CHAPTER 5
Balance Sheet and Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Disclosure principles,
uses of the balance
sheet, financial
flexibility.
1, 2, 3, 4, 5,
6, 7, 10, 18,
21, 29, 30,
31
3, 4
2.
3.
Preparation of balance
4, 7, 8, 9,
1, 2, 3, 4, 5,
4, 5, 6, 7, 9,
1, 2, 3, 4,
2, 3, 4
Classification of items
11, 12, 13,
1, 2, 3, 4, 5,
1, 2, 3, 8,
1, 2
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Explain the uses,
limitations, and content of a
balance sheet.
1, 2, 3, 4, 5, 6,
7, 8, 9,11, 12,
13, 14, 15, 16,
17, 18,19
1, 2, 3, 4,
6,
8, 9, 10
7
CA5-2,
CA5-3
balance sheet.
9, 10, 14, 20
1, 2, 3, 4, 5, 6,
7, 8, 9, 10, 11
1, 2, 3, 4,
5, 6, 7, 8,
9, 10, 11,
1, 2, 3, 4,
5, 6, 7
CA5-1,
CA5-2,
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E5.1
Balance sheet classifications.
Simple
15–20
E5.2
Classification of balance sheet accounts.
Simple
15–20
E5.3
Classification of balance sheet accounts.
Simple
15–20
E5.4
Preparation of a classified balance sheet.
Simple
30–35
E5.5
Preparation of a corrected balance sheet.
Simple
30–35
E5.6
Corrections of a balance sheet.
30–35
E5.7
Current assets section of the balance sheet.
Moderate
15–20
Current vs. long-term liabilities.
Moderate
10–15
E5.9
Current assets and current liabilities.
30–35
E5.10
Current liabilities.
Moderate
15–20
E5.11
Balance sheet preparation.
Moderate
25–30
E5.12
Preparation of a balance sheet.
Moderate
30–35
E5.13
Statement of cash flows—classifications.
Moderate
15–20
E5.14
Preparation of a statement of cash flows.
Moderate
25–35
E5.15
Preparation of a statement of cash flows.
Moderate
25–35
E5.16
Preparation of a statement of cash flows.
Moderate
25–35
Preparation of a statement of cash flows and a
balance sheet.
Moderate
30–35
E5.18
Preparation of a statement of cash flows, analysis.
Moderate
25–35
P5.1
Preparation of a classified balance sheet, periodic
inventory.
Moderate
30–35
P5.2
Balance sheet preparation.
Moderate
35–40
P5.3
Balance sheet adjustment and preparation.
Moderate
40–45
P5.4
Preparation of a corrected balance sheet.
40–45
P5.5
Balance sheet adjustment and preparation.
40–45
a balance sheet.
P5.7
Preparation of a statement of cash flows and
balance sheet.
40–50
CA5.1
Reporting for financial effects of varied transactions.
Moderate
20–25
CA5.2
Identifying balance sheet deficiencies.
Moderate
20–25
CA5.3
Critique of balance sheet format and content.
Simple
20–25
CA5.4
Presentation of property, plant, and equipment.
Simple
20–25
CA5.5
Cash flow analysis.
40–50
ANSWERS TO QUESTIONS
1. The balance sheet provides information about the nature and amounts of investments in enterprise
resources, obligations to enterprise creditors, and the owners’ equity in net enterprise resources.
2. Solvency refers to the ability of an enterprise to pay its debts as they mature. For example, when a
company carries a high level of long-term debt relative to assets, it has lower solvency. Information
3. Financial flexibility is the ability of an enterprise to take effective actions to alter the amounts and
timing of cash flows so it can respond to unexpected needs and opportunities. An enterprise with a
4. Some situations in which estimates affect amounts reported in the balance sheet include:
(a) allowance for doubtful accounts.
