Blnce Sheet & Stement of Csh Flows Chpter 5 Lerning Objectives 1. Identify the uses limit of blnce sheet. 2. Identify the mjor clssific the blnce sheet. 3. Prepre clssified blnce sheet using the ccount form. (Not using the report form from the text) 4. Identify blnce sheet informi requiring supplementl dclosure. 5. Identify mjor blnce sheet dclosure techniques.ft 6. Explin the purpose of the stement of csh flows.. Identify the ctent of the stement of csh flows. 8. Not prepring stement of csh flows s per text. 9. Underst the usefulness of the stement of csh flows. 5-1 UCSB, Anders 5-2 UCSB, Anders Blnce Sheet Bsics Wh blnce sheet? Tells where the the entity sts finncilly; AS AS OF ; Better wy wy to to think of of it it s s Stement of of Finncil Positi Trnscti bsed. Something hs hs to to ctully HAPPEN first first Htoricl cost cost bs Importnt Fct: Inherently relies up estimes. Exmple: Vlui of of receivbles inventories; Goodwill vlui; Completeness of of reported impirments; Comprive blnce sheet nlys substntil tool in in understing whether the Compny improving or or deterioring. 5-3 UCSB, Anders No Stement Sts it s s Own ALL OF THE STATEMENTS AND NOTES ARE INTERDEPENDANT The blnce sheet needs n income stement stement of csh c flows note dclosure to tell complete picture Think of the self blncing spect. If you debit /r credit sles, then you need to see the blnce sheet AND the income stement to hve the t complete picture. For instnce if Compny generes $1,000,000 of net income, their totl verge equity for the yer ws $1.5, would you be impressed?... Wh bout if their verge equity ws $100 billi? Wh if Compny hd opering income the income stement but b showed negive csh flows from opering ctivities the stement of csh flows might you wnt to know why? 5-4 UCSB, Anders
Some importnt blnce sheet tools terms Liquidity- How fst cn n sset turn into csh? Solvency- How ble the Compny to py it s debts? Combined (Liquidity Solvency) represents the Compny s finncil flexibility If If compny dependnt up lenders for working cpitl, they typiclly must comply with restrictive covennts 5-5 UCSB, Anders Blnce Sheet Limit Htoricl Cost Bsed. Newhll L Frming Compny purchsed l l in in le le 1800 s. On On their their 2002 nnul report, their Net Net Assets, htoricl cost cost were $136,000,000 VS VS cservive pprl vlue of of $389,000,000. They were ler ler purchsed by by Lennr for for $1 $1 billi! Trnscti-bsed: something hs to to hppen first Omits mny items th th hve vlue (but (but re re not not bsed pst pst trnscti- remember the the stements re re trnsctibsed) Exmple:» Humn Humn resource» Technologicl dcies Requires estimi/ Judgment. INSTRUCTOR NOTE: RP RP 5-6 UCSB, Anders WHAT S S A FINANCIAL INSTRUMENT DEFINITION: Csh, n ownership interest, or ctrctul right to receive or obligi to deliver csh or nother finncil instrument. SUCH AS: Most current ssets libilities Debt. NOT: Fixed ssets, intngible ssets. 5- UCSB, Anders FAIR VALUE OF FINANCIAL INSTRUMENTS FASB No. 15: Provides guidnce HOW to to mesure fir vlue Uses mrket prticipnt pproch» Results in in more more comprble (potentilly less less ccure) d d NOT NOT When to to pply... Only pplicble if if other literure requires mesurement fir fir vlue. FASB No. 159: Mkes presenti of of finncil instruments fir vlue optil- very unusul very ctrdictory to to the noti of of comprbility NOTE: If If presented cost the blnce sheet, then fir vlue dclosed in in the notes. Therefore the fir vlue of of ll ll finncil instruments presented somewhere within the finncil stements! 5-8 UCSB, Anders
INTERESTING ABOUT FAIR VALUES How lg hve fir vlue mesurements been in f/s s? How mny people will come to the sme fir vlue est.? How mny people will come to the sme cost bs? Wh impct does FAS 15 hve items previously ccounted for cost? These points dd up to the need for FAS 15 It Blends dditil informi of fir vlue with cstency of cost bs. If you remember e point, remember th: FAS 15 looks to use d which going to result in two compnies coming to s close to the exct sme vlui of fir vlue for similr items s possible. Fs 15 levels of inputs Which D re they using? LEVEL 1- Quoted Mrket Price for the item stop LEVEL 2- Quoted Mrket Price for the type of item stop LEVEL 3- Unobservble/ Compny Genered 5-9 UCSB, Anders 5-10 10 UCSB, Anders BALANCE SHEET SUMMARY Assets Probble future ecomic benefits obtined or ctrolled by prticulr entity s result of pst trnsct or events. Current ssets Ncurrent ssets Intngibles Other ssets = Libilities + Equity