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CHAPTER 5

2003 2004 2005. CHAPTER 5. Balance Sheet and Statement of Cash Flows. ……..…………………………………………………………. Assets, liabilities, & equity at a specific date. Usefulness of the Balance Sheet. helps predict amount & uncertainty of future cash flows. ability to pay debts. ability to get

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CHAPTER 5

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  1. 2003 2004 2005 CHAPTER 5 Balance Sheet and Statement of Cash Flows ……..…………………………………………………………... Assets, liabilities, & equity at a specific date. Usefulness of the Balance Sheet • helps predict amount & uncertainty of future cash flows

  2. ability to pay debts ability to get cash as needed ability to respond to the unexpected • useful for analyzing a company’s …

  3. E DLL $3 M $300 M ? Limitations of the Balance Sheet Historical cost is not always . … … but it’s more . than fair value estimates. Omits items of financial value. When reliable estimates cannot be made. Numbers not completely reliable. Judgment is frequently involved.

  4. CLASSIFICATION IN THE BALANCE SHEET Type or expected function Financial flexibility and liquidity characteristics • land for production vs. land for investment • petty cash vs. bond sinking fund

  5. Cash Short-term Investments Receivables Current Assets • restrictions must be noted • restricted cash might be non-current • held-to-maturity • trading • available-for-sale • trade vs. non-trade • pledged

  6. Prepaid Expenses PAID Current Assets (cont.) Inventories • valuation basis disclosed • grouped by stage of completion • benefits to be received within 1 year

  7. Securities Tangible Fixed Assets $1,000 Special Funds 8.0% REGISTERED Subsidiaries (nonconsolidated) Long-Term Investments • intended to be held for more than a year • not currently used in operations

  8. Property, Plant, and Equipment • durable nature • used in operations • disclose accumulated depreciation Intangible Assets • lacking physical substance

  9. Accounts Payable $1,000 $1,000 $1,000 8.0% 8.0% 8.0% REGISTERED REGISTERED REGISTERED Due 2003 Current Liabilities • reasonably expected to be liquidated within the normal business cycle Unearned Revenue Current Portion Long-Term Bonds

  10. Pension Obligations Bonds Payable $1,000 $1,000 8.0% 8.0% REGISTERED REGISTERED Product Warranties Long-Term Liabilities • not expected to be liquidated within a year

  11. Financial Instruments • carrying value and estimated fair value Owners’ Equity • Capital Stock • par value • authorized, issued, and outstanding • Additional Paid-In Capital • Retained Earnings • unappropriated vs. restricted • Treasury Stock

  12. STATEMENT OF CASH FLOWS • Operating activities • cash receipts from operations • cash expenditures from operations • Investing activities • property, plant, & equipment • debt or equity securities • Financing activities • issuance of stocks or bonds • payment of dividends

  13. Net Income  Cash from Operations • Adjust for non-cash expenses • add back • depreciation expense • amortization expense • Adjust for non-cash gains and losses • add back • loss on sale of plant assets • subtract • gain on sale of securities

  14. Adjust for changes in operating assets • accounts receivable • inventory • prepaid expenses • Adjust for changes operating liabilities • accounts payable • unearned revenues

  15. Assets Liabilities Increase Decrease Changes in Assets and Liabilities

  16. Current cash debt coverage ratio = Net Cash from Operations Net Cash from Operations Average Current Liabilities Average Total Liabilities Cash debt coverage ratio = Usefulness of the Statement of Cash Flows • “cash is the lifeblood of a company” • the statement provides useful information: • whether the company is generating sufficient cash through operations • reasons for positive or negative cash flow

  17. - Dividends Free Cash Flow Net cash from operations - Capital expenditures Free cash flow • discretionary cash flow from operations • cash flow from selling investment securities, issuing stock, or taking out a loan doesn’t count!

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