Financial Accounting Tools for Business Decision Making chapter 02 a further look at financial statements

2-1


A FURTHER LOOK
AT FINANCIAL
STATEMENTS

2-2

Financial Accounting, Seventh Edition

2


Learning
Learning Objectives
Objectives
After studying this chapter, you should be able to:

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1.

Identify the sections of a classified balance sheet.

2.

Identify tools for analyzing financial statements and ratios for
computing a company’s profitability.

3.

Explain the relationship between a retained earnings statement and a
statement of stockholders’ equity.

4.

Identify and compute ratios for analyzing a company’s liquidity and
solvency using a balance sheet.

5.

Use the statement of cash flows to evaluate solvency.

6.

Explain the meaning of generally accepted accounting principles.

7.

Discuss financial reporting concepts.


Preview of Chapter 2

Financial Accounting
Seventh Edition
Kimmel Weygandt Kieso
2-4

The
The Classified
Classified Balance
Balance Sheet
Sheet


Presents a snapshot at a point in time.



To improve understanding, companies group similar
assets and similar liabilities together.

Standard Classifications

2-5

Illustration 2-1

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet
Sheet
Illustration 2-2

2-6

LO 1


The
The Classified
Classified Balance
Balance Sheet
Sheet
Illustration 2-2

2-7

LO 1


The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Assets

2-8



Assets that a company expects to convert to cash or use
up within one year or the operating cycle, whichever is

longer.



Operating cycle is the average time it takes from the
purchase of inventory to the collection of cash from
customers.



Common types of current assets are (1) cash, (2)
investments, (3) receivables, (4) inventories, and (5)
prepaid expenses.
LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Assets

Illustration 2-3

Companies list current asset accounts in the order they expect to
convert them into cash.
2-9

LO 1 Identify the sections of a classified balance sheet.

The
The Classified
Classified Balance
Balance Sheet
Sheet
Review Question
Cash, and other resources that are reasonably expected to
be realized in cash or sold or consumed in the business
within one year or the operating cycle, are called:

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a.

Current assets.

b.

Intangible assets.

c.

Long-term investments.

d.

Property, plant, and equipment.

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet
Sheet
Long-Term Investments

Alternative Terminology
Long-term investments are often referred
to simply as investments.



Investments in stocks and bonds of other corporations that
are held for more than one year.



Long-term assets such as land or buildings that a company
is not currently using in its operating activities.



Long-term notes receivable.
Illustration 2-4

2-11

LO 1


The
The Classified
Classified Balance
Balance Sheet
Sheet
Property, Plant, and Equipment

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Alternative Terminology
Property, plant, and equipment is
sometimes called fixed assets or
plant assets.



Long useful lives.



Currently used in operations.



Includes land, buildings, equipment, delivery vehicles, and
furniture.



Depreciation - allocating the cost of assets to a number of
years.



Accumulated depreciation - total amount of depreciation
expensed thus far in the asset’s life.
LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet
Sheet
Property, Plant, and Equipment
Illustration 2-5

2-13

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet

Sheet
Intangible Assets

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

Assets that do not have physical substance.



Includes goodwill, patents, copyrights, and
trademarks or trade names.

Helpful Hint
Sometimes intangible
assets are reported
under a broader
heading called “Other
assets.”
Illustration 2-6

LO 1


The
The Classified
Classified Balance
Balance Sheet
Sheet

Review Question
Patents and copyrights are

2-15

a.

Current assets.

b.

Intangible assets.

c.

Long-term investments.

d.

Property, plant, and equipment.

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Liabilities

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

Obligations the company is to pay within the next year or
operating cycle, whichever is longer.



Common examples are accounts payable, salaries and
wages payable, notes payable, interest payable, and income
taxes payable.



Also included as current liabilities are current maturities
of long-term obligations—payments to be made within the
next year on long-term obligations.

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Liabilities
Illustration 2-7

2-17

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet
Sheet
Long-Term Liabilities


Obligations a company expects to pay after one year.



Include bonds payable, mortgages payable, long-term
notes payable, lease liabilities, and pension liabilities.
Illustration 2-8

2-18

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance

Balance Sheet
Sheet
Review Question
Which of the following is not a long-term liability?

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a.

Bonds payable.

b.

Current maturities of long-term debt.

c.

Long-term notes payable.

d.

Mortgages payable.

LO 1 Identify the sections of a classified balance sheet.


The
The Classified
Classified Balance
Balance Sheet

Sheet
Stockholders’ Equity


Common stock - investments of assets into the business by
the stockholders.



Retained earnings - income retained for use in the business.
Illustration 2-2

2-20

LO 1 Identify the sections of a classified balance sheet.


Match each of the items to its proper balance sheet classification,
shown below. If the item would not appear on a balance sheet, use “NA.”
Current assets (CA)

Current liabilities (CL)

Long-term investments (LTI)

Long-term liabilities (LTL)

Property, plant, and equipment (PPE)

Stockholders’ equity (SE)

Intangible assets (IA)

Solution
CL

Salaries and wages payable

LTI

Investment in real estate

NA

Service revenue

PPE Equipment

CL

Interest payable

PPE Accumulated depreciation

IA

Goodwill

CA

Debt investments (short-term)

NA

Depreciation expense

SE

Retained earnings

LTL

Mortgage payable

CL

Unearned service revenue

(due in 3 years)
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LO 1


Using
Using the
the Financial
Financial Statements
Statements
Ratio Analysis



Ratio analysis expresses the relationship among selected
items of financial statement data.



A ratio expresses the mathematical relationship between
one quantity and another.



2-22

A single ratio by itself is not very meaningful.

LO 2 Identify tools for analyzing financial statements and
ratios for computing a company’s profitability.


Using
Using the
the Financial
Financial Statements
Statements
Illustration 2-9
Financial ratio classifications

2-23

LO 2 Identify tools for analyzing financial statements and
ratios for computing a company’s profitability.


Using
Using the
the Financial
Financial Statements
Statements
Using the Income Statement

2-24

Illustration 2-10

LO 2 Identify tools for analyzing financial statements and
ratios for computing a company’s profitability.


Using
Using the
the Income
Income Statement
Statement

Profitability
Ratio

Illustration: Earnings per share (EPS) measures the net
income earned on each share of common stock.

Best Buy

Illustration 2-11

2-25

$1,277 - $0
=
(393 + 419)
2

$1,317 - $0
=
(419 + 414)
2

$3.14

$3.16

LO 2