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1. Identify the uses and limitations of a balance sheet. After studying this chapter, you should be 2. Identify the major classifications of the able to: sheet. balance 3. Prepare a classified balance sheet using the report and account formats. 4. Identify balance sheet information requiring supplemental disclosure.
5. Identify major disclosure techniques for the balance sheet. 6. Indicate the purpose of the statement of cash flows. 7. Identify the content of the statement of cash flows. 8. Prepare a statement of cash flows. 9. Understand the usefulness of the statement of cash flows.
Most assets and liabilities are stated at historical cost. Judgments and estimates are used in determining many of the items. The balance sheet does not report items that can not be objectively determined. It does not report information regarding off-balance sheet financing.
Current Assets
Current assets are expected to be consumed, sold, or converted into cash: either in one year or in the operating cycle, whichever is longer. Current assets are presented in order of liquidity. The following valuation principles are used: Short-term investments at fair value Accounts receivable at net realizable value
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Long-Term Investments
Long-term investments may be:
1 2 3
Investments in securities (bonds, stock) Investments in fixed assets (land not used in operations) Investments set aside in special funds (e.g., sinking fund) Investments in non-consolidated subsidiaries or affiliated companies
Current Liabilities
Current liabilities are liquidated:
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Either through the use of current assets, or By creation of other current liabilities
Payables resulting from acquisitions of goods and services Collections received in advance of services Other liabilities which will be paid in the short term
Long-Term Liabilities
Long-term obligations are those not expected to be paid within the operating cycle. Examples are: obligations arising from specific financing situations (issuance of bonds) obligations arising from ordinary business operations (pension obligations) obligations that are contingent (product warranties)
Additional information may be: 1 Information not presented elsewhere, or 2 Information that qualifies items in the balance sheet Supplemental information examples: Material events having an uncertain outcome Explanations regarding accounting policies Covenant restrictions
Ratio Analysis
Ratio analysis expresses the relationship between selected financial data. These relationships can be expressed as: percentages rates, or proportions
Types of Ratios
Type What is measured
Short-term ability to pay maturing obligations Effectiveness in using assets employed Degree of success or failure for a given period
Examples
Current ratio Quick assets ratio Receivables turnover Inventory turnover Rate of return on assets Earnings per share
Liquidity ratios
Activity ratios Profitability ratios Coverage ratios
Degree of protection for Debt to total assets long-term creditors and Times interest earned investors