accounting management chapter 04.pptx

accounting management chapter 04.pptx

1. Intermediate Accounting Seventeenth Edition Kieso; Weygandt; Warfield Chapter 4 Balance Sheet This slide deck contains animations. Please disable animations if they cause issues with your device.

2. Learning Objectives After studying this chapter, you should be able to: Explain the uses, limitations, and content of the balance sheet. Prepare a classified balance sheet. 2 Copyright ©2019 John Wiley & Sons, Inc.

3. Preview of Chapter 4 Balance Sheet Balance Sheet Usefulness of the balance sheet Limitations of the balance sheet Classification in the balance sheet Preparation of the Balance Sheet Account form Report form 3 Copyright ©2019 John Wiley & Sons, Inc.

4. Learning Objective 1 Explain the Uses, Limitations, and Content of the Balance Sheet 4 Copyright ©2019 John Wiley & Sons, Inc.

5. Balance Sheet (1 of 4) Balance Sheet , sometimes referred to as the statement of financial position : Reports assets, liabilities, and equity at a specific date. Provides information about resources, obligations to creditors, and equity in net resources. Helps in predicting amounts, timing, and uncertainty of future cash flows. L O 1 5 Copyright ©2019 John Wiley & Sons, Inc.

6. Balance Sheet (2 of 4) Usefulness of the Balance Sheet Computing rates of return Evaluating capital structure Assess risk and future cash flows Analyze the company’s: Liquidity Solvency Financial flexibility L O 1 6 Copyright ©2019 John Wiley & Sons, Inc.

7. Balance Sheet (3 of 4) Limitations of the Balance Sheet Most assets and liabilities are reported at historical cost Use of judgments and estimates Many items of financial value are omitted L O 1 7 Copyright ©2019 John Wiley & Sons, Inc.

8. Balance Sheet (4 of 4) Classification in the Balance Sheet Elements of The Balance Sheet Assets. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. 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. L O 1 8 Copyright ©2019 John Wiley & Sons, Inc.

9. Classification in the Balance Sheet Elements of the Balance Sheet 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. L O 1 9 Copyright ©2019 John Wiley & Sons, Inc.

10. Classification in the Balance Sheet (1 of 2) Assets Liabilities and Owners' Equity Current assets Current liabilities Long-term investments Long-term debt Property, plant, and equipment Owners' (stockholders') equity Intangible assets Other assets In practice you usually see little departure from these major subdivisions. L O 1 10 Copyright ©2019 John Wiley & Sons, Inc.

11. Classification in the Balance Sheet (2 of 2) 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 Basis of Valuation Cash and cash equivalents Fair value Short-term investments Generally, fair value Receivables Estimated amount collectible Inventories Lower-of-cost-or-net realizable value/market Prepaid expenses Cost L O 1 11 Copyright ©2019 John Wiley & Sons, Inc.

12. 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 L O 1 12 Copyright ©2019 John Wiley & Sons, Inc.

13. Cash Balance Sheet Presentation L O 1 13 Copyright ©2019 John Wiley & Sons, Inc.

14. Current Assets (1 of 2) 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 L O 1 14 Copyright ©2019 John Wiley & Sons, Inc.

15. Current Assets (2 of 2) 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. L O 1 15 Copyright ©2019 John Wiley & Sons, Inc.

16. Short-Term Investments Balance Sheet Presentation L O 1 16 Copyright ©2019 John Wiley & Sons, Inc.

17. 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 L O 1 17 Copyright ©2019 John Wiley & Sons, Inc.

18. Receivables Balance Sheet Presentation L O 1 18 Copyright ©2019 John Wiley & Sons, Inc.

19. 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) L O 1 19 Copyright ©2019 John Wiley & Sons, Inc.

