CH 05

Intermediate
Accounting
5-1
Prepared by
Coby Harmon
University of California, Santa Barbara
Balance Sheet and

Statement of Cash Flows
Intermediate Accounting
14th Edition
Kieso, Weygandt, and Warfield

5-2
Learning
Learning Objectives
Objectives
5-3
1.
Explain the uses and limitations of a balance sheet.
2.
Identify the major classifications of the balance sheet.
3.
Prepare a classified balance sheet using the report and account

formats.
4.
Indicate the purpose of the statement of cash flows.
5.
Identify the content of the statement of cash flows.
6.
Prepare a statement of cash flows.
7.
Understand the usefulness of the statement of cash flows.
8.
Determine which balance sheet information requires supplemental

disclosure.
9.
Describe the major disclosure techniques for the balance sheet.
Balance
Balance Sheet
Sheet and
and Statement
Statement of
of Cash
Cash Flows
Flows
Balance Sheet
Statement of
Cash Flows
Usefulness
Purpose
Limitations
Content and format
Classification
Preparation
Usefulness
5-4
Additional
Information
Supplemental
disclosures
Techniques of
disclosure
Balance
Balance Sheet
Sheet
Balance Sheet, also referred to as the statement of
financial position:
1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to
creditors, and equity in net resources.
3. Helps in predicting amounts, timing, and uncertainty of
future cash flows.
5-5
LO 1 Explain the uses and limitations of a balance sheet.
Balance
Balance Sheet
Sheet
Usefulness of the Balance Sheet
5-6
Computing rates of return.
Evaluating the capital structure.
Assess risk and future cash flows.
Analyze the companys:
Liquidity,
Solvency, and
Financial flexibility.
Balance
Balance Sheet
Sheet
Limitations of the Balance Sheet
5-7
Most assets and liabilities are reported at historical

cost.
Use of judgments and estimates.
Many items of financial value are omitted.
Balance
Balance Sheet
Sheet
Classification
5-8
LO 2 Identify the major classifications of the balance sheet.
Balance
Balance Sheet
Sheet
Classification
Illustration 5-1
In practice you usually see little departure from these major subdivisions.
5-9
Classification
Classification in
in the
the Balance
Balance Sheet
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.
Illustration 5-2
5-10
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Review
The correct order to present current assets is
a. Cash, accounts receivable, prepaid items, inventories.
b. Cash, accounts receivable, inventories, prepaid items.
c. Cash, inventories, accounts receivable, prepaid items.
d. Cash, inventories, prepaid items, accounts receivable.
5-11
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Cash
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.

Illustration 5-3
5-12
LO 2
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Cash
Illustration 5-4
Balance SheetRestricted Cash
5-13
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Short-Term Investments
5-14
Portfolios
Type
Valuation
Classification
Held-toMaturity
Debt
Amortized
Cost
Current or
Noncurrent
Trading
Debt or
Equity
Fair Value
Current
Availablefor-Sale
Debt or
Equity
Fair Value
Current or
Noncurrent
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Short-Term Investments
Illustration 5-5
Balance Sheet Presentation of
Investments in Securities
5-15
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Receivables
Major categories of receivables should be shown in the
balance sheet or the related notes.
A company should clearly identify
5-16
Anticipated loss due to uncollectibles.
Amount and nature of any nontrade receivables.
Receivables used as collateral.
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Receivables
Illustration 5-6
Balance Sheet Presentation
of Receivables
5-17
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Inventories
Disclose:
Basis of valuation (e.g., lower-of-cost-or-market).
Cost flow assumption (e.g., FIFO or average cost).

Illustration 5-6
5-18
LO 2
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Prepaid Expenses
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to:
5-19
insurance
rent
supplies
taxes
advertising
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Prepaid Expenses
Illustration 5-9
5-20
Balance
Balance Sheet
Sheet Current
Current Assets
Assets
Current Assets - Summary
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.
5-21
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Non-Current Assets
Long-term Investments
1. Securities (bonds, common stock, or long-term notes).
2. Tangible fixed assets not currently used in operations
(land held for speculation).
3. Special funds (sinking fund, pension fund, or plant
expansion fund.
4. Non-consolidated subsidiaries or affilated companies.
5-22
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term Investments
Portfolios
5-23
Type
Valuation
Classification
Held-toMaturity
Debt
Amortized
Cost
Current or
Noncurrent
Trading
Debt or
Equity
Fair Value
Current
Availablefor-Sale
Debt or
Equity
Fair Value
Current or
Noncurrent
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Securities
bonds,
stock, and
long-term notes
For marketable securities,

managements intent
determines current or
noncurrent classification.
5-24
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Fixed Assets
5-25
Land held for

speculation
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Special Funds
5-26
Sinking fund
Pensions fund
Cash surrender
value of life
insurance
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Long-Term
Investments
Nonconsolidated
Nonconsolidated
Subsidiaries
Subsidiaries or
or
Affiliated
Companies
Companies
5-27
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Illustration 5-10
Balance Sheet
Presentation of
5-28
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Property, Plant, and Equipment
Tangible long-lived assets used in the regular operations
of the business.
Physical property such as land, buildings, machinery,

furniture, tools, and wasting resources (minerals).
With the exception of land, a company either depreciates

