INTERMEDIATE Intermediate ACCOUNTING Intermediate Accounting Accounting F I F T E E N T H 5-1 E D I T I O N Prepared by Prepared by Coby Harmon Prepared by Coby Harmon Coby Harmon University of California Santa Barbara University of California, Santa Barbara University of California, Santa Barbara Westmont College Westmont College kieso weygandt warfield team for success PREVIEW OF CHAPTER Intermediate Accounting 15th Edition Kieso Weygandt Warfield 5-2 Balance Sheet and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: 5-3 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 formats Indicate the purpose of the statement of cash flows Identify the content of the statement of cash flows Prepare a basic statement of cash flows Understand the usefulness of the statement of cash flows Determine which balance sheet information requires supplemental disclosure Describe the major disclosure techniques for the balance sheet Balance Sheet Balance Sheet, sometimes referred to as the statement of financial position: Reports assets, liabilities, and equity at a specific date Provides information about resources, obligations to creditors, and equity in net resources Helps in predicting amounts, timing, and uncertainty of future cash flows 5-4 LO Explain the uses and limitations of a balance sheet Balance Sheet Usefulness of the Balance Sheet 5-5  Computing rates of return  Evaluating the capital structure  Assess risk and future cash flows  Analyze the company’s: ► Liquidity, ► Solvency, and ► Financial flexibility LO Explain the uses and limitations of a balance sheet GROUNDED WHAT’S YOUR PRINCIPLE The terrorist attacks of September 11, 2001, showed how vulnerable the major airlines are to falling demand for their services Since that infamous date, major airlines have reduced capacity and slashed jobs to avoid bankruptcy United Airlines, Northwest Airlines, US Airways, and several smaller competitors fi led for bankruptcy in the wake of 9/11 Delta Airlines made the following statements in its annual report issued shortly after 9/11: “If we are unsuccessful in further reducing our operating costs we will need to restructure our costs under Chapter 11 of the U.S Bankruptcy Code We have substantial liquidity needs and there is no assurance that we will be able to obtain the necessary financing to meet those needs on acceptable terms, if at all.” 5-6 These financial flexibility challenges have continued, exacerbated by ever-increasing fuel prices, labor costs, and the economic downturn in response to the financial crisis Not surprisingly, several of the major airlines (Delta and Northwest, Continental and United, and Airtran and Southwest) merged recently as a way to build some competitive synergies and to bolster their financial flexibility Others (American Airlines and US Airways) are exploring mergers Source: R Seaney, “Airline Mergers: Good for Travelers?” http:// abcnews.go.com/Travel/airline-merger-maniacost/story?id516227892 (April 27, 2012) LO Explain the uses and limitations of a balance sheet Balance 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 LO Explain the uses and limitations of a balance sheet Balance Sheet and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: 5-8 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 formats Indicate the purpose of the statement of cash flows Identify the content of the statement of cash flows Prepare a basic statement of cash flows Understand the usefulness of the statement of cash flows Determine which balance sheet information requires supplemental disclosure Describe the major disclosure techniques for the balance sheet Balance Sheet Classification in the Balance Sheet 5-9 LO Identify the major classifications of the balance sheet Balance Sheet Classification in the Balance Sheet Illustration 5-1 In practice you usually see little departure from these major subdivisions 5-10 LO Identify the major classifications of the balance sheet APPENDIX 5A Using Ratios 5-84 Ratio Analysis—A Reference Illustration 5A-1 A Summary of Financial Ratios LO 10 Identify the major types of financial ratios and what they measure APPENDIX 5A Using Ratios 5-85 Ratio Analysis—A Reference Illustration 5A-1 A Summary of Financial Ratios LO 10 Identify the major types of financial ratios and what they measure APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company The following are the traditional financial portions of the annual report: • Letter to the Stockholders • Financial Highlights • Management’s Discussion and Analysis • Management Certification of Financial Statements • Management’s Report on Internal Control • Auditor’s Reports • Financial Statements • Notes to the Financial Statements • Supplementary Financial Information (e.g., 10-year financial summary) 5-86 APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company Consolidated Statement of Earnings 5-87 APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company Consolidated Balance Sheets 5-88 APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company Consolidated Balance Sheets 5-89 APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company Consolidated Statement of Shareholders’ Equity Dollars in millions/Shares in thousands Statements for the year ended 2010 and 2009 not presented 5-90 APPENDIX 5B Specimen Financial Statements: The Procter & Gamble Company Consolidated Statement of Cash Flows 5-91 RELEVANT FACTS - Similarities 5-92  Both IFRS and GAAP allow the use of title “balance sheet” or “statement of financial position.” IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet  Both IFRS and GAAP require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s 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  IFRS and GAAP require presentation of noncontrolling interests in the equity section of the balance sheet LO 11 Compare the accounting procedure related to the balance sheet under GAAP and IFRS RELEVANT FACTS - Differences 5-93  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  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  IFRS has many differences in terminology For example in the equity section common stock is called share capital—ordinary  Use of the term “reserve” is discouraged in GAAP, but there is no such prohibition in IFRS LO 11 Compare the accounting procedure related to the balance sheet under GAAP and IFRS ON THE HORIZON The FASB and the IASB are working on a project to converge their standards related to financial statement presentation A key feature of the proposed framework is that each of the statements will be organized, in the same format, to separate an entity’s financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors Thus, the same classifications used in the statement of financial position would also be used in the statement of comprehensive income and the statement of cash flows The project has three phases You can follow the joint financial presentation project at the following link: http://www.fasb.org/project/financial_statement_ presentation.shtml 5-94 LO 11 Compare the accounting procedure related to the balance sheet under GAAP and 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 5-95 LO 11 Compare the accounting procedure related to the balance sheet under GAAP and IFRS IFRS SELF-TEST QUESTION 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 liabilities) on their statement of financial positions c may report noncurrent assets before current assets on the statement of financial position d not have any guidelines as to what should be reported on the statement of financial position 5-96 LO 11 Compare the accounting procedure related to the balance sheet under GAAP and IFRS IFRS SELF-TEST QUESTION A company has purchased a tract of land and expects to build a production plant on the land in approximately years During the 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 5-97 LO 11 Compare the accounting procedure related to the balance sheet under GAAP and IFRS Copyright Copyright © 2013 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 5-98 ...PREVIEW OF CHAPTER Intermediate Accounting 15th Edition Kieso Weygandt Warfield 5-2 Balance Sheet and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should... unsuccessful in further reducing our operating costs we will need to restructure our costs under Chapter 11 of the U.S Bankruptcy Code We have substantial liquidity needs and there is no assurance... balance sheet 5 Balance Sheet and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: 5-8 Explain the uses and limitations of a balance sheet Identify