20. Inventories (1 of 2) Balance Sheet Presentation (Acer) Acer Incorporated (in thousands) Current assets Raw materials $ 442,706 Work in process 1,506 Finished goods 515,202 Spare parts 138,477 Inventories in transit 281,364 Less: Provision for inventory obsolescence and net realizable value (159,553) $1,219,702 Note 8 (in part): Inventories. Inventories are measured at the lower of standard cost and net realizable value. The differences between standard and actual cost are fully recognized in cost of sales. Net realizable value represents the estimated selling price in the ordinary course of business, less all estimated costs of completion and necessary selling expenses. L O 1 20 Copyright ©2019 John Wiley & Sons, Inc.

21. Inventories (2 of 2) Balance Sheet Presentation (Weyerhaeuser) L O 1 21 Copyright ©2019 John Wiley & Sons, Inc.

22. 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 supplies advertising rent taxes L O 1 22 Copyright ©2019 John Wiley & Sons, Inc.

23. Prepaid Expenses Balance Sheet Presentation L O 1 23 Copyright ©2019 John Wiley & Sons, Inc.

24. Current Assets (1 of 2) 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. L O 1 24 Copyright ©2019 John Wiley & Sons, Inc.

25. Current Assets (2 of 2) Illustration BE5.2 Prepare the current assets section of the balance sheet, listing the accounts in proper sequence. Current assets Cash $ 7,000 Equity investments 11,000 Accounts receivable $90,000 Less: Allowance for doubtful accounts 4,000 86,000 Inventory 30,000 Prepaid insurance 5,200 Total current assets $139,200 L O 1 25 Copyright ©2019 John Wiley & Sons, Inc.

26. Noncurrent Assets Long-Term Investments Securities (bonds, common stock, or long-term notes). Tangible fixed assets not currently used in operations (land held for speculation). Special funds (sinking fund, pension fund, plant expansion fund, or cash surrender value of life insurance). Nonconsolidated subsidiaries or affiliated companies. L O 1 26 Copyright ©2019 John Wiley & Sons, Inc.

27. Long-Term Investments (1 of 4) Usually presented on balance sheet below “Current assets,” in a separate section called “Investments.” Debt investments classified as available-for-sale are reported at fair value Held-to-maturity debt investments are reported at amortized cost Equity investments are reported at fair value or by using the equity method L O 1 27 Copyright ©2019 John Wiley & Sons, Inc.

28. Long-Term Investments (2 of 4) Balance Sheet Presentation L O 1 28 Copyright ©2019 John Wiley & Sons, Inc.

29. Long-Term Investments (3 of 4) Illustration BE5.3 Included in Outkast Company’s December 31, 2020, trial balance are the following accounts: Prepaid Rent $5,200, Debt Investments (to be held to maturity until 2023) $56,000, Unearned Fees $17,000, Land (held for investment) $39,000, and Notes Receivable (long-term) $42,000. Prepare the long-term investments section of the balance sheet. L O 1 29 Copyright ©2019 John Wiley & Sons, Inc.

30. Long-Term Investments (4 of 4) Illustration BE5.3 Prepare the long-term investments section of the balance sheet. Long-term investments Debt investments $ 56,000 Land held for investment 39,000 Note receivables (long-term) 42,000 Total investments $137,000 L O 1 30 Copyright ©2019 John Wiley & Sons, Inc.

31. Noncurrent Assets Property, Plant, and Equipment Tangible, long-lived assets used in the regular operations of the business. Physical property such as land, buildings, machinery, furniture, tools, and wasting resources (minerals). With the exception of land, a company either depreciates (e.g., buildings) or depletes (e.g., oil reserves) these assets. L O 1 31 Copyright ©2019 John Wiley & Sons, Inc.

32. Property, Plant, and Equipment Balance Sheet Presentation L O 1 32 Copyright ©2019 John Wiley & Sons, Inc.

33. Property, Plant, and Equipment (1 of 2) Illustration BE5.4 Lowell Company’s December 31, 2020, trial balance includes the following accounts: Inventory $120,000, Buildings $207,000, Accumulated Depreciation—Equipment $19,000, Equipment $190,000, Land (held for investment) $46,000, Accumulated Depreciation—Buildings $45,000, Land $71,000, and Timberland $70,000. Prepare the property, plant, and equipment section of the balance sheet. L O 1 33 Copyright ©2019 John Wiley & Sons, Inc.