(e.g., buildings) or depletes (e.g., oil reserves) these
assets.
5-29
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Property, Plant, and
Equipment
Tangible assets used
in the regular
operations of the
business.
5-30
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Illustration 5-11
Balance Sheet Presentation of
Property, Plant, and Equipment
5-31
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Intangibles
Lack physical substance
and are not financial
instruments.
5-32
Limited life intangibles

amortized.
Indefinite-life
intangibles tested for
impairment.
LO 2
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Intangibles (BE5-6): Patrick Corporation adjusted trial balance
contained the following asset accounts at December 31, 2012: 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
Franchises
47,000
Patents
33,000
Trademarks
10,000
Total
5-33
$ 50,000
$140,000
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Intangible Assets
Illustration 5-12
Balance Sheet
Presentation of
Intangible Assets
5-34
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Other Assets
Items vary in practice. Can include:
5-35
Long-term prepaid expenses
Non-current receivables
Assets in special funds
Property held for sale
Restricted cash or securities
Balance
Balance Sheet
Sheet Noncurrent
Noncurrent Assets
Assets
Other Assets
This section should
include only unusual items
sufficiently different from
assets in the other
categories.
5-36
LO 2
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Current Liabilities
Obligations that a
company reasonably
expects to liquidate either
through the use of current
assets or the creation of
other current liabilities.
5-37
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Current Liabilities
Illustration 5-13
of Current Liabilities
5-38
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
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.
5-39
Balance
Balance Sheet
Sheet Long-Term
Liabilities
Long-Term Liabilities (BE5-9): Included in Adams Companys
December 31, 2012, trial balance are the following accounts: Accounts
Payable $220,000; Pension Asset/Liability $375,000; Discount on
Bonds Payable $29,000; Unearned Revenue $41,000; Bonds Payable
$400,000; Salaries and 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 Asset/liability
Bonds payable
Discount on bonds payable
Total
5-40
$375,000
400,000
(29,000)
746,000
Balance
Balance Sheet
Sheet Long-Term
Liabilities
Non-Current Liabilities
Illustration 5-14
of Non-Current Liabilities
5-41
Balance
Balance Sheet
Sheet Owners
Owners Equity
Equity
Owners Equity
5-42
Balance
Balance Sheet
Sheet Owners
Owners Equity
Equity
Owners Equity
Illustration 5-15
of Stockholders Equity
5-43
Classification
Classification in
in the
the Balance
Balance Sheet
Sheet
Account
5-44
Classification
(a) Investment in preferred stock
(a) Current asset/Investment
(b) Treasury stock
(b) Stockholders Equity
(c) Common stock
(c) Stockholders Equity
(d) Cash dividends payable
(d) Current liability
(e) Accumulated depreciation
(e) Contra-asset
(f) Interest payable
(f) Current liability
(g) Deficit
(g) Stockholders Equity
(h) Trading securities
(h) Current asset
(i) Unearned revenue
(i) Current liability
Balance
Balance Sheet
Sheet Format
Format
Classified Balance Sheet
Account form
Report form
Accounting Trends and Techniques2009 (New York:

AICPA) indicates that all of the 500 companies surveyed
use either the report form (438) or the account form (62),
sometimes collectively referred to as the customary form.
5-45
LO 3 Prepare a classified balance sheet using the report and account formats.
Balance
Balance Sheet
Sheet Format
Format
Account Form
5-46
Illustration 5-16
LO 3 Prepare a classified balance sheet using the report and account formats.
Balance
Balance Sheet
Sheet
Format
Format
Report Form
Illustration 5-16
5-47
LO 3
Statement
Statement of
of Cash
Cash Flows
Flows
One of the three basic objectives of financial
reporting is
assessing the amounts, timing, and

uncertainty of cash flows.
5-48
LO 4 Indicate the purpose of the statement of cash flows.
Statement
Statement of
of Cash
Cash Flows
Flows
Purpose of the Statement of Cash Flows
To provide relevant information about the cash receipts
and cash payments of an enterprise during a period.
The statement provides answers to the following
questions:
5-49
1.
Where did the cash come from?
2.
What was the cash used for?
3.
What was the change in the cash balance?

