Intermediate Accounting I
Lecture 3:
Balance Sheet,
Statement of Cash Flows (Part 1)
by
Rebecca Bloch
In the beginning of the lecture, the professor discusses the usefulness and limitations of the Balance Sheet. The professor also discusses liquidity and solvency, as well as classification of assets and liabilities. The professor also talks about Financial Disclosures, management discussion and analysis, and how the Accrual
Basis Financial Statements do not tell the whole story. The professor goes in an in depth discussion of the Statement of Cash Flows: operating, investing and financing activities, and methods of reporting a Statement of Cash Flows. The professor uses examples and exercises to reinforce the lecture topics.
The balance sheet, while useful, has its limitations. Assets minus liabilities, measured according to
GAAP, is not likely to be representative of the market value of the entity. The balance sheet provides information useful for assessing future cash flows, liquidity, and long-term solvency. However, it misses intangibles like skills, knowledge, and capabilities of people. It uses judgements and estimates and should be used in conjunction with the income statement.
Liquidity is how quickly assets will convert to cash.
Creditors want to know if they can pay their bills in the short-term.
The company wants to how much much debt it has relative to its assets. Companies with higher debt are more risky because more assets have to meet these fixed long-term obligations (long-term solvency). Liquidity and solvency impact financial flexibility. If a company has too much debt to get additional loans for a future investment opportunity, then they have a greater risk of failure of an enterprise.
Investments are non-operating assets not used directly in operations. They are usually classified as non-current. Investments include equity and debt securities in other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes (i.e. future plant expansion or for repayment of bonds. Trading,
AFS (available-for-sale) and
HTM (held-to-maturity) securities are also investments.
The full disclosure principle requires that financial statements provide all material, relevant information concerning the reporting entity.
Primary financial statements cannot fulfill this requirement because they do not provide a complete picture of the company's performance and financial position.
Disclosure notes include certain required notes as well as notes fashioned to suit the disclosure needs of the reporting enterprise. The summary of significant accounting policies conveys calculable information about the company's choices from among various alternative accounting methods. A subsequent event is a significant development that takes place after the company's fiscal year-end but before the financial statements are issued. The economic substance of related-party transactions should be disclosed, including dollar amounts involved. Contingencies are material events with uncertain outcomes (litigation). Contractual situations and the fair values of financial instruments should also be disclosed.
Usefulness and Limitations: 0:06
Assessing Liquidity and Solvency: 5:40
Classifications: 9:57
Operating
Cycle: 10:56
Current Assets: 10:59; 11:18
Investments: 11:07; 11:24
Property, Plant and Equipment: 14:29
Intangible Assets: 14:39
Other Assets: 14:49
Current Liabilities: 14:57
Long-Term Liabilities: 15:13
Shareholders' Equity: 15:16
Exercise 5-4: 15:
26
Financial Disclosures: 23:03
Disclosure
Highlights: 30:54
Exercise in Classifying: 33:52
Management Discussion and Analysis: 35:28
Review: 37:49
Accrual Basis Financial Statements
don't tell the whole story: 39:39
We can receive (or pay) money
that is not related to our
primary business purpose: 42:32
The Statement of
Cash Flows: 48:00
Operating Expenses: 51:00
Investing Activities: 55:15
Financing Activities: 59:38
Example of a Statement of Cash Flows: 1:09:21
Significant Non-Cash Activities: 1:03:55
Exercise: Classify as operating,
investing or financing: 1:07:43
Why is Cash Important?: 1:09:12
--- Cash is Important to Investors and Creditors: 1:09:17
---
Bottom Line: 1:09:10
Two Methods of Reporting
Statement of Cash Flows: 1:11:52
In Summary:
The Statement of Cash Flows: 1:13:52
Direct and Indirect Methods: 1:14:17
--- Example: 1:18:04
---
Direct Method: 1:19:01
------ Cash
Paid: 1:25:55
- published: 15 May 2013
- views: 28257