34. Property, Plant, and Equipment (2 of 2) Illustration BE5.4 Prepare the property, plant, and equipment section of the balance sheet. Property, plant, and equipment Land $ 71,000 Buildings $207,000 Less: Accumulated depreciation 45,000 162,000 Equipment 190,000 Less: Accumulated depreciation 19,000 171,000 Timberland 70,000 Total property, plant, and equipment $474,000 L O 1 34 Copyright ©2019 John Wiley & Sons, Inc.

35. Noncurrent Assets Intangible Assets Lack physical substance and are not financial instruments. Limited life intangibles amortized Indefinite-life intangibles tested for impairment L O 1 35 Copyright ©2019 John Wiley & Sons, Inc.

36. Intangible Assets (1 of 3) Balance Sheet Presentation L O 1 36 Copyright ©2019 John Wiley & Sons, Inc.

37. Intangible Assets (2 of 3) Illustration BE5.5 Crane Corporation has the following accounts included in its December 31, 2020, trial balance: Equity Investments (to be sold in the next 6 months) $21,000, Goodwill $150,000, Prepaid Insurance $12,000, Patents $220,000, and Franchises $130,000. Prepare the intangible assets section of the balance sheet. L O 1 37 Copyright ©2019 John Wiley & Sons, Inc.

38. Intangible Assets (3 of 3) Illustration BE5.5 Prepare the intangible assets section of the balance sheet. Intangible assets Goodwill $150,000 Patents 220,000 Franchises 130,000 Total intangible assets $500,000 L O 1 38 Copyright ©2019 John Wiley & Sons, Inc.

39. Noncurrent Assets Other Assets Items vary in practice. Can include Long-term prepaid expenses Prepaid pension cost Noncurrent receivables Assets in special funds Deferred income taxes Restricted cash or securities L O 1 39 Copyright ©2019 John Wiley & Sons, Inc.

40. Classification in the Balance Sheet Liabilities Classified as current or long-term. Current Liabilities Obligations a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. L O 1 40 Copyright ©2019 John Wiley & Sons, Inc.

41. Liabilities Current Liabilities Payables resulting from the acquisition of goods and services: accounts payable, wages payable, taxes payable, and so on. Collections received in advance, such as unearned rent revenue or unearned subscriptions revenue. Other liabilities, 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. L O 1 41 Copyright ©2019 John Wiley & Sons, Inc.

42. Current Liabilities (1 of 3) Balance Sheet Presentation L O 1 42 Copyright ©2019 John Wiley & Sons, Inc.

43. Current Liabilities (2 of 3) Illustration BE5.8 Included in Adams Company’s December 31, 2020, trial balance are the following accounts: Accounts Payable $220,000, Pension Liability $375,000, Discount on Bonds Payable $29,000, Unearned Rent Revenue $41,000, Bonds Payable $400,000, Salaries and Wages Payable $27,000, Interest Payable $12,000, and Income Taxes Payable $29,000. Prepare the current liabilities section of the balance sheet. L O 1 43 Copyright ©2019 John Wiley & Sons, Inc.

44. Current Liabilities (3 of 3) Illustration BE5.8 Prepare the current liabilities section of the balance sheet. Current liabilities Accounts payable $220,000 Unearned rent revenue 41,000 Salaries and wages payable 27,000 Interest payable 12,000 Income taxes payable 29,000 Total $329,000 L O 1 44 Copyright ©2019 John Wiley & Sons, Inc.

45. Liabilities Long-Term Liabilities Obligations that a company does not reasonably expect to liquidate within the normal operating cycle. Companies classify long-term liabilities that mature within the current operating cycle as current liabilities if payment of the obligation requires the use of current assets. L O 1 45 Copyright ©2019 John Wiley & Sons, Inc.