LO 4 Indicate the purpose of the statement of cash flows.
Statement
Statement of
of Cash
Cash Flows
Flows
Content and Format
Three different activities:
Operating,
Investing,
Financing
Illustration 5-17
Basic Format of Cash
Flow Statement
5-50
LO 5 Identify the content of the statement of cash flows.
Statement
Statement of
of Cash
Cash Flows
Flows
Content and Format
Operating
Investing
Financing
Cash inflows and

outflows that
enter into the
determination of
net income.
Cash inflows and

outflows from
non-current
assets.
Cash inflows and

outflows from
non-current
liabilities and
equity.
The statements value is that it helps users evaluate liquidity, solvency,

and financial flexibility.
5-51
Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-18
5-52
Preparation
Preparation of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Sources of Information
Information obtained from several sources:
(1) comparative balance sheets,
(2) the current income statement, and
(3) selected transaction data.
5-53
LO 6 Prepare a basic statement of cash flows.
Statement
Statement of
of Cash
Cash Flows
Flows
Statement of Cash Flows: On January 1, 2012, in its first
year of operations, Telemarketing Inc. issued 50,000 shares of
$1 par value common stock for $50,000 cash. The company
rented its office space, furniture, and telecommunications
equipment and performed marketing services throughout the
first year. In June 2012 the company purchased land for
$15,000. Illustration 5-19 shows the companys comparative
balance sheets at the beginning and end of 2012.
5-54
Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-19
Illustration 5-20
5-55
LO 6
Statement
Statement of
of Cash
Cash Flows
Flows
Preparing the Statement of Cash Flows
Determine:
1. Cash provided by (or used in) operating activities.
2. Cash provided by or used in investing and financing
activities.
3. Determine the change (increase or decrease) in cash
during the period.
4. Reconcile the change in cash with the beginning and the
ending cash balances.
5-56
Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-19
Illustration 5-20
Cash provided by operating activities
5-57
Illustration 5-21
Illustration 5-19
Illustration 5-20
Statement
Statement of
of
Cash
Cash Flows
Flows
Next, the company
determines its investing
and financing activities.
5-58
Illustration 5-21
Statement
Statement of
of Cash
Cash Flows
Flows
Statement of Cash Flows (BE 5-12): Keyser Beverage
Company reported the following items in the most recent year.
Activity
Net income
Dividends paid
Increase in accounts receivable
Increase in accounts payable
Purchase of equipment
Depreciation expense
Issue of notes payable
$40,000
5,000
10,000
7,000
8,000
4,000
20,000
Operating
Financing
Operating
Operating
Investing
Operating
Financing
Required: Compute net cash provided by operating activities.

5-59
Statement
Statement of
of Cash
Cash Flows
Flows
Statement of Cash Flows (BE 5-12)
Noncash credit to
revenues.
Noncash charge to
expenses.
5-60
Statement
Statement of
of Cash
Cash Flows
Flows
Review
In preparing a statement of cash flows, which of the following
transactions would be considered an investing activity?
5-61
a.
Sale of equipment at book value
b.
Sale of merchandise on credit
c.
Declaration of a cash dividend
d.
Issuance of bonds payable at a discount receivable.
Statement
Statement of
of Cash
Cash Flows
Flows
Significant Noncash Activities
Significant financing and investing activities that do not
affect cash are reported in either a separate schedule at
the bottom of the statement of cash flows or in the notes.
Examples include:
5-62
Issuance of common stock to purchase assets.
Conversion of bonds into common stock.
Issuance of debt to purchase assets.
Exchanges on long-lived assets.

Statement
Statement of
of Cash
Cash Flows
Flows
Illustration 5-23
Comprehensive
Statement of Cash Flows
5-63
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Without cash, a company will not survive.
Cash flow from Operations:
5-64
High amount - company able to generate sufficient

cash to pay its bills.
Low amount - company may have to borrow or issue

equity securities to pay bills.
LO 7 Understand the usefulness of the statement of cash flows.
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Financial Liquidity
Current Cash
Debt Coverage
Ratio
Net Cash Provided by

Operating Activities
=
Average Current Liabilities
Ratio indicates whether the company can pay off its current
liabilities from its operations. A ratio near 1:1 is good.
5-65
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Financial Liquidity
Cash Debt
Coverage
Ratio
Net Cash Provided by

Operating Activities
=
Average Total Liabilities
This ratio indicates a companys ability to repay its liabilities

from net cash provided by operating activities, without having
to liquidate the assets employed in its operations.
5-66
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Free Cash Flow
Illustration 5-28
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.
5-67
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Review
The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
5-68
Supplemental
Supplemental Disclosures
Disclosures
Four types of information that are supplemental to account
titles and amounts presented in the balance sheet:
5-69
LO 8 Determine which balance sheet information

requires supplemental disclosure.
Techniques
Techniques of
of Disclosure
Disclosure
5-70
Parenthetical Explanations
Notes
Cross-Reference and Contra Items
Supporting Schedules
Terminology
LO 9 Describe the major disclosure techniques for the balance sheet.
APPENDIX
5A
Ratio AnalysisA Reference
Using Ratios to Analyze Performance

