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Intermediate Accounting Ch. 5, Kieso
Chapter 5: Balance Sheet and Statement of Cash Flows
Terms in this set (57)
Presentation in a classified balance sheet that lists assets by sections on the left side and liabilities and stockholders' equity by sections on the right side.
An account that increases either an asset, liability, or owners' equity account. An example is Premium on Bonds Payable, which, when added to the Bonds Payable account, describes the total bond liability of the company.
Debt securities not classified as held-to-maturity or trading securities. Companies report available-for-sale securities at fair value, but do not report changes in fair value as part of net income until after they sell the security. Interest on available-for-sale securities is recorded when earned. Unrealized holding gains and losses on available-for-sale securities are recognized as other comprehensive income and as a separate component of stockholders' equity.
Financial statement that shows the financial condition of a company at the end of a period by reporting its assets, liabilities, and stockholders' equity
Measure of solvency that indicates a company's ability to repay its liabilities from cash generated from operations (without having to liquidate productive assets). Computed as the ratio of cash provided by operating activities to total debt, as represented by average total liabilities. (p. 204).
cash debt coverage ratio
Material events with an uncertain future. The uncertainty can involve a possible gain (gain contingency) or possible loss (loss contingency) that will ultimately be resolved when one or more future events occur or fail to occur. Typical gain contingencies are tax operating loss carryforwards or company litigation against another party. Typical loss contingencies relate to litigation, environmental issues, possible tax assessments, or government investigations.
An account that reduces either an asset, liability, or owners' equity account. Examples include Accumulated Depreciation and Discount on Bonds Payable. Use of contra accounts enables readers of financial statements to see the original cost of the asset, liability, or owners' equity account as well as the changes in the account to date.
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. Companies present current assets in the balance sheet in order of liquidity.
Measure of liquidity that indicates a company's ability to pay its short-term debts. Computed as cash provided by operating activities divided by average current liabilities.
current cash debt coverage
The obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. This concept includes: payables resulting from the acquisition of goods and services; (2) collections received in advance for the delivery of goods or performance of services; and (3) other liabilities whose liquidation will take place within the operating cycle.
The ability of a company to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. A company's liquidity and solvency affect its financial flexibility.
Assets consisting of cash, accounts receivable, an ownership interest, or a contractual right to receive or obligation to deliver cash or another financial instrument.
Cash flow activities that include (1) obtaining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders and paying them dividends.
Measure of the cash remaining from operating activities after adjusting for capital expenditures and dividends paid. Some analysts prefer free cash flow to the measure of cash provided by operating activities because free cash flow takes into account the outflows needed to maintain current operations. (p. 204).
free cash flow
Assets that lack physical substance and that are not financial instruments. Intangible assets derive their value from the rights and privileges granted to the company using them. They are normally classified as long-term assets. Companies write off (amortize) limited-life intangible assets over their useful lives and they periodically assess indefinite-life intangibles for impairment.
Cash flow activities that include (1) purchasing and disposing of investments and productive long-lived assets using cash, and (2) lending money and collecting the loans.
The amount of time that is expected for an asset to be realized or otherwise converted into cash or until a liability has to be paid. In general, the greater a company's liquidity, the lower its risk of failure.
Investments that companies expect to hold for many years. Examples are: (1) investments in securities, such as bonds or common stock; (2) investments in tangible fixed assets not currently used in operations, such as land held for speculation; (3) investments set aside in special funds such as a pension fund; and (4) investments in nonconsolidated subsidiaries. Companies usually present long-term investments on the balance sheet just below current assets.
Obligations that a company expects to pay at some date beyond the normal operating cycle. Examples are: bonds payable, notes payable, some deferred income tax amounts, lease obligations, and pension obligations. Also referred to as long-term debt. Companies provide a great deal of supplementary disclosure for long-term liabilities because they often are subject to covenants and restrictions for the protection of lenders.
The ownership claim on a company's total assets. The owners' equity section of the corporate balance sheet consists of capital stock, additional paid-in capital, and retained earnings. Partners show separately their permanent capital accounts and the balance in their temporary accounts (drawing accounts). Proprietors ordinarily use a single capital account that handles all of the owner's equity transactions.
owners' (stockholders') equity
Assets of a durable nature used in the regular operations of the business. These assets consist of physical property (such as land, buildings, machinery) and wasting resources (timberland, minerals). With the exception of land, a company either depreciates (e.g., buildings) or depletes (e.g., oil reserves) these assets.
property, plant, and equipment
Presentation in a classified balance sheet that lists liabilities and stockholders' equity directly below assets on the same page
An appropriation of retained earnings. Also called appropriated earnings.
