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Intermediate Accounting: Ch. 5
Balance sheet and the statement of cash flows
Terms in this set (58)
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
the ease with which an investment can be turned into cash without losing its value
The ability of a company to pay interest as it comes due and to repay the balance of debt at its maturity.
the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities
Cash and other resources that companies reasonably expect to convert to cash or use up within one year or the operating cycle, whichever is longer. Current assets are listed in the balance sheet in order of liquidity
investments not classified as cash equivalents that will be liquidated in the coming year or operating cycle, whichever is longer.
- Short-term investments include:
1. Held to maturity
Held to maturity
Debt securities that a company has the positive intent and ability to hold to maturity
Debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences
Debt and equity securities not classified as held-to-maturity or trading securities
monetary claims against a business or an individual, acquired mainly by selling goods or services and by lending money
stock of goods held in reserve; includes finished goods waiting to be sold and raw materials to be used in production
- Inventories are stated at the lower-of-cost or market.
represents an asset recorded when an expense is paid in advance, creating benefits beyond the current period.
under normal conditions are not sold, consumed, or converted to cash within a normal operating cycle of business (or 1 yr)
Long-term investments, often referred to simply as investments, normally consist of one of four types:
1. Investment in securities, such as bonds, common stock or long-term notes.
2. Investment in tangible fixed assets not currently used in operations, such as land held for speculation
3. Investments set aside in special funds such as sinking fund, pension fund or plant expansion fund. This includes the cash surrender value of life insurance.
4. Investment in nonconsolidated subsidiaries or affiliated companies
- Securities classified as held-to-maturity are reported at amortized costs, available-for-sale securities are reported at fair value
Property, Plant and Equipment
Assets with relatively long useful lives that companies use in operating the business
Long-term assets that have no physical form but do have value such as patents, trademarks, and goodwill.
vary widely in practice. Include long-term prepaid expenses, prepaid pension cost, and noncurrent receivables, special funds, deferred income taxes, property held for sale and restricted cash or securities.
A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.
Current liabilities include:
1. Payables resulting from acquisition of goods and services: accounts payable, wages payable, taxes payable, and so on.
2. Collection received in advance for the delivery of goods or performance of services, such as unearned rent revenue or unearned subscription revenue.
3. Other liabilities whose liquidation will take place within the operating cycle, such as the portion of long-term bonds to be paid in the current period or short term obligations arising from the purchase of equipment.
Current liabilities listed on balance sheet (typically)
Short-term notes payable
Accrued employee compensation and benefits
Income taxes payable
Accrued special charges
Current maturities of long-term debt
Other current liabilities
Total current liabilities
The difference between current assets and current liabilities (can also be termed net current assets). The figure shows the funds available for a business to meet their immediate expenditure needs.
Obligation that are not expected to be paid within a year and do not require the use of current assets. Also called
Types of long-term liabilitie
Generally, long-term liabilities are of three types:
1. Obligation arising from specific financing situations, such as the issuance of bonds, long-term lease obligations, and long-term notes payable.
2. Obligations arising from the ordinary operations of the company, such as the pension obligations and deferred income tax liabilities
3. Obligations that depend on the occurrence or non-occurrence of one or more future events to confirm the amounts payable, or the payee, or the date payable, such as service or product warranties and other contingencies.
amount of money that owners would receive if they sold all of a firm's assets and paid all of its liabilities
Stockholders equity section
Stockholders equity section:
1. Capital stock
2. Additional paid-in capital
3. Retained earnings
The par or stated value of the shares issued
- The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents the size of the equity position of a firm and can be found on the balance sheet (or notes) of a typical financial statement. Firms can both issue more capital stock, or buyback shares that are currently owned by shareholders.
Additional Paid-in Capital
The excess of the amount received from the sale of stock over the par value of the shares sold.
- A value that is often included in the contributed surplus account in the shareholders' equity section of a company's balance sheet. The account represent the excess paid by an investor over the par-value price of a stock issue. Additional paid-in-capital can arise from issuing either preferred or common stock.
the accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends
acts as contract between issuers and bondholder. often contains provisions to protect the right of bondholders
The form of balance sheet that resembles the basic format of the accounting equation, with assets on the left side and liabilities and stockholders' equity sections on the right side.
A format for preparing the balance sheet in which the classifications of accounts are listed one under another.
Formula used to measure the likelihood of bankruptcy by using balance sheet and income statement information
Statement of cash flows
Financial statement that reports cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.
What the statement of cash flows reports
The statement of cash flow reports the following:
1. the cash effect of operations during a period
2. Investing transactions
3. financial transactions
4. the net increase or decrease in cash during the period
Statement of Cash Flows: Operating activities
Operating activities involve the cash effects of transactions that enter into the determination of net income
Statement of Cash Flows: Investing activities
Investing activities include making and collecting loans and acquiring and disposing of investment (both debt and equity) and property, plant, and equipment.
Statement of Cash Flows: Financing activities
involve liability and owners equity items. They include (a) obtaining resources from owners and providing them with a return on their investment, and (b) borrowing money from creditors and repaying the amounts borrowed.
Basic format of the statement of cash flows
Statement of Cash Flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net increase (decrease) in cash
Cash at the beginning of year
Cash at end of year
Preparing the statement of cash flows
Preparing the statement of cash flows involves four steps:
1. Determine the cash provided by (or used in) operating activiities
2. Determine the 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 ending cash balance
Cash provided by operating activities
Cash provided by operating activities is the excess of cash receipts over cash payments from operating activities. Companies determine this amount by converting net income on an accrual basis to a cash basis. (P.231)
Significant Non-cash Activities
Significant Non-cash Activities:
1. Issuance of common stock to purchase assets
2. Conversions of bonds into common stock
3. Issuance of debt to purchase assets
4. Exchange of long-lived assets
Current cash coverage ratio
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. (p. 233).
- The higher the ratio the better
Current cash coverage ratio
Current cash coverage ratio =
Net cash provided by operating activities / Average current liabilities
Cash debt coverage ratio
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. 234).
Cash debt coverage ratio
Cash debt coverage ratio =
Net cash provided by operating activities / Average total liabilities
Free cash flow
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. 234).
Free cash flow
Free cash flow =
Net cash provided by operating activities
- Capital expenditures
Supplemental balance sheet information
Contingencies, Accounting policies, contractual situations, fair values.
Material events that have an uncertain outcome
Explanations of the valuations methods used or the basic assumptions made concerning inventory valuations, depreciation methods, investments in subsidiaries.
Explanation of certain restrictions or covenants attached to specific assets or, more likely, to liabilities.
Disclosure of fair values, particularly for financial instruments
Assets consisting of cash, accounts receivable, an ownership interest, or a contractual right to receive or obligation to deliver cash or another financial instrument.
What a willing buyer is willing to pay, and a willing seller is willing to accept, with neither of them under duress and the property has been on the market for sufficient time to verity its value.
Companies use notes if they cannot conveniently show additional explanations as parenthetical explanations
being in debt; money that should have been paid; work that should have been done
An account that always has a companion account and whose normal balance is opposite that of the companion account.
Examples include accumulated depreciation and discount on bonds payable.
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.
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