Section 2 - Cash and Cash Equivalents & Balance Sheet

Transcription

1 Section 2 - Cash and Cash Equivalents & Balance Sheet 12-1 Cash Currency and coins Balances in checking accounts Items for deposit such as checks and money orders from customers Cash equivalents are short-term (original maturity of 90 days or less from the date of purchase), highly liquid investments that can be readily converted to cash. Money market funds Treasury bills Commercial paper Commercial Paper: a short term note issued by corporations with good credit ratings. Often issued in 5k & 10k denominations. They generally yield a higher rate then T bills.

2 12-2 Summary of Cash-Related Items Note: Short-term paper: e.g., CDs (7 days up to 90 days)

3 Restricted Cash and Compensating Balances Restricted Cash Management s intent to use a certain amount of cash for a specific purpose future plant expansion, future payment of debt. If material, the restricted cash should be classified as investments and funds or other assets. Compensating Balance Minimum balance that must be maintained in a company s bank account as support for funds borrowed from the bank. It results in a higher effective borrowing rate for the borrower. 12-3

4 Reporting Cash Restricted Cash Companies state separately legally restricted cash from regular cash Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances (lenders require customers to maintain minimum cash balances in checking or savings account, record as cash on deposit maintained as compensating balance ; report as noncurrent assets in either investment or other assets section, if it is set up against long term borrowing.). Example: Listed as Restricted Cash and investments (with footnotes) e.g., 1,000,000 are primarily cash received from singers for nomination and entry fees to be applied to upcoming talent show, winnings held in trust for contestants.

5 12-5 Reporting Cash Bank Overdrafts Company writes a check for more than the amount in its cash account. Generally reported as a current liability. Offset against other cash accounts only when accounts are with the same bank (right of offset).

6 U.S. GAAP vs. IFRS 12-6 In general, cash and cash equivalents are treated similarly under IFRS and U.S. GAAP. One difference is highlighted below. Bank overdrafts are treated as liabilities. Bank overdrafts may be offset against other cash accounts.

7 Bank Reconciliation 12-7 A bank reconciliation explains the difference between cash reported on bank statement and cash balance on a company s books. Provides information for reconciling journal entries. Bank Balance + Deposits in Transit - Outstanding Checks ± Bank Errors = Corrected Balance Book Balance + Bank Collections - Service Charges - NSF Checks ± Book Errors = Corrected Balance

8 Reconciliation of Bank Balances 12-8

9 Investments Nature of Investments 12-9 Bonds and notes (Debt securities) Stock - Common & preferred (Equity securities) Investments can be accounted for in a variety of ways, depending on the nature of the investment relationship.

10 12-10 Types of Securities Invested or Equity Securities & Classification: & Reporting Method:, Fair Value Method, Equity Method, Consolidation

11 12-11 The Balance Sheet The Balance Sheet Reports a company s financial position on a particular date. Limitations: The balance sheet does not portray the market value of the entity as a going concern nor its liquidation value. Resources (soft skills) such as employee skills and reputation are not recorded in the balance sheet. Usefulness: The balance sheet describes many of the resources a company has for generating future cash flows. It provides liquidity information useful in assessing a company s ability to pay its current obligations. It provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.

12 12-12 Dell Inc. Balance Sheet (In millions) January 28, 2011 January 29, 2010 Assets: Current assets: Cash and cash equivalents $ 13,913 $ 10,635 Short-term investments Accounts receivables, net 6,493 5,837 Financing receivables, net 3,643 2,706 Inventories, net 1,301 1,051 Other current assets 3,219 3,643 Total current assets 29,021 24,245 Property, plant, and equipment, net 1,953 2,181 Investments Long-term financing receivables, net Goodwill 4,365 4,074 Purchased intangible assets, net 1,495 1,694 Other non-current assets Total Assets $ 38,599 $ 33,652

13 Current Assets Current Assets Will be converted to cash or consumed within one year or the operating cycle, whichever is longer. 1. Cash 2. Cash Equivalents 3. Short-term Investments 4. Receivables 5. Inventories 6. Prepaid Expenses Cash equivalents include certain negotiable items such as: commercial paper, money market funds, & U.S. treasury bills. Commercial Paper: Short-term unsecured debt sold by corporations; it is the principal marketable security.

14 12-14 Balance Sheet Current Assets Cash Generally any monies available on demand. Cash equivalents - short-term highly liquid investments that mature within 3 months or less. Restrictions (CD used as collateral for debt service) or commitments must be disclosed.

15 12-15 Balance Sheet Current Assets Short-Term Investments Portfolios Type Valuation Classification Held-to- Maturity Debt Amortized Cost Current or Noncurrent Trading Debt or Equity Fair Value Current Availablefor-Sale Debt or Equity Fair Value Current or Noncurrent Trading: frequent buying and selling in a short period of time; is part of net income. Available-for-Sale: unrealized gains & losses recorded as OCI; report in OCI Stmt. Held-to-Maturity: 1. Positive intend 2. the ability to hold. Do not adjust to FV.

