Intermediate Accounting ACCT 311
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This 6 page Class Notes was uploaded by Troy Bins on Saturday September 12, 2015. The Class Notes belongs to ACCT 311 at West Virginia University taught by Staff in Fall. Since its upload, it has received 47 views. For similar materials see /class/202825/acct-311-west-virginia-university in Accounting at West Virginia University.
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Date Created: 09/12/15
ACCT3l l DeGeorge Chapter 5 Chapter 5 Balance Sheet and Statement of Cash Flows FASB Statement of Financial Concepts 5 identi es the objectives of Financial statements To present the user with The nancial position of the company The net income and comprehensive income for a period The cash ows for the period The investments from and distributions to the owners The four basic nancial statements accomplish this primary objective Footnotes are required to meet the qualitative characteristic of completeness For a user a complete set of nancials with footnotes are still of little use To be relied upon the user needs to know that the nancials were prepared In accordance with GAAP ie the auditors report or opinion Financial statements are interrelated in that the nancial statements taken as a whole including the notes to the statements present relevant and reliable information for a user Purpose of a balance sheet is to provide information about the economic resources obligations and owners equity so as to help users assess the amount timing and uncertainty of projected cash ows Whose projection The users not the Preparer s Balance sheet Assets Liabilities Equity Or Assets 7 Liabilities Equity also referred to as net worth However the net worth or equity of a company on its balance sheet is not the value of the company The value of a company is what a buyer is willing to pay The balance sheet along with the other nancial statements taken as a whole provide a basis for users to determine the value The balance sheet does show see ratios below The liquidity of a company how rapidly the net assets can be converted to cash The exibility of a company how easily the company can adapt to change and The operating capability can the company maintain its current level of operations Additionally the balance sheet provides a barometer for measuring the performance of the company ie return on net assets Capital and Capital Maintenance The key to a users ability use the nancial data is A the users knowledge of the nancial data and B the Preparer s knowledge of nancial data The two must be in sync ACCT3l l DeGeorge Chapter 5 The recognition principle from chapter 2 identi ed that in order to recognize or record an item in the nancial statements the item must 1 t the de nition of the item 2 be measurable 3 be relevant and 4 be reliable Key de nitions Assets Liabilities Owners Equity is what is remains assets 7 liabilities as de ned Measurement of balance sheet items Historical cost 7 most prevalent and most reliable Current or Replacement cost input value What we would have to pay to replace the item today Current Market Value exit value What we would expect to receive upon sale in its current condition Net Realizable Value 7 cash expected to be realized Accounts receivable less allowance for bad debts Present Value 7 similar to NRV but with the time value of money concept Historical cost is most prevalent but all ve are acceptable and sometimes required by GAAP Limitations of the Balance Sheet Historical cost reliability versus relevance B S does not include all of the economic resources of the company Value of employees Value of created intangibles These items cannot be measured and therefore are not reported As long as the user is aware this is not necessarily a problem ACCT31 l DeGeorge Chapter 5 Classi cation of Balance Sheet Items Why Summary nancial information We can summarize like items Cash is cash regardless of how many different checking accounts we use How Liguidity is the key Balance sheet is arranged in the order of expected conversion to cash or in the case of liabilities the expected use of cash Current Assets less Current Liabilities Working Capital To be curren the asset must be expected to be converted to cash or to be used in the operations of the business and the liability must be due or expected to be paid within one m or within the normal operating cycle whichever is longer The starting period of the one year or operating cycle is the balance sheet date Current Assets Current Liabilities current ratio This is a normal and key indicator of the liguidity of a company Total LiabilitiesOwners Equity debt to equity ratio This is a normal and key indicator of the exibility of a company Investment in Property plant and equipment can be an indicator of the operating capability of a company Current Assets Cash and cash equivalents risk free and maturing in less that 3 months Temporary investments in marketable securities intent is critical Even if a marketable security a bond has a longterm maturity If the intent of the company is to buy and sell prior to maturity The item would be considered short term Receivables Inventory Prepaids and other current assets Current Liabilities Accounts payable Salaries Payable Uneamed deferred revenue Income taxes payable Current portion of longterm obligations Other current liabilities ACCT3l l DeGeorge Chapter 5 Long term Assets Longterm Investments Investments which the company plans to hold till maturity versus trading Cash surrender value of life insurance policies Common company pays the premium employee identi es The bene ciary upon death the company gets the CSV Although The company could terminate the policy and receive the cash today The intent is to hold until death Land or property purchased for future use but not currently in use Property Plant and Equipment currently being used in the operations and expected to be used for more than one accounting period Intangible Assets 7 used in operations but have no physical existence We cannot create these assets but we can buy them Patents Trademarks Copyrights Goodwill Other Assets 7 deferred items Long term Liabilities Include all components such as bond premiums or discounts Stockholders Equity Legal capital the amount of cashvalue required by law to be maintained Par Value is normally the legal capital Contributed Capital Par Value Additional Paid in Capital Can relate to both common stock and preferred stock Retained Earnings History to date net earnings less dividends Accumulated Other Comprehensive Income Comprehensive income the change in owners equity which Is NOT related to transactions with the owners Other comprehensive income would exclude net income Treasury Stock a contra equity account is the amount paid by the company to reacquire shares of previously issued and outstanding stock ACCT3l l DeGeorge Chapter 5 Other Disclosures Footnotes Summary of accounting policies APB Opinion 20 Fair Value and Risk FASB 133 Contingent Liabilities and Contingent Assets Contingent Assets or Contingent gains are not reported in the nancial statements Contingent Liabilities are recorded in the nancial statements if payment is probable the amount can be reasonably estimated and the event causing the payment has occurred Other contingent liabilities that are not recorded are still required to be disclosed in the footnotes ACCT31 l DeGeorge Chapter 5 Statement of Cash Flows In General Operating Cash Flows 7 Changes in Working Capital excluding cash Investing Cash Flows 7 Changes in longterm assets Financing Cash Flows 7 Changes in longterm liabilities amp equity Sources and Uses of Cash Increases in Assets causes cash to decrease What would cause PPampE to Increase Decrease in Assets causes cash to increase What would cause NR to decrease ALL ASSETS HAVE THE SAME EFFECT ON CASH Increase in Liabilities causes cash to increase Why would Longterm debt increase Decrease in liabilities causes cash to decrease What would cause LT Debt to decrease ALL LIABILITIES HAVE THE SAME EFFECT ON CASH Operating Cash Flows 7 Indirect Method Net Income Non operating losses gains part of investing cash ows Non cash expensesrevenues Changes in operating assets amp liabilities Cash ows from operating activities Investing Cash Flows Cash used to acquire longterm assets Proceeds from sale of LT assets includes gainloss on sale Cash ows from investing activities Financing Cash Flows or 7 Cash fromto lenders or 7 Cash fromto owners Cash ows from nancing activities
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