5. A higher level of inventories increases current assets, which is in the numerator of the current
ratio. Therefore, a higher inventory will increase the current ratio. In general, a higher current ratio
indicates a company has better liquidity since there are more current assets relative to current
6. Liquidity describes the amount of time that is expected to elapse until an asset is converted into
cash or until a liability has to be paid. The ranking of the assets given in order of liquidity is:
(1) (d) Short-term investments
Questions Chapter 5 (Continued)
7. The major limitations of the balance sheet are:
(a) The values stated are generally historical and not at fair value.
8. Some items of value to technology companies such as Intel or IBM are the value of research and
development (new products that are being developed but which are not yet marketable), the value
of the “intellectual capital” of its workforce (the ability of the companies’ employees to come up
9. Classification in financial statements helps users by grouping items with similar characteristics and
separating items with different characteristics. Current assets are expected to be converted to
10. Separate amounts should be reported for accounts receivable and notes receivable. The amounts
should be reported gross, and an amount for the allowance for doubtful accounts should be
11. No. Available-for-sale securities should be reported as a current asset only if management expects
to convert them into cash as needed within one year or the operating cycle, whichever is longer. If
12. The relationship between current assets and current liabilities is that current liabilities are those
13. The total selling price of the season tickets is $20,000,000 (10,000 X $2,000). Of this amount,
$8,000,000 has been earned by 12/31/20 (16/40 X $20,000,000). The remaining $12,000,000
Questions Chapter 5 (Continued)
14. Working capital is the excess of total current assets over total current liabilities. This excess is
sometimes called net working capital. Working capital represents the net amount of a company’s
15. (a) Stockholders’ Equity. “Treasury stock (at cost).”
Note: This is a reduction of total stockholders’ equity (reported as contra-equity).
(b) Current Assets. Included in “Cash.”
16. (a) Allowance for doubtful accounts should be deducted from accounts receivable in current
assets.
(b) Merchandise held on consignment should not appear on the consignee’s balance sheet
except possibly as a note to the financial statements.
17. (a) Trade accounts receivable should be stated at their estimated amount collectible, often
referred to as net realizable value. The method most generally followed is to deduct from the
total accounts receivable the amount of the allowance for doubtful accounts.
18. Assets are defined as probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events. If a building is leased under a capital lease, the
Questions Chapter 5 (Continued)
19. Battle is incorrect. Retained earnings is a source of assets, but is not an asset itself. For example,
even though the funds obtained from issuing a note payable are invested in the business, the note
20. The notes should appear as long-term liabilities with full disclosure as to their terms. Each year, as
the profit is determined, notes of an amount equal to two-thirds of the year’s profits should be
21. The purpose of a statement of cash flows is to provide relevant information about the cash receipts
and cash payments of an enterprise during a period. It differs from the balance sheet and the
22. The difference between these two amounts may be due to increases in current assets (e.g., an
increase in accounts receivable from a sale on account would result in an increase in revenue and
23. The difference between these two amounts could be due to noncash charges that appear in the
income statement. Examples of noncash charges are depreciation, depletion, and amortization of
24. Operating activities involve the cash effects of transactions that enter into the determination of
net income. Investing activities include making and collecting loans and acquiring and disposing
Questions Chapter 5 (Continued)
25. (a) Net income is adjusted downward by deducting $5,000 ($39,000 – $34,000) from $90,000
and reporting cash provided by operating activities as $85,000.
(b) The issuance of the preferred stock is a financing activity. The issuance is reported as
follows:
26. The company appears to have good liquidity and reasonable financial flexibility. Its current cash
debt coverage is 1.20
$1,200,000
, which indicates that it can pay off its current liabilities in a
28. Free cash flow is net cash provided by operating activities less capital expenditures and dividends.
The purpose of free cash flow analysis is to determine the amount of discretionary cash flow a
Questions Chapter 5 (Continued)
29. Some of the techniques of disclosure for the balance sheet are:
(a) Parenthetical explanations.
30. A note entitled “Summary of Significant Accounting Policies” would indicate the basic accounting
principles used by that enterprise. This note should be very useful from a comparative standpoint
31. General debt obligations, lease contracts, pension arrangements and stock option plans are four
items for which disclosure is mandatory in the financial statements. The reason for disclosing
32. The profession has recommended that the use of the term “surplus” be discontinued in balance
sheet presentations of stockholders’ equity. This term has a connotation outside accounting that is
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5.1
Current assets
Cash ……………………………………………………………
$ 30,000
Accounts receivable …………………………………….
