Accounting tools for business decision making 7 kieo ch02
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Accounting: Tools for Business Decision Making
Seventh Edition
Kimmel; Weygandt; Kieso
Chapter 2
A Further Look at Financial Statements
Prepared by
COBY HARMON
University of California, Santa Barbara
Westmont College
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Chapter Outline:
Learning Objectives
LO 1Identify the sections of a classified balance sheet.
LO 2Use ratios to evaluate a company’s profitability, liquidity, and solvency.
LO 3Discuss financial reporting concepts.
Copyright ©2019 John Wiley & Sons, Inc.
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Learning Objective 1
Identify the Sections of a Classified Balance Sheet
LO 1
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The Classified Balance Sheet
•
Presents a snapshot at a point in time
•
To improve understanding, companies group similar assets and similar liabilities together
Standard Classifications
Assets
Liabilities and Stockholders’ Equity
Current assets
Current liabilities
Long-term investments
Long-term liabilities
Property, plant, and equipment
Stockholders’ equity
Intangible assets
LO 1
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Franklin Corporation
Classified
Balance Sheet
October 31, 2022
Balance Sheet –
Assets
Assets
Current assets
Cash
$ 6,600
Debt investments
2,000
Accounts receivable
7,000
Notes receivable
1,000
Inventory
3,000
Supplies
2,100
Prepaid insurance
400
Total current assets
$22,100
Long-term investments
Stock investments
5,200
Investment in real estate
2,000
Property, plant, and equipment
LO 1
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Land
5
10,000
7,200
Franklin Corporation
Classified Balance Sheet
– Liabilities &
Stockholders’ Equity
Balance Sheet
October 31, 2022
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable
$ 11,000
Accounts payable
2,100
Unearned sales revenue
900
Salaries and wages payable
1,600
Interest payable
450
Total current liabilities
$16,050
Long-term liabilities
Mortgage payable
10,000
Notes payable
1,300
Total long-term liabilities
11,300
Total liabilities
27,350
Stockholders’ equity
LO 1
Common stock
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14,000
Nature of Current Assets
•
Assets a company expects to convert to cash or use up within one year or the
operating cycle, whichever is longer
•
Common types include cash, investments, receivables, inventories, and prepaid
expenses
•
Operating cycle
LO 1
•
Average time it takes from purchase of inventory, to sale of goods, and then to collection of
cash from customers
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Current Assets Presentation
Southwest Airlines Co.
Balance Sheet (partial)
(in millions)
Current assets
Cash and cash equivalents
$1,680
Short-term investments
1,625
Accounts receivable
546
Inventories
337
Prepaid expenses and other current assets
310
Total current assets
$4,498
Companies list current asset accounts in the order they expect to convert them into cash.
LO 1
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Current Assets
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:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
LO 1
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Current Assets
Review Question Answer
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:
a. Answer: Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
LO 1
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Components of Long-Term 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
ã
LO 1
Long-term notes receivable
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11
Long-Term Investments Presentation
Alphabet Inc.
Balance Sheet (partial)
(in millions)
Long-term investments
Non-marketable investments
LO 1
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$5,183
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Nature of Property, Plant & Equipment
•
Asset with long useful lives
•
Currently used in operations
•
Includes land, buildings, equipment, delivery vehicles, and furniture
•
Are depreciated
•
•
Accumulated depreciation
•
LO 1
Cost is allocated to a number of years
Total amount of depreciation expensed to date in an asset’s life
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Property, Plant, and Equipment Presentation
Cooper Tire & Rubber Company
Balance Sheet (partial)
(in thousands)
Property, plant, and equipment
Land and land improvements
$ 47,767
Buildings
282,960
Machinery and equipment
1,742,449
Molds, cores, and rings
224,662
$2,297,838
Less: Accumulated depreciation
1,433,611
$ 864,227
LO 1
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Nature of Intangible Assets
•
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.”
LO 1
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Intangible Assets Presentation
The Walt Disney Company
Balance Sheet (partial)
(in millions)
Intangible assets and goodwill
Character/franchise intangibles and copyrights
$ 5,829
Other amortizable intangible assets
893
Accumulated amortization
(1,635)
Net amortizable intangible assets
5,087
FCC licenses
624
Trademarks
1,218
Other indefinite lived intangible assets
20
6,949
Goodwill
27,810
$34,759
LO 1
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Intangible Assets
Review Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
LO 1
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Intangible Assets
Review Question Answer
Patents and copyrights are
a. Current assets.
b. Answer: Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
LO 1
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Do It! 1a: Assets Section of Classified Balance Sheet (1 of 2)
Baxter Hoffman recently received the following information related to Hoffman Corporation’s December 31, 2022,
balance sheet.
Prepaid insurance
$ 2,300
Inventory
3,400
Cash
800
Equipment
10,700
Accounts receivable
1,100
Trademarks
4,700
Debt investments (long-term)
2,100
Accumulated depreciation—Equipment
2,700
LO 1
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Prepare the assets section of
Hoffman Corporation’s classified
balance sheet.
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Do It! 1a: Assets Section of Classified Balance Sheet (2 of 2)
Hoffman Corporation
Balance Sheet (partial)
December 31, 2022
Assets
Current assets
Cash
$ 800
Accounts receivable
1,100
Inventory
3,400
Prepaid insurance
2,300
Total current assets
$ 7,600
Long-term investments
Debt investments
2,100
Property, plant, and equipment
Equipment
LO 1
10,700
Less: Accumulated depreciation—equipment
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Intangible assets
2,700
20
8,000
Nature of Current Liabilities
•
Obligations the company is to pay within the next year or operating cycle, whichever is longer
•
Common examples
LO 1
•
Accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes
payable
•
Current maturities of long-term obligations
•
Payments to be made within the next year on long-term obligations
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Current Liabilities
Alphabet Inc.
Balance Sheet (partial)
(in millions)
Current liabilities
Accounts payable
$ 1,931
Short-term debt
3,225
Accrued compensation and benefits
3,539
Accrued expenses and other current liabilities
10,313
Income taxes payable, net
302
Total current liabilities
LO 1
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$19,310
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Nature of 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
LO 1
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Long-Term Liabilities
Nike, Inc.
Balance Sheet (partial)
(in millions)
Long-term liabilities
Bonds payable
$5,474
Deferred income taxes and other
1,907
Total long-term liabilities
LO 1
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$7,381
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Long-term Liabilities
Review Question
Which of the following is not a long-term liability?
a. Bonds payable.
b. Current maturities of long-term debt.
c. Long-term notes payable.
d. Mortgages payable.
LO 1
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