Ch 4 - Balance Sheet & Statement of Cash Flows Flashcards
What is the purpose of the Balance Sheet?
report assets, liabilities, and equity at a specific date
What are the benefits does the Balance Sheet Provide? (4)
- Computing rates of return
- Evaluating the capital structure
- Assess amount, timing, and risk about future cash flows
- analyze the company’s liquidity (ability to pay off short term debt), solvency (ability to pay off long term debt), and financial flexibility
What are the limitations of the Balance Sheet? (3)
- most assets and liabilities are reported at historical cost
- use of judgements and estimates
- many items of financial value are omitted (ex: human capital)
What is the definition of an asset?
past transaction resulting in probable future economic benefit
What is the definition of a liability?
past transaction resulting in probable future economic sacrifice
What is the definition of equity?
residual (ownership) interest in the assets that remains after duducting the liabilities
List 5 items that would be classified under Current Assets in a Balance Sheet
Also provide the basis of valuation for each item
- Cash and cash equivalent (fair value
- short-term investments (generally fair value)
- receivables (estimated amount collectible)
- inventories (lower-of-cost-or net realizable value)
- prepaid expenses (cost)
List 6 items that would be classified under Current Liabilities in a Balance Sheet
- Notes Payable
- Accounts Payable
- Accrued compensation
- Unearned revenue
- Income tax payable
- Current maturities of LT debt
List 3 items that would be classified under Long-Term Liabilities in a Balance Sheet
- Long-term debt
- Obligations capital lease
- Deferred income taxes
List 5 items that would be classified under Owner’s Equity in a Balance Sheet
- Capital Stock
- Additional paid-in capital
- Retained Earnings
- Accumulated Other Comprehensive Income (AOCI)
- Treasury Stock
What is Capital Stock?
the stated value of the shares of stock issued
What is additional paid-in capital?
the excess of amounts paid in over the par or stated value
What are Retained Earnings?
the corporation’s cumulative undistributed earnings
What is accumulated other comprehensive income?
the cumulative amount of the other comprehensive income items
What is Treasury Stock?
A contra-equity account for stock buybacks
What are the 4 types of supplemental information provided in Balance Sheets?
List & Define
- Contingencies: material events that have an uncertain outcome
- Accounting Policies: explanations of the valuation methods used or basic assumptions made
- Contractual Situations: explanations of certain restrictions or covenants attached to specific assets or liabilities
- Fair Values: disclosures of fair values
What is the purpose of the Statement of Cash Flows?
to provide relevant information about the cash receipts and cash payments during a period
Also explains change in the balance sheet
What are the 3 questions that the Statement of Cash Flows answers?
- Where did the cash come from?
- What was the cash used for?
- What was the change in the cash balance?
Provide Examples of Cash Equivalents
- treasury bills
- commercial paper
- CDs
What activities are included on the Statement of Cash Flows?
Cash provided by and used for:
- operating activities (expenses and revenues)
- investing activities (PPE, debt and equity securities of other companies)
- financing activities (dividends, issuance of equity securities, debt-bonds and notices, reacquisition of capital stock)
Net increase (decrease) in cash
Cash beginning balance
Cash ending balance
What is Capital Structure?
relative ratio between liabilities (debt) and equity
What is the direct approach to record Operating Activities?
- cash inflow: the receipt of cash (counterpart of revenue)
- cash outflow: cash paid (counterpart of expense) to supplies or employees
What is the indirect approach to record Operating Activities?
- start with net income (from income statement)
- add back non-cash expenses (depreciation & amortization; gain/loss of noncurrent assets)
- Adjust for movement (between this year and last) in working capital (current assets-current liabilities)
- (increase)/decrease in inventory
- (increase)/decrease in receivables
- increase/(decrease) in payabe=les
- reconcile/adjust it to net cash provided by (or used for) operating activities)
US GAAP mandates indirect approach for the operating section
Important example on slide 19
According to US GAAP, how is interest recevied classified in the Statement of Cash Flows?
operating activities
According to US GAAP, how is interest paid classified in the Statement of Cash Flows?
operating activities
According to US GAAP, how is dividend recevied classified in the Statement of Cash Flows?
operating activities
According to US GAAP, how is dividend paid classified in the Statement of Cash Flows?
financing activities
Provide examples of significant financing and investing activities that do not affect cash (noncash acttivities) that are provided at bottom of SCF (4)
- issuance of common stock to purchase assets
- conversion of bonds into common stock
- issuance of debt to purchase assets
- exchanges on long-lived assets
