)
Cash Flow
Financing Activities:
Issue of Common Stock: $147,000
Dividends paid: ($10,000)
Inflow $137,000
Common Stock $147,000
Retained Earnings +$ 25,000
Beg Bal: $0
Net Income: $35,000
less: Dividends ($10,000)
End Balance: $25,000
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

24. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Cash Flows: Summary
Cash used by operating activities:($ 2,000)
Cash used by investing activities:($110,000)
Cash from financing activities: $137,000
Net inflow for the year $ 25,000
Beginning cash balance: $ -0-
Ending cash balance $ 25,000
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

25. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Ratio Analysis
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

26. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Ratios
Ratio analysis expresses the relationship between selected financial data.
These relationships can be expressed as:
percentages
rates, or
proportions 1 2 3
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

27. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
Types of Ratios
What is measured
Examples
Type
Liquidity ratios
Short-term ability to pay
maturing obligations
Current ratio
Quick assets ratio
Activity ratios
Effectiveness in using
assets employed
Receivables turnover
Inventory turnover
Profitability
ratios
Degree of success or
failure for a given period
Rate of return on assets
Earnings per share
Coverage ratios
Degree of protection for
long-term creditors and
investors
Debt to Total assets
Times interest earned
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)

28. Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)
COPYRIGHT
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
11/6/2018
Intermediate Accounting, 10th Edition, Ch. 5 (Kieso et al.)