46. Long-Term Liabilities (1 of 4) Three types: Obligations arising from specific financing situations, such as the issuance of bonds, long-term lease obligations, and long-term notes payable. Obligations arising from pension obligations and deferred income tax liabilities. Obligations that depend on the occurrence or non-occurrence of one or more future events, such as service or product warranties and other contingencies. L O 1 46 Copyright ©2019 John Wiley & Sons, Inc.

47. Long-Term Liabilities (2 of 4) Balance Sheet Presentation L O 1 47 Copyright ©2019 John Wiley & Sons, Inc.

48. Long-Term Liabilities (3 of 4) Illustration BE5.9 Included in Adams Company’s December 31, 2020, trial balance are the following accounts: Accounts Payable $220,000, Pension Liability $375,000, Discount on Bonds Payable $29,000, Unearned Rent Revenue $41,000, Bonds Payable $400,000, Salaries and Wages Payable $27,000, Interest Payable $12,000, and Income Taxes Payable $29,000. Prepare the long-term liabilities section of the balance sheet. L O 1 48 Copyright ©2019 John Wiley & Sons, Inc.

49. Long-Term Liabilities (4 of 4) Illustration BE5.9 Prepare the long-term liabilities section of the balance sheet. Long-term liabilities Pension Liability $375,000 Bonds payable 400,000 Discount on bonds payable (29,000) Total $746,000 L O 1 49 Copyright ©2019 John Wiley & Sons, Inc.

50. Classification in the Balance Sheet Owners’ Equity Stockholders' Equity Section Capital Stock. Par or stated value of the shares issued. Additional Paid-in Capital. Excess of amounts paid in over the par or stated value. Retained Earnings. Corporation's undistributed earnings. Accumulated Other Comprehensive Income. Aggregate amount of other comprehensive income items. L O 1 50 Copyright ©2019 John Wiley & Sons, Inc.

51. Owners’ Equity Stockholders' Equity Section Treasury Stock. Generally, the cost of shares repurchased. Noncontrolling Interest (Minority Interest). Portion of the equity of subsidiaries not wholly owned by the reporting company. L O 1 51 Copyright ©2019 John Wiley & Sons, Inc.

52. Owners’ Equity Balance Sheet Presentation (in thousands) L O 1 52 Copyright ©2019 John Wiley & Sons, Inc.

53. Owners’ Equity (1 of 2) Illustration BE5.10 Hawthorn Corporation’s adjusted trial balance contained the following accounts at December 31, 2020: Retained Earnings $120,000, Common Stock $750,000, Bonds Payable $100,000, Paid-in Capital in Excess of Par—Common Stock $200,000, Goodwill $55,000, Accumulated Other Comprehensive Loss $150,000, and Noncontrolling Interest $35,000. Prepare the stockholders’ equity section of the balance sheet. L O 1 53 Copyright ©2019 John Wiley & Sons, Inc.

54. Owners’ Equity (2 of 2) Illustration BE5.10 Prepare the stockholders’ equity section of the balance sheet. Stockholders’ equity Common stock $750,000 Paid-in capital in excess of par 200,000 $950,000 Retained earnings 120,000 Accumulated other comprehensive income ( 150,000) Equity attributable to Hawthorn Corporation 920,000 Noncontrolling interest 35,000 Total stockholders’ equity $ 955,000 L O 1 54 Copyright ©2019 John Wiley & Sons, Inc.

55. Learning Objective 2 Prepare a Classified Balance Sheet 55 Copyright ©2019 John Wiley & Sons, Inc.

56. Preparation of the Balance Sheet Classified Balance Sheet Account form Report form Accounting Trends and Techniques (New York: A I C P A) indicates that all of the 500 companies surveyed use either the “report form” (484) or the “account form” (16), sometimes collectively referred to as the “customary form.” L O 2 56 Copyright ©2019 John Wiley & Sons, Inc.

57. 57 Balance Sheet - Format Account Form Illustration 5-16

58. Balance Sheet -Format Report Form Illustration 5-16