Chapter 2 - Slides

2020-04-22
Survey of Accounting
First Edition
Kimmel ● Weygandt
Chapter 2
A Further Look at Financial Statements
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Survey of Accounting
Copyright ©2019 John Wiley & Sons, Inc. 2
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Chapter Outline:
Learning Objectives
1. Identify the sections of a classified balance sheet.
2. Use ratios to evaluate a company’s profitability,
liquidity, and solvency.
LO 1: Identify the Sections of a 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 Copyright ©2019 John Wiley & Sons, Inc. 4
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Identify the Sections of a Classified

Balance Sheet (1 of 2)
Identify the Sections of a Classified

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The Classified Balance Sheet (1 of 16)

Current Assets
• 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 sale of goods, and then 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.
Current Assets
Companies list current asset accounts in the order they expect to convert
them into cash.
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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.

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. Answer: Current assets.
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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.
• Long-term notes receivable.
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Property, Plant, and Equipment
• 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.
Alternative Terminology
Property, plant, and equipment is sometimes called fixed assets or plant assets.
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Property, Plant, and Equipment
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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.”
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Intangible Assets
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Review Question
Patents and copyrights are
a. Current assets.
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Review Question
Patents and copyrights are
a. Current assets.
b. Answer: Intangible assets.
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Do It! 1a: Assets Section of Classified

Baxter Hoffman recently received the following information related
to Hoffman Corporation’s December 31, 2017, balance sheet.
Prepaid insurance $ 2,300 Inventory $3,400

Cash 800 Accumulated 2,700
Equipment 10,700 depreciation-
Accounts receivable 1,100 equipment
Prepare the assets section of Hoffman Corporation’s classified

balance sheet.
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Prepare the assets section of the classified balance sheet.
Prepaid insurance $ 2,300 Inventory $3,400

Cash 800 Accumulated 2,700
Equipment 10,700 depreciation-
Accounts receivable 1,100 equipment
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Current Liabilities
• 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.
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Current Liabilities
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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.
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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.
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Review Question
Which of the following is not a long-term liability?
a. Bonds payable.
b. Answer: Current maturities of long-term debt.
c. Long-term notes payable.
d. Mortgages payable.
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Stockholders’ Equity
• Common stock - investments of assets into the business
by the stockholders.
• Retained earnings - income retained for use in the
business
Stockholders’ Equity section for Franklin Corporation
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Do It! 1b: Balance Sheet Classifications (1 of 2)

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) Blank
Solution
[Blank] Salaries and wages payable [Blank] Investment in real estate
[Blank] Service revenue [Blank] Equipment
[Blank] Interest payable [Blank] Accumulated depreciation
[Blank] Goodwill [Blank] Debt investments (short-term)
[Blank] Depreciation expense [Blank] Retained earnings
[Blank] Mortgage payable (due in 3 years) [Blank] Unearned service revenue
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Do It! 1b: Balance Sheet Classifications (2 of 2)

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) Blank
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 (due in 3 years) CL Unearned service revenue
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LO 2: Use Ratios to Evaluate a Company’s

Profitability, Liquidity, and Solvency
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.
• A single ratio by itself is not very meaningful.
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Ratio Analysis
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Using the Income Statement (1 of 3)
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Earnings per Share

Profitability Ratio
Illustration: Earnings per share (EPS) measures the net income earned on each
share of common stock.
in millions 2014 2013
Net income $ 532 $(441)
Preferred (loss) -0- -0-
Share out standing at beginning of year 338 341
Share out standing at end of year 347 338
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Review Question
For 2017 Stoneland Corporation reported net income $26,000; net
sales $400,000; and average shares outstanding 6,000. There were
preferred stock dividends of $2,000. What was the 2017 earnings
per share?
a. $4.00
b. $0.06
c. $16.67
d. $66.67
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Review Question
For 2017 Stoneland Corporation reported net income $26,000; net
sales $400,000; and average shares outstanding 6,000. There were
preferred stock dividends of $2,000. What was the 2017 earnings
per share?
a. Answer: $4.00
b. $0.06
c. $16.67
d. $66.67
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Using a Classified Balance Sheet (1 of 5)
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Liquidity—the ability to pay obligations expected to
become due within the next year or operating cycle.
Working capital is the difference between the amounts
of current assets and current liabilities.
Working Capital  Current Assets  Current Liabilities
Best Buy had working capital in 2014 of $3,049 million
($10,485 million − $7,436 million).
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Liquidity ratios measure the short-term ability to pay
maturing obligations and to meet unexpected needs for
cash.
For every dollar of current liabilities, Best Buy has $1.41

of current assets.
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Solvency—the ability to pay interest as it comes due
and to repay the balance of a debt due at its maturity.
Solvency ratios measure the ability of the company
to survive over a long period of time.
▼Helpful Hint
Some users evaluate solvency using a ratio of liabilities divided
by stockholders’ equity. The higher this “debt to equity” ratio,
the lower is a company’s solvency.
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Debt to assets ratio measures the percentage of total
financing provided by creditors rather than stockholders.
The 2014 ratio means that every dollar of assets was

financed by 72 cents of debt.
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Investor Insight
When Debt Is Good
Debt financing differs greatly across industries and companies.
Here are some debt to assets ratios for selected companies in a
recent year:
Blank Debt to Assets Ratio
Google 23%
Nike 41%
Microsoft 48%
ExxonMobil 48%
General Motors 74%
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Using the Statement of Cash Flows (1 of 2)