16 Operating Cycle of a Typical Manufacturing Company Use cash to acquire raw materials Convert raw materials to finished product Sell product to customer A/R Collect cash from customer

17 Noncurrent Assets Noncurrent Assets Not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer. 1. Investments (bonds, stocks, LT notes; land held for speculation) 2. Property, Plant, & Equipment 3. Intangible Assets 4. Other Assets (deferred charges, i.e., long-term prepaid expenses or expenditure that will yield benefit for several acctg periods; e.g., start- up costs, organization costs, bond issuance costs)

18 Investments 1. Not used in the operations of the business. Noncurrent Assets 2. Include both debt and equity securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes. Property, Plant, and Equipment 1. Are tangible, long-lived, and used in the operations of the business. 2. Include land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells. 3. Reported at original cost less accumulated depreciation (or depletion for natural resources), except for land which is not depreciated. Intangible Assets 1. Used in the operations of the business but have no physical substance. 2. Include patents, copyrights, and franchises. 3. Reported net of accumulated amortization. Other Assets Include long-term prepaid expenses and any noncurrent assets not falling in to one of the other classifications.

19 12-19 Balance Sheet Noncurrent Assets Long-Term Investments Securities bonds, stock, and long-term notes For marketable securities, management s intent determines current or noncurrent classification. Balance Sheet (in thousands) Current assets Cash $ 285,000 Investments: Invesment in ABC bonds 321,657 Investment in UC Inc. 253,980 Notes receivable 150,000 Land held for speculation 550,000 Sinking fund 225,000 Pension fund 653,798 Cash surrender value 84,321 Investment in Uncon. Sub. 457,836 Total investments 2,696,592 Property, Plant, and Equip. Building 1,375,778 Land 975,000

20 Balance Sheet Liabilities Dell Inc. Balance Sheet (In milions) January 28, 2011 January 29, 2010 Liabilities: Current liabilities: Short-term debt $ 851 $ 663 Accounts payable 11,293 11,373 Accrued and other 4,181 3,884 Short-term deferred service revenue 3,158 3,040 Total current liabilities 19,483 18,960 Long-term debt 5,146 3,417 Long-term deferred service revenue 3,518 3,029 Other non-current liabilities 2,686 2,605 Total liabilities $ 30,833 $ 28, Liabilities represent obligations to other entities. The information value of reporting these amounts is enhanced by classifying them as current liabilities and long-term liabilities.

21 12-21 Current Liabilities Current Liabilities 1. Accounts Payable 2. Notes Payable 3. Accrued Liabilities 4. Unearned Revenues 5. Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle, whichever is longer.

22 12-22 Long-Term Liabilities Long-Term Liabilities 1. Long-term Notes 2. Mortgages 3. Long-term Bonds 4. Pension Obligations 5. Lease Obligations Obligations that will not be satisfied within one year or the operating cycle, whichever is longer.

23 Short-Term Obligations Expected to be Refinanced May reclassify a short-term liability as long-term if 2 conditions are met: It has the intent to refinance on a long-term basis. and It has demonstrated the ability to refinance. The ability to refinance on a long-term basis can be demonstrated by an existing refinancing agreement, or actual financing prior to issuance of the financial statements.

24 12-24 U.S. GAAP vs. IFRS Classification of Liabilities to be Refinanced Liabilities payable within the coming year are classified as long term liabilities if refinancing is completed before date of issuance of the financial statements. Liabilities payable within the coming year are classified as long term liabilities if refinancing is completed before the balance sheet date (year end date).

25 Balance Sheet Stockholders Equity Dell Inc. Balance Sheet (In millions) January 28, 2011 January 29, 2010 Stockholders' equity Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,369 and 3,351, respectively; shares outstanding: 1,918 and 1,957, respectively 11,797 11,472 Treasury stock, at cost: 976 and 919 shares, respectively (28,704) (27,904) Retained earnings 24,744 22,110 Accumulated other comprehensive (loss) (71) (37) Total stockholders' equity $ 7,766 $ 5,641 Shareholders equity is the residual interest in the assets of an entity that remains after deducting liabilities.

26 Multiple Step Income Statement & Comprehensive Income An income statement for a hypothetical manufacturing co. that you can refer to as we proceed through the chapter. Objective: to gain a general perspective of the items reported and classifications contained in corporate income statements. Note: Dividend revenue: other income

27 Operating versus Non-operating Income Operating Income Non-operating Income Includes revenues and expenses directly related to the principal revenuegenerating activities of the company (e.g., gains or losses from selling equipment & other assets used in generating the revenue) Includes certain gains and losses related to peripheral or incidental activities of the company (e.g., selling investment; special gains & losses that are infrequent or unusual, but not both.)

28 12-28 Income Statement (Single-Step) Proper Heading Revenues & Gains Expenses & Losses

29 Income Statement (Multiple-Step) Proper Heading Gross Profit Operating Expenses Nonoperating Items

30 12-30 U. S. GAAP vs. IFRS There are more similarities than differences between income statements prepared according to U.S. GAAP and those prepared applying IFRS. Some differences are highlighted below. Has no minimum requirements. SEC requires that expenses be classified by function (cost of goods sold, general & admin ). Bottom line called net income or net loss. Report extraordinary items separately. Specifies certain minimum information to be reported on the face of the income statement. Allows expenses classified by function or natural description (salaries, rent ). Bottom line called profit or loss. Prohibits reporting extraordinary items.

31 Discontinued Operations As part of the continuing process to converge U.S. GAAP and international standards, the FASB and IASB have been working together to develop a common definition and a common set of disclosures for discontinued operations The proