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Intermediate accounting 17e by kieso ch05

Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield

Chapter 5

Balance Sheet and
Statement of Cash Flows

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Learning Objectives
After studying this chapter, you should be able to:
1. Explain the uses and limitations of the balance sheet.
2. Prepare a classified balance sheet.
3. Explain the purpose, content, and presentation of the
statement of cash flows.
4. Describe additional types of information provided.


Copyright ©2019 John Wiley & Sons, Inc.

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Preview of Chapter 5

Balance Sheet and Statement of Cash Flows

Balance Sheet
• Usefulness
• Limitations
• Classification

Preparation of the Balance Sheet
• Account form
• Report form
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Preview of Chapter 5
Statement of Cash Flows
• Purpose
• Content
• Preparation
• Usefulness

Additional Information
• Notes to the financial statements
• Techniques of disclosure
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Learning Objective 1
Explain the Uses, Limitations, and
Content of the Balance Sheet

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Balance Sheet
Balance Sheet, sometimes referred to as the statement
of financial position:
1. Reports assets, liabilities, and equity at a specific
date.
2. Provides information about resources, obligations to
creditors, and equity in net resources.
3. Helps in predicting amounts, timing, and uncertainty
of future cash flows.

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Balance Sheet

Usefulness of the Balance Sheet

• Computing rates of return
• Evaluating capital structure
• Assess risk and future cash flows
• Analyze the company’s:

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Liquidity



Solvency



Financial flexibility
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Balance Sheet

Limitations of the Balance Sheet
1. Most assets and liabilities are reported at historical
cost
2. Use of judgments and estimates
3. Many items of financial value are omitted

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Balance Sheet

Classification in the Balance Sheet
Elements of The Balance Sheet
1. Assets. Probable future economic benefits obtained
or controlled by a particular entity as a result of past
transactions or events.
2. 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.
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Classification in the Balance Sheet
Elements of the Balance Sheet

3. 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.

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Classification in the Balance Sheet
Assets
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Other assets

Liabilities and Owners' Equity
Current liabilities
Long-term debt
Owners' (stockholders') equity
Blank
Blank

In practice you usually see little departure from these major
subdivisions.

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Classification in the Balance Sheet
Current Assets

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.
Item
Cash and cash equivalents
Short-term investments
Receivables
Inventories

Fair value
Generally, fair value
Estimated amount collectible
Lower-of-cost-or-net realizable value/market

Prepaid expenses

Cost

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Basis of Valuation

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Current Assets
Cash

• Generally any monies available “on demand”
• Cash equivalents - short-term highly liquid
investments that mature within three months or less
• Restrictions or commitments must be disclosed

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Cash

Balance Sheet Presentation

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Current Assets

Short-Term Investments (Equity Securities)
All equity securities are recorded at fair value with
changes reported in net income unless:
• Accounted for under equity method or
• Not practicable to determine fair value

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Current Assets

Short-Term Investments (Debt Securities)
Three separate classifications for debt securities:
Held-to-maturity: Company has positive intent and ability
to hold to maturity.
Trading: Bought and held primarily for sale in the near
term to generate income on short-term price differences.
Available-for-sale: Not classified as held-to-maturity or
trading securities.

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Short-Term Investments
Balance Sheet Presentation

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Current Assets
Receivables

Major categories of receivables should be shown in the
balance sheet or the related notes.
A company should clearly identify
• Anticipated loss due to uncollectibles
• Amount and nature of any nontrade receivables
• Receivables used as collateral

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Receivables

Balance Sheet Presentation

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Current Assets

Inventories
Disclose

• Basis of valuation


Lower-of-cost-or-net realizable value or



Lower-of-cost-or-market

• Cost flow assumption (e.g., F I F O or L I F O)

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Inventories

Balance Sheet Presentation (Acer)

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Inventories

Balance Sheet Presentation (Weyerhaeuser)

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Current Assets
Prepaid Expenses

Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment Before Expense Recorded
Prepayments often occur in regard to:
• insurance

• rent

• supplies

• taxes

• advertising
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Prepaid Expenses

Balance Sheet Presentation

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Current Assets
Illustration

BE5.2 Koch Corporation’s adjusted trial balance contained the
following asset accounts at December 31, 2020: Cash $7,000,
Land $40,000, Patents $12,500, Accounts Receivable $90,000,
Prepaid Insurance $5,200, Inventory $30,000, Allowance for
Doubtful Accounts $4,000, and Equity Investments (to be sold
in the next quarter) $11,000.
Prepare the current assets section of the balance sheet, listing
the accounts in proper sequence.

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