Financial accounting tools for business decision making 9 KIeso ppt ch02

Financial Accounting: Tools for Business Decision Making
Ninth Edition
Kimmel ● Weygandt ● Kieso

Chapter 2
A Further Look at Financial Statements
Prepared by
COBY HARMON

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University of California, Santa Barbara
Westmont College


Chapter Outline:
Learning Objectives
LO 1 Identify the sections of a classified balance sheet.
LO 2 Use ratios to evaluate a company’s profitability, liquidity, and solvency.
LO 3 Discuss financial reporting concepts.

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Learning Objective 1
Identify the Sections of a Classified Balance Sheet

LO1

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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

Blank

LO1

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Franklin Corporation

Classified Balance
Sheet – Assets

Balance Sheet
Assets
October 31, 2022

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
7,200

Property, plant, and equipment
Land

10,000

Equipment

$24,000

Less: Accumulated
depreciation—equipment

5,000

19,000

29,000
Intangible assets
Patents
3,100
LO1

Total assets

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$61,400

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Franklin Corporation
Balance Sheet
October 31, 2022

Classified Balance
Sheet – Liabilities &

Liabilities and Stockholders’ Equity
Current liabilities
Notes payable

$ 11,000

Accounts payable

Stockholders’ Equity

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
Common stock

14,000

Retained earnings

20,050

Total stockholders’ equity

LO1

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34,050

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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

•

Average time it takes from purchase of inventory, to sale of goods, and then to
collection of cash from customers

LO1

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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.

LO1

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Current Assets (1 of 2)
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:

LO1

a.

Current assets.

b.

Intangible assets.

c.

Long-term investments.

d.

Property, plant, and equipment.

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Current Assets (2 of 2)
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:

LO1

a.

Current assets.

b.

Intangible assets.

c.

Long-term investments.

d.

Property, plant, and equipment.

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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

LO1

Long-term notes receivable

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Long-Term Investments Presentation

Alphabet Inc.
Balance Sheet (partial)
(in millions)

Long-term investments
Non-marketable investments

LO1

$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

•

LO1

Cost is allocating 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

Blank

Land and land improvements

$

Buildings

282,960

Machinery and equipment

1,742,449

Molds, cores, and rings

224,662

Less: Accumulated depreciation

$2,297,838
1,433,661

Net property, plant, and equipment

LO1

47,767

$ 864,227

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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.”

LO1

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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
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

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Net amortizable intangible assets

6,949

Goodwill

27,810

Net intangible assets

LO1

$ 5,829

$34,759

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Intangible Assets (1 of 2)
Review Question
Patents and copyrights are
a.

Current assets.

b.

Intangible assets.

c.

Long-term investments.

d.

Property, plant, and equipment.

LO1

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Intangible Assets (2 of 2)
Review Question
Patents and copyrights are
a.

Current assets.

b.

Intangible assets.

c.

Long-term investments.

d.

Property, plant, and equipment.

LO1

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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

Prepare the asset section

Cash 800

of Hoffman Corporation’s

Equipment 10,700

classified balance sheet.

Accounts receivable

1,100

Trademarks 4,700
Debt investments (long-term)

2,100

Accumulated depreciation—Equipment

LO1

2,700

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Hoffman Corporation
Partial Balance Sheet
December 31, 2022

Do It! 1a:

Assets

(2 of 2)
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

10,700

Less: Accumulated depreciation—equipment

2,700
8,000

Intangible assets
LO1

Trademarks

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Nature of Current Liabilities

•

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

•

Common examples

•

Accounts payable, salaries and wages payable, notes payable, interest payable, and
income taxes payable

•

And current maturities of long-term obligations

•

LO1

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
Income taxes payable, net

302

Total current liabilities

LO1

10,313

$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

LO1

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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

LO1

$7,381

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Long-term Liabilities (1 of 2)
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.

LO1

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