Analysts and other interested parties can gather qualitative
information from financial statements by examining
relationships between items on the statements and identifying
trends in these relationships.
5-71
LO 10 Identify the major types of financial ratios and what they measure.
APPENDIX
5A

Illustration 5A-1
A Summary of Financial Ratios
5-72
APPENDIX
5A

Illustration 5A-1
5-73
APPENDIX
5A

Illustration 5A-1
5-74
APPENDIX
5-75
5B
Specimen Financial Statements:

The Procter & Gamble Company
APPENDIX
5-76
5B

APPENDIX
5-77
5B

APPENDIX
5-78
5B

APPENDIX
5-79
5B

APPENDIX
5-80
5B

APPENDIX
5-81
5B

RELEVANT FACTS
5-82
IFRS recommends but does not require the use of the title
statement of financial position rather than balance sheet.
IFRS requires a classified statement of financial position except in

very limited situations. IFRS follows the same guidelines as this
textbook for distinguishing between current and noncurrent assets
and liabilities. However under GAAP, public companies must follow
SEC regulations, which require specific line items. In addition,
specific GAAP standards mandate certain forms of reporting this
information.
Under IFRS, current assets are usually listed in the reverse order of
liquidity. For example, under GAAP cash is listed first, but under
IFRS it is listed last.
RELEVANT FACTS
5-83
IFRS has many differences in terminology that you will notice in this
textbook.
Both IFRS and GAAP require disclosures about (1) accounting

policies followed, (2) judgments that management has made in the
process of applying the entitys accounting policies, and (3) the key
assumptions and estimation uncertainty that could result in a
material adjustment to the carrying amounts of assets and liabilities
within the next financial year. Comparative prior period information
must be presented and financial statements must be prepared
annually.
Use of the term reserve is discouraged in GAAP, but there is no

such prohibition in IFRS.
IFRS SELF-TEST QUESTION

Current assets under IFRS are listed generally:
a. by importance.
b. in the reverse order of their expected conversion to cash.
c.
by longevity.
d. alphabetically.
5-84

Companies that use IFRS:
a. may report all their assets on the statement of financial position
at fair value.
b. are not allowed to net assets (assets 2 liabilities) on their
statement of financial positions.
c.
may report noncurrent assets before current assets on the

statement of financial position.
d. do not have any guidelines as to what should be reported on

the statement of financial position.
5-85

A company has purchased a tract of land and expects to build a
production plant on the land in approximately 5 years. During the 5
years before construction, the land will be idle. Under IFRS, the land
should be reported as:
a. land expense.
b. property, plant, and equipment.
c.
an intangible asset.
d. a long-term investment.
5-86
Copyright
Copyright
Copyright 2012 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.
5-87

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Intermediate

Balance Sheet and

Kieso, Weygandt, and Warfield

Explain the uses and limitations of a balance sheet.

Identify the major classifications of the balance sheet.

Prepare a classified balance sheet using the report and account

Indicate the purpose of the statement of cash flows.

Identify the content of the statement of cash flows.

Prepare a statement of cash flows.

Understand the usefulness of the statement of cash flows.

Determine which balance sheet information requires supplemental

Describe the major disclosure techniques for the balance sheet.

Content and format

LO 1 Explain the uses and limitations of a balance sheet.

Computing rates of return.

Evaluating the capital structure.

Assess risk and future cash flows.

Analyze the companys:

Most assets and liabilities are reported at historical

Use of judgments and estimates.

Many items of financial value are omitted.

LO 1 Explain the uses and limitations of a balance sheet.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

Generally any monies available on demand.

Cash equivalents - short-term highly liquid investments

Restrictions or commitments must be disclosed.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

Anticipated loss due to uncollectibles.

Amount and nature of any nontrade receivables.

Receivables used as collateral.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

Basis of valuation (e.g., lower-of-cost-or-market).

Cost flow assumption (e.g., FIFO or average cost).

Prepayments often occur in regard to:

LO 2 Identify the major classifications of the balance sheet.

convert into cash,

either in one year or in

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

For marketable securities,

Land held for

LO 2 Identify the major classifications of the balance sheet.

Physical property such as land, buildings, machinery,

With the exception of land, a company either depreciates

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

Limited life intangibles

LO 2 Identify the major classifications of the balance sheet.

LO 2 Identify the major classifications of the balance sheet.

Long-term prepaid expenses

Assets in special funds

Property held for sale

Restricted cash or securities

LO 2 Identify the major classifications of the balance sheet.