A310 Chapter 4 - Balance Sheet & Statement of Cash Flows
Par value- Common stock
$.01 par value
Historical-Preferred stock
$100 par value
Shareholder's Equity
1) Paid-in Capital and 2) Retained Earnings
The amount in excess of par value paid to the firm when its shares were originally issued
Additional paid-in capital
Current portion of long-term debt
Amount due at maturity
Comprises the decreases in cash resulting from investments made in productive assets or securities during the period, as well as the increases in cash when such investments are liquidated
Cash Flow from Investing Activities
Cash and cash equivalents, short term investments, accounts receivable, inventories, prepaid expenses
Current Assets
The resulting amount for cash flow from operating activities is the same under the two methods. Both U.S. GAAP and IFRS encourage, but do not require, the use of the _______ ___________
Direct Method
Long-term debt
Discounted present value of the future cash flows
_________ ____________ _________ are an integral part of companies' financial reports and provide a wealth of information that allows financial statement users to better understand and interpret the numbers presented in the body of the financial statements.
Financial statement notes
(U.K. used as an example) -Allows ordering from least to most liquid Noncurrent Assets + Current Assets - Non-current Liabilities - Current Liabilities = Total Equity
IFRS Format
Loss of a major customer A business combination Issuance of debt or equity securities A catastrophic loss
Material Events & Transactions
Historical cost Current replacement cost Net realizable value Discounted present value Discounted present value
Measurement Bases
provides information about the cash receipts and cash disbursements of an enterprise that occurred during a period, cash refers to cash plus cash equivalents, presented for each period, helpful in assessing future profitability, liquidity, and long-term solvency
Statement of Cash Flows
Assets listed from most to least liquid Current Assets + Long-lived Assets = Current Liabilities + Non-current Liabilities +stockholders' Equity
U.S. Format
The_______ _______shows the assets owned by a company at a given point in time and how those assets are financed (debt versus equity). A variety of measurement bases are used to report the various asset, liability, and stockholders' equity accounts.
balance sheet
Long term solvency
indicated riskiness of a compnay with regard to amoutn (need continuation)
Events or transactions that have a significant effect on a company's financial position or results of operations sometimes occur after the close of its fiscal year-end but before the financial statements are issued. Disclosure of these subsequent events is required if they are
material and are likely to influence investors' appraisal of the risk and return prospects of the reporting entity.
activities that do not effect cash flows, reporting on the face of the statement of cash flows or in a disclose note
non financing activities
Subtle differences between IFRS and U.S. GAAP: one is how to report cash interest from investments U.S. GAAP reports these as part of _______ ______ _______ IAS 7 allows the option to report these as cash flows from _____________ _______.
operating cash flows; investing activities
Each change is ????, again using positive/negative notation to represent debits/credits.
placed in the column for that balance sheet item
cash outflows include cash paid for
purchase of long-lived assets used in the business, purchase of investments securities liek stocks and bonds of other entities, loans to other entities
coneys valuable information about a company's choices from among various alternative accounting methods
summary of significant accounting policies
The worksheet approach to creating cash flow statements is identical to
that described in the chapter in that it relies on analyzing the changes in all of the balance sheet accounts.
The Summary of Significant Accounting Policies note explains
the important accounting choices the reporting entity uses to account for selected transactions and accounts.
The amounts are entered into rows that will correspond to line items in the cash flow statement. When the cell shows a ????
zero, the reconciliation of the corresponding column is complete.
The amount by which cash and cash equivalents changed from one balance sheet date to the next
Δ (change in) Cash and Cash Equivalents
A complete statement of cash flows explains the changes in every _______ ____________account during the period, not just cash.
Balance Sheet
Comprises changes in cash due to transactions related to the financing of the business, such as the issuance or repurchase of debt or equity securities and the payment of dividends*
Cash Flow from Financial Activities
Comprises the increase or decrease in cash arising from the firm's profit-making activities
Cash Flow from Operating Activities
-Presents each item as a percentage of total assets. -Allows an analysts to compare companies in a way that factors out differences between balance sheet amounts due solely to differences in company size. -The numbers and percentages tell a story about the company, its industry, its strategies, and its performance.
Common-Size Balance Sheet
-obligations expected to be satisfied through the use of current assets or the creation of other current liabilities -expected to be satisfied within one year or the operating cycle, whichever is longer
Current Liabilities
Liabilities expected to be settled within 12 months (or with the operating cycle, if longer)
Current liabilities
Current Assets
assets expected to be converted to cash within the coming year or within the normal oper. cycle of business if that's longer than one year.
net cash flow is derived indirectly by starting with reported net income and adding or subtracting items to convert that amount to a cash basis.