In the Statement of Cash Flows, cash provided by
operating activities fails to take into account that a
company must invest in new property, plant, and
equipment and must maintain dividends at current levels
to satisfy investors.
Free cash flow describes the net cash provided by
operating activities after adjusting for capital expenditures
and dividends paid.
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Using the Statement of Cash Flows (2 of 2)

Illustration: MPC produced and sold 10,000 personal
computers this year. It reported $100,000 cash provided by
operating activities. In order to maintain production at 10,000
computers, MPC invested $15,000 in equipment. It chose to
pay $5,000 in dividends. Calculate free cash flow.
Cash provided by operating activities $100,000

Less: Expenditures on property, plant, and equipment −15,000
Dividends paid −5,000
Free cash flow $ 80,000
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Do It! 2: Ratio Analysis (1 of 4)

The following information is available for Ozone Inc.
Blank 2017 2016
Current assets $ 88,000 $ 60,800
Total assets 400,000 341,000
Current liabilities 40,000 38,000
Total liabilities 120,000 150,000
Net income 100,000 50,000
Net cash provided by operating activities 110,000 70,000
Preferred dividends 10,000 10,000
Common dividends 5,000 2,500
Expenditures on PP&E 45,000 20,000
Shares outstanding at beginning of year 60,000 40,000
Shares outstanding at end of year 120,000 60,000
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(a) Compute earnings per share for 2017 and 2016 for Ozone.
Ozone’s primary competitor, Frost Corporation, had earnings
per share of $2 in 2017.
Solution 2017
Earnings per share  $100, 000  $10, 000   $1.00
120, 000  60, 000  2
2016
 $50, 000  $10, 000   $0.80
 60, 000  40, 000  2
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(b) Compute the current ratio and debt to assets ratio for 2017.
Solution
2017 2016
$88, 000 $60,800
Current Ratio  2.20 :1  1.60 :1
$40, 000 $38, 000
Debt to Assets $120, 000 $150, 000

ratio  30%  44%
$400, 000 $341, 000
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(c) Compute free cash flow for each year.
Solution
Blank 2017 2016

Net cash provided by operating activities $110,000 $70,000
Expenditures on PP&E − 45,000 − 20,000
Preferred dividend − 10,000 − 10,000
Common dividends − 5,000 − 2,500
$ 50,000 $ 37,500
Blank $ 50,000 $ 37,500
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Copyright
Copyright © 2019 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
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Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up
copies for his/her own use only and not for distribution or resale. The Publisher assumes
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from the use of the information contained herein.
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2020-04-22

Copyright ©2019 John Wiley & Sons, Inc. 2

Copyright ©2019 John Wiley & Sons, Inc. 3

LO 1: Identify the Sections of a Classified

LO1 Copyright ©2019 John Wiley & Sons, Inc. 4

Identify the Sections of a Classified

LO1 Copyright ©2019 John Wiley & Sons, Inc. 5

Identify the Sections of a Classified

LO1 Copyright ©2019 John Wiley & Sons, Inc. 6

The Classified Balance Sheet (1 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 8

The Classified Balance Sheet (3 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 9

The Classified Balance Sheet (4 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 10

The Classified Balance Sheet (5 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 11

The Classified Balance Sheet (6 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 12

Property, Plant, and Equipment

LO1 Copyright ©2019 John Wiley & Sons, Inc. 13

The Classified Balance Sheet (7 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 14

The Classified Balance Sheet (8 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 15

The Classified Balance Sheet (9 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 16

The Classified Balance Sheet (10 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 17

Do It! 1a: Assets Section of Classified

Prepaid insurance $ 2,300 Inventory $3,400

Prepare the assets section of Hoffman Corporation’s classified

LO1 Copyright ©2019 John Wiley & Sons, Inc. 18

Do It! 1a: Assets Section of Classified

Prepaid insurance $ 2,300 Inventory $3,400

LO1 Copyright ©2019 John Wiley & Sons, Inc. 19

Do It! 1a: Assets Section of Classified

LO1 Copyright ©2019 John Wiley & Sons, Inc. 20

The Classified Balance Sheet (11 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 21

The Classified Balance Sheet (12 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 22

The Classified Balance Sheet (13 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 23

The Classified Balance Sheet (14 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 24

The Classified Balance Sheet (15 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 25

The Classified Balance Sheet (16 of 16)

LO1 Copyright ©2019 John Wiley & Sons, Inc. 26

Do It! 1b: Balance Sheet Classifications (1 of 2)

Do It! 1b: Balance Sheet Classifications (2 of 2)

LO 2: Use Ratios to Evaluate a Company’s

LO2 Copyright ©2019 John Wiley & Sons, Inc. 29

LO2 Copyright ©2019 John Wiley & Sons, Inc. 30

Using the Income Statement (1 of 3)

LO2 Copyright ©2019 John Wiley & Sons, Inc. 31

Earnings per Share

LO2 Copyright ©2019 John Wiley & Sons, Inc. 32

Using the Income Statement (2 of 3)