Less: Allowance for doubtful accounts …….
Inventory ……………………………………………………..
Prepaid insurance ………………………………………..
BRIEF EXERCISE 5.2
Current assets
Cash ……………………………………………………………
$ 7,000
Equity Investments ……………………………………..
Accounts receivable …………………………………….
Less: Allowance for doubtful accounts …….
Inventory ……………………………………………………..
Prepaid insurance ………………………………………..
BRIEF EXERCISE 5.3
Long-term investments
Debt investments …………………………………………..
Land held for investment ………………………………..
Note receivables (long-term) …………………………..
BRIEF EXERCISE 5.4
Property, plant, and equipment
Land ……………………………………………………………
$ 71,000
Less: Accumulated depreciation ……………..
Equipment …………………………………………………..
Timberland ………………………………………………….
70,000
BRIEF EXERCISE 5.5
Intangible assets
Goodwill ………………………………………………………
$150,000
Franchises …………………………………………………..
BRIEF EXERCISE 5.6
Intangible assets
Goodwill ………………………………………………………
$ 50,000
Franchises …………………………………………………..
Trademarks …………………………………………………
10,000
BRIEF EXERCISE 5.7
Current liabilities
Notes payable ………………………………………………
$ 22,500
Salaries and wages payable ………………………….
Income taxes payable …………………………………..
BRIEF EXERCISE 5.8
Current liabilities
Accounts payable ………………………………………..
$220,000
Unearned rent revenue …………………………………
Salaries and wages payable ………………………….
Interest payable ……………………………………………
Income taxes payable …………………………………..
BRIEF EXERCISE 5.9
Long-term liabilities
Bonds payable ……………………………………………..
$400,000
Less: Discount on bonds payable ……………
29,000
$371,000
Pension liability ……………………………………………
BRIEF EXERCISE 5.10
Stockholders’ equity
Common stock …………………………………………….
$750,000
Paid-in capital in excess of par ……………………..
Retained earnings ………………………………………..
Accumulated other comprehensive loss ………..
BRIEF EXERCISE 5.11
Stockholders’ equity
Preferred stock …………………………………………….
$152,000
Common stock …………………………………………….
Additional paid-in capital ……………………………..
174,000
Retained earnings ………………………………………..
Equity attributable to Stowe Company …………..
Noncontrolling interest …………………………………
63,000
BRIEF EXERCISE 5.12
Cash Flow Statement
Operating Activities
Net income ………………………………………………….
$40,000
Depreciation expense ………………………………….
Increase in accounts receivable ……………………
Increase in accounts payable ……………………….
1,000
Investing Activities
Purchase of equipment ………………………………..
Financing Activities
Issue notes payable …………………………………….
Dividends paid …………………………………………….
Net cash flow from financing activities …….
BRIEF EXERCISE 5.13
Cash flows from operating activities
Net income ………………………………………………….
$151,000
Depreciation expense ……………………………..
Increase in accounts payable ………………….
Increase in accounts receivable ………………
40,500
BRIEF EXERCISE 5.14
Sale of land and building …………………………………..
$191,000
Purchase of land ………………………………………………
Purchase of equipment ……………………………………..
BRIEF EXERCISE 5.15
Issuance of common stock ………………………………..
$147,000
Purchase of treasury stock ………………………………..
Payment of cash dividend …………………………………
Retirement of bonds ………………………………………….
BRIEF EXERCISE 5.16
Free Cash Flow Analysis
Net cash provided by operating activities …………..
$400,000
Purchase of equipment …………………………..
Purchase of land* …………………………………..