Probble future scrifices of ecomic benefits ring from present oblig of prticulr entity to trnsfer ssets or provide services to other entities in the future s result of pst trnsct or events. Current libilies Ncurrent libilites Residul interest in the ssets of n entity th remins fter deducting its libilities. In business enterpre, the equity the ownership interest. Cpitl stock APIC Retined ernings AOCI Tresurey Stock CLASSIFICATION- CURRENT VS NONCURRENT Current- expected to cvert in in e yer or opering cycle (whichever lger). Otherwe it it n-current Some compny s d t need clssified blnce sheet, which mens th the blnce sheet does not dtinguh current from lgterm Rel este Compny- becuse the mjority of of wh would be be their opering ssets re ncurrent in in nure. D t forget to check debt for the current porti 5-11 11 UCSB, Anders 5-12 12 UCSB, Anders
Ctr Account presenti Certin ssets hve reduct clled ctr-sset ccounts: Accounts receivble/ llownce Fixed ssets/ deprecii Intngible ssets/ ccum. mortizi. Cn present s -item or s prt of the descripti. Exmples next slide. Ctr-Asset Presenti Exmples Accounts receivble $10,000 Allownce for doubtful ccounts $ (2,500) Accounts receivble, net $,500 OR Accounts receivble, net of of $2,500 llownce for doubtful ccounts $,500 5-13 13 UCSB, Anders 5-14 14 UCSB, Anders 5-15 In-Clss Exerce Bsed Bsed the the following informi, prepre the the blnce sheet sheet for for XYZ, XYZ, Inc. Inc. :: 10,000 10,000 shres shres outsting, $1 $1 pr pr which which were were sold sold to to investors for for $110,000; Debt Debt in in the the mount of of $1,000,000 outsting. Principl mures $250,000 per per yer yer until until repid; repid; Csh Csh of of $125,000; Accounts receivble $250,000, excluding the the llownce for for doubtful ccounts $25,000; Prepid insurnce of of $15,000 PP&E PP&E $2,000,000. Accumuled deprecii $200,000. Cpitlized comms pid pid to to lesing lesing gents gents $115,000. Accumuled mortizi $15,000. Accounts pyble $58,000 Retined ernings $5,000 Accumuled other other comprehensive income income $500,000 15 UCSB, Anders 5-16 ASSETS Csh 125,000 Accounts receivble, net of $25,000 llownce 225,000 Prepid expenses 15,000 Totl current ssets 525,000 PP&E 2,000,000 Accumuled deprecii (200,000) Net PP&E 1,800,000 Intngible sset, net of mortizi of $15,000 100,000 TOTAL ASSETS 2,425,000 LIABILITIES & STOCKHOLDERS EQUITY Accounts pyble 58,000 current murities of LTD 250,000 Totl current libilities 308,000 Lg-term debt, less current murities 50,000 EQUITY Comm stock (10,000 SHARES $1 PAR) 10,000 APIC 100,000 Retined Ernings 5,000 Accumuled Other Comp Income 500,000 1,36,000 TOTAL LIABILITIES & EQUITY 2,425,000 16 UCSB, Anders
Additil blnce sheet informi Dclosure my be prentheticl or in in notes. Prentheticl dclosure exmple: Held Held for for sle sle investments investments ($100,000 ($100,000 cost), cost), $128,000 $128,000 estimed estimed fir fir vlue vlue Note dclosure exmple:,, (Note (Note ) ) Note Note re re crried crried cost, cost, less less deprecii. deprecii. Plnt Plnt deprecied deprecied stright stright bs bs 35 35 yers. yers. All All other other deprecible deprecible deprecied deprecied stright stright bs bs yers. yers.,,,, deprecii deprecii December December 31, 31, 200X 200X ws: ws: L L $800,000 $800,000 Building Building $300,000 $300,000 Equipment Equipment $50,000 $50,000 $1,850,000 $1,850,000 Less Less deprecii deprecii $(100,000) $(100,000) &,, net net Investments/ Securities Lg-term investments my be crried : FAS 115- if if do not hve significnt influence (generlly <20% ownership) Equity- if if hve significnt influence (generlly 20-50% ownership) Csolided if if Ctrolled - sepre equity item for n-ctrolling interest (generlly >50% ownership) 5-1 1 UCSB, Anders 5-18 18 UCSB, Anders Stement of Csh Flows As As sted in in previous lectures, the stement of of csh flows fills in in the gp creed by by pplying ccrul ccounting. It It tells the users where the csh went to to cme from. It It lso breks those sources uses into three brod cegories: Csh flows from oper» Net Net income income chnges in in current current ssets ssets & libilities Csh flows from investing» Csh Csh flows flows from from purchse sle sle of of lg lg term term ssets ssets» Presented Gross - i.e i.e purchse sle sle sepre Csh flows from finncing» Csh Csh flows flows from from lg-term debt debt equity equity ctivity ctivity» Presented Gross i.e i.e borrowing repyment sepre Ced in in greer detil in in chpter 23. 5-19 19 UCSB, Anders