A basic financial statement that provides information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period, in a format that reconciles the beginning and ending cash balances. (p. 197).
trading securities Debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences.
statement of cash flows
Debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences.
The excess of total current assets over total current liabilities; represents the net amount of a company's relatively liquid resources. Also called net working capital.
Measures of how effectively a company is using its assets. Common activity ratios are: receivables turnover, inventory turnover, and asset turnover.
Measures of the degree of protection for long-term creditors and investors. Common coverage ratios are: debt to total assets, times interest earned, the cash debt coverage ratio, and book value per share.
Measures of a company's short-run ability to pay its maturing obligations. Common liquidity ratios are: the current ratio, the quick or acid-test ratio, and the current cash debt coverage ratio.
Measures of the degree of success or failure of a given company or division for a given period of time. Common profitability ratios are: profit margin on sales, rate of return on assets, rate of return on common stock equity, earnings per share, the price-earnings ratio, and the payout ratio.
An evaluation of the relationship among selected financial statement data, expressed in terms of either a percentage, a rate, or a simple proportion.
by providing a basis for (1) computing rates of return, (2) evaluating the capital structure of the enterprise, and (3) assessing the liquidity, solvency, and financial flexibility of the enterprise
How does the balance sheet contribute to financial reporting?
assets, liability and equity
What are the general elements of the balance sheet?
current assets; long-term investments; property, plant, and equipment; intangible assets; and other assets; current liabilities and long-term liabilities; capital stock, additional paid-in capital, and retained earnings
What are the major classifications of assets, liabilities, and owners' equity of a corporation?
contingencies, accounting policies, contractual situations, fair values
What types of information normally require supplemental disclosure?
parenthetical explanations, notes, cross reference and contra items, and supporting schedules
What are the major disclosure techniques for the balance sheet?
The primary purpose of a statement of cash flows is to provide relevant information about a company's cash receipts and cash payments during a period.
What's the purpose of the statement of cash flows?
operating activities, investing activities, and financing activities
What different kinds of activities are the statement of cash flows separated into?
include all transactions and other events not defined as investing or financing activities; generally involve producing and delivering goods and providing services; cash flows from operating activities are generally the cash effects of transactions that enter into the determination of net income
include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment
include (a) obtaining resources from owners and providing them with a return on and a return of their investment, and (b) borrowing money from creditors and repaying the amounts borrowed
(1) Determine the net cash provided by or used in operating activities, (2) determine the net cash provided by or used in investing and financing activities, (3) determine the net change in cash during the period, and (4) reconcile the net change in cash with the beginning and ending cash balances
What are the steps followed to prepare a statement of cash flows?
(1) Cash and cash equivalents - fair value; (2) short term investments - fair value (generally); (3) Receivables - estimated amount collectible (or net realizable value); (4) inventories - lower of cost or market; (5) prepaid expenses - cost
What are the five major items found in the current asset classification of the balance sheet and their bases of valuation?
Current assets are presented in the balance sheet in order of liquidity.
Does anything on the balance sheet have a specific order?
such as a sale of property ,a loan to an affiliate, or loans to employees - companies should separately classify these as long-term assets unless collection is expected within one year, and if so, then these receivables must be shown separately from nontrade receivables
How are receivables arising from unusual transactions handled?
Companies group those items with similar characteristics and separate items that have different characteristics, i.e., (1) assets that differ in their type or expected function, (2) assets and liabilities with different implications for the company's financial flexibility, and (3) assets and liabilities with different general liquidity characteristics.
How should companies classify items in financial statements?
an account whose balance is needed to properly value the item to which the valuation account relates
a vluation account whose normal balance is opposite of the normal balance of the account to which the valuation account relates
a valuation account whose normal balance is the same as the normal balance of the account to which it relates
contra balance sheet account
"Allowance for..." is generally?
income statement account
"Provisions for..." is generally?
refers to a portion of RE which simply means it cannot be used as a basis for the declaration of dividends.
A appropriation of RE ___
Fair value information may be more useful than historical cost for valuation of certain types of assets and liabilities, especially for ___
For major groups of assets and liabilities, companies must make the following fair value disclosures: (1) the fair value measurement and (2) the fair value hierarchy level of the measurements as a whole, classified by Level 1, 2, or 3.
Companies must make what fair value disclosures and for what?
to level 3 measurements, the related disclosures are substantial and must identify what assumptions the company used to generate the fair value numbers and any related income effects.
Companies must provide significant additional disclosure related ___
must be carefully evaluated to understand the impact these valuations have on the financial statements.
Companies that use Level 3 measurements extensively ___
using expected cash flow and present value techniques, as described in the Statement of Financial Accounting Concepts No. 7, "Using Cash Flow Information and Present Value in Accounting".
Level 3 fair value measurements may be developed ___
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