Dividends ………………………………………………
SOLUTIONS TO EXERCISES
EXERCISE 5.1 (15–20 minutes)
(a) If the debt investment (bonds) is readily marketable and held primarily
for sale in the near term to generate income on short-term price
differences, then the account should appear as a current asset and be
included with trading securities. Available-for-sale securities are
classified as current or noncurrent depending upon the
(f) If the warehouse in process of construction is being constructed for
another party, it is classified as an inventory account in the current
assets section. This account will be shown net of any billings on the
contract. On the other hand, if the warehouse is being constructed for
EXERCISE 5.1 (Continued)
(j) Equity investments are reported as current assets if the shares are
expected to be sold within one year. Otherwise, the equity investment
is reported in the Investments section.
EXERCISE 5.2 (15–20 minutes)
1.
(h)
11.
(b)
2.
(d)
12.
(f)
3.
(f)
13.
(a)
4.
(f)
14.
(h)
5
(c)
15.
(c)
6.
(a)
16.
(b)
7.
(f)
17.
(a)
8.
(g)
18.
(a)
9.
(a)
19.
(g)
10.
(a)
20.
(f)
EXERCISE 5.3 (15–20 minutes)
1.
(a)
10.
(f)
2.
(b)
11.
(a)
3.
(f)
12.
(f)
4.
(a)
13.
(a) or (e) (preferably (a))
5
(f)
14.
(c) and (n)
6.
(h)
15.
(f)
7.
(j)
16.
(x)
8.
(d)
17.
(f)
9.
(a)
18.
(c)
19.
(i)
EXERCISE 5.4 (30–35 minutes)
Denis Savard Inc.
Balance Sheet
December 31, 20–
Assets
Current assets
Cash ……………………………………………………
$XXX
Less: Cash restricted for plant
expansion …………………………………….
XXX
$XXX
Less: Allowance for doubtful
accounts ………………………………………
XXX
Notes receivable …………………………………..
XXX
Receivables—officers …………………………..
XXX
Inventories
Finished goods ……………………………….
Work in process ………………………………
Raw materials …………………………………
Total current assets ……………………
$XXX
Long-term investments
Preferred stock investments………………….
XXX
Land held for future plant site ……………….
XXX
Restricted cash (plant expansion)………….
Total long-term investments ……….
Property, plant, and equipment
Buildings ……………………………………………..
XXX
Less: Accum. depreciation—
buildings………………………………………
XXX
Intangible assets
Copyrights …………………………………………..
EXERCISE 5.4 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable, short-term …………………………..
$XXX
Salaries and wages payable ………………………..
XXX
Unearned subscriptions revenue …………………
XXX
Unearned rent revenue …………………………..…..
Total current liabilities …………………………..
Bonds payable, due in four years ………………..
$XXX
Less: Discount on bonds payable………………..
Total liabilities ………………………………………
Stockholders’ equity
Capital stock:
Common stock ……………………………………..
XXX
Additional paid-in capital:
Total paid-in capital ………………………….
Retained earnings ………………………………………
retained earnings …………………………..
Less: Treasury stock, at cost ………………..
Equity attributable to Denis Savard, Inc. ………
Equity attributed to noncontrolling interest ….
Total stockholders’ equity ………………..
Paid-in capital in excess of par
Note to instructor: An assumption made here is that cash included the
restricted cash for plant expansion. If it did not, then a subtraction from
EXERCISE 5.5 (30–35 minutes)
Uhura Company
Balance Sheet
December 31, 2020
Assets
Current assets
Cash ………………………………………………..
$230,000
Equity investments, at fair value ………..
120,000
Accounts receivable ($340,000 + $17,000)
$357,000
accounts …………………………………..
17,000
340,000
cost-or-market (NRV) ………………………
401,000
Prepaid expenses ……………………………..
Total current assets ……………………..
$1,103,000
Long-term investments
Land held for future use …………………….
175,000
insurance ………………………………………
90,000
Property, plant, and equipment
Buildings ($570,000 + $160,000) ……………..
$730,000
Less: Accum. depr.—buildings …….
570,000
Equipment ($160,000 + $105,000) ……………
Less: Accum. depr.—equipment …..
Intangible assets
Goodwill …………………………………………..
80,000
Total assets ………………………………..
$2,178,000