Indirect Method of Reporting
Current liabilities Noncurrent or Long-term liabilities
LIABILITIES
long-term notes, bonds, pension obligations, lease obligations
Long-Term Liabilities
Three important notes that are typically found in companies' financial reports:
Summary of significant accounting policies Disclosure of important subsequent events Related-party transactions
two generally accepted formats that can be used to report operating activities on SCF
direct and indirect
explain data presented in financial statements themselves, or provide information not directly related to any specific item in the statements
disclosure notes
pension plans, long-term debt, income tax, leases, investments, PPE, employee benefit plan
disclosure notes
limitations
does not portray the market value of the entity
Next, the analyst must ????, so that the entire change from the beginning balance to the ending balance is explained.
econcile each of the balance sheet accounts other than cash
Understanding the interrelationships between successive balance sheets and the statement of cash flows and being able to exploit these
interrelationships to derive unknown account balances are important skills for analysts and lending officers.
obligations that will not be satisfied in the next yr or operating cycle, whichever is longer do not require use of current assets or the creation of current liabilities for payment impact on future cash flows and long-term solvency is assessed by reporting payment terms, interest rates, and other details in a disclosure note
Long-Term Liabilities
The cumulative earnings less cumulative dividend distributions of the company since its inception.
Retained earnings
includes other equity components such as accumulated other comprehensive (loss) income
Shareholder's equity
Common stock Additional paid-in capital Retained earnings
Stockholder's Equity
Noncurrent Assets
assets expected to provide economic benefits beyond the next year, or operating cycle (long-term)
IFRS (IAS 7) encourages, but does not require, entities to report cash flows from operating activities using the direct method. Why: ?
believed to provide information that is not available under the indirect method
Successive balance sheets and the statement of cash flows articulate with one another meaning changes in noncash balance sheet accounts can be used to explain changes in
cash for a period.
When making intercompany comparisons, financial statement users must be careful to recognize how the different measurement bases affect key ______ ______ and how account ________ and statement _________vary across countries.
financial ratios; titles; formats
from owners when shares are sold to them, from creditors when cash is borrowed through notes, loans, mortgages, and bonds
financing cash inflows
to owner int he form of dividends or other distribution, to owners for the re acquisition of shares previously sold, to creditors as repayment of the principal amounts of debt (excluding trade payables that relate to operating activities)
financing cash outflows
Both FASB and IASB tabled a proposal to mandate the use of the direct method for reporting operating cash flows since
most computer systems aren't set up to efficiently process the requisite data
The statement of cash flows shows the change in cash for a given period broken down into ______, _______, ____ ________ __________.
operating, investing, and financing activities.
operating, financing, investing
statement of cash flows
issuance of debt or equity securities, business combination or the sale of a business, sale of assets, event that sheds light on the outcome of a loss contingency
subsequent events
Understanding the basic differences between the direct and indirect approach to presenting cash flows from operations, and differences between
where certain items are reported on a cash flow statement under IFRS versus U.S. GAAP are also important skills.
Because cash flows and accrual earnings can differ dramatically, firms must present a statement of cash flows in addition to an income statement and a balance sheet. The cash flow statement explains the causes for
year-to-year changes in cash and cash equivalents.
Historical cost
Additional paid-in capital
accounts and notes payable, deferred revenues, accrued liabilities, current maturities of long-term debt.
Current Liabilities
Property, plant, and equipment, net
Historical cost minus accumulated depreciation (except that fair market value, if lower, is used when "impaired")
Inventories, net
Lower of cost or market
All other liabilities
Noncurrent or Long-term liabilities
related-party transactions, errors, fraud, illegal acts
noteworthy events and transactions
inflows and outflows of cash that result from activities reported in the income statement
operating activities
The top and bottom rows of the analysis present the balance sheets at the beginning and end of the period for which a cash flow statement is desired. Debit balances are shown as _____ ______ and credit balances are shown as ____________ ______.
positive amounts; negative amounts.
Analysis of changes in selected balance sheet accounts also can be used to explain why operating cash flows differ from ___________ ___________
accrual income.
Operating Cycle
1. use cash to acquire raw material 2. convert raw material to finished product 3. deliver product customer 4. collect cash from customer
Current assets- Cash and other assets expected to be converted to cash within 12 months (or with the operating cycle, if longer) Noncurrent assets- All other assets
ASSETS
The par value of shares issued and outstanding
Common stock
cash effects of each operating activity is reported directly in the statement
Direct Method of Reporting
There are two methods for presenting cash flow from operating activities:
Direct and Indirect
Accrued liabilities
Historical cost
The operating section begins with net income and then presents all the reasons why and amounts by which cash flow from operations differs from net income.
Indirect Method
investments, PPE, intangible assets, and other assets(misc long term items)
Noncurrent Assets
Paying in advance for special items
Prepaid expenses
Liquidity
a company's ability to pay its current obligations
Financing is done through what account under current assets?
accounts receivable
what are two of the primary financial statements required under GAAP.
balance sheet and statement of cash flows
* Although interest payments actually are due to financing activities, U.S. GAAP includes interest payments in
operating cash flows
sale of goods and services, interest and dividends from investments
operating cash inflows
occurs after a company's fiscal year end but before the financial statements are issued
subsequent events
Conversely, the statement of cash flows provides information that enables users to
understand changes in balance sheet accounts that have occurred over the reporting period.
Retained earnings
Combinations of different measurement bases
Noncontrolling interests
Combinations of different measurement bases.
FASB prefers but does not require which reporting method?
Direct
The operating section of the cash flow statement presents cash transactions related to the determination of net income.
Direct Method
Accounts receivables, net
Net realizable value.
convey addtional info about account balances in basic finacnial statements
financial disclosures
