Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter Balance Sheet and Statement of Cash Flows This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Explain the uses and limitations of the balance sheet Prepare a classified balance sheet Explain the purpose, content, and presentation of the statement of cash flows Describe additional types of information provided Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Balance Sheet and Statement of Cash Flows Balance Sheet • Usefulness • Limitations • Classification Preparation of the Balance Sheet • Account form • Report form Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Statement of Cash Flows • Purpose • Content • Preparation • Usefulness Additional Information • Notes to the financial statements Techniques of disclosure Copyright â2019 John Wiley & Sons, Inc Learning Objective Explain the Uses, Limitations, and Content of the Balance Sheet LO Copyright ©2019 John Wiley & Sons, Inc 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 LO Copyright ©2019 John Wiley & Sons, Inc Balance Sheet Usefulness of the Balance Sheet • Computing rates of return • Evaluating capital structure • Assess risk and future cash flows • Analyze the company’s: LO  Liquidity  Solvency  Financial flexibility Copyright ©2019 John Wiley & Sons, Inc Balance Sheet Limitations of the Balance Sheet Most assets and liabilities are reported at historical cost Use of judgments and estimates Many items of financial value are omitted LO Copyright ©2019 John Wiley & Sons, Inc Balance Sheet Classification in the Balance Sheet Elements of The Balance Sheet Assets Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events Liabilities Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events LO Copyright ©2019 John Wiley & Sons, Inc Classification in the Balance Sheet Elements of the Balance Sheet Equity Residual interest in the assets of an entity that remains after deducting its liabilities In a business enterprise, the equity is the ownership interest LO Copyright ©2019 John Wiley & Sons, Inc 10 Notes to the Financial Statements Fair Values For major groups of assets and liabilities, companies must make the following fair value disclosures: the fair value measurement and the fair value hierarchy level of the measurements as a whole, classified by Level 1, 2, or LO Copyright ©2019 John Wiley & Sons, Inc 92 Techniques of Disclosure • Parenthetical Explanations • Cross-Reference and Contra Items • Supporting Schedules • Terminology LO Copyright ©2019 John Wiley & Sons, Inc 93 Techniques of Disclosure Parenthetical Explanations LO Copyright ©2019 John Wiley & Sons, Inc 94 Techniques of Disclosure Cross-Referencing and Contra Items LO Copyright ©2019 John Wiley & Sons, Inc 95 Techniques of Disclosure Supporting Schedules LO Copyright ©2019 John Wiley & Sons, Inc 96 Techniques of Disclosure Terminology Balance sheets should contain descriptions that readers will generally understand and clearly interpret Profession has recommended that LO  companies use the word reserve only to describe an appropriation of retained earnings  use of the word surplus be discontinued in balance sheet presentations of stockholders’ equity Copyright ©2019 John Wiley & Sons, Inc 97 Appendix A: Ratio Analysis—a Reference Major Types of Ratios Liquidity Ratios Measures of the company's short-term ability to pay its maturing obligations Activity Ratios Measures of how effectively the company uses its assets Profitability Ratios Measures of the degree of success or failure of a given company or division for a given period of time Coverage Ratios Measures of the degree of protection for longterm creditors and investors LO Copyright ©2019 John Wiley & Sons, Inc 98 Appendix A: Ratio Analysis—a Reference (Liquidity and Activity) LO Copyright ©2019 John Wiley & Sons, Inc 99 Appendix A: Ratio Analysis—a Reference (Profitability) LO Copyright ©2019 John Wiley & Sons, Inc 100 Appendix A: Ratio Analysis—a Reference (Coverage) LO Copyright ©2019 John Wiley & Sons, Inc 101 Learning Objective Compare the Accounting Procedure Related to the Balance Sheet Under GAAP and IFRS LO Copyright ©2019 John Wiley & Sons, Inc 102 I F R S Insights Relevant Facts - Similarities • 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 non-controlling interests in the equity section of the balance sheet LO Copyright ©2019 John Wiley & Sons, Inc 103 I F R S Insights Relevant Facts - Differences • 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 G AAP, public companies must follow S EC 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 I FRS 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 G AAP, but there is no such prohibition in IFRS LO Copyright ©2019 John Wiley & Sons, Inc 104 I F R S Insights 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 is currently on hold You can follow the joint financial presentation project at the following link: www.fasb.org LO Copyright ©2019 John Wiley & Sons, Inc 105 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 Copyright ©2019 John Wiley & Sons, Inc 106 ... Sheet Elements of The Balance Sheet Assets Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events Liabilities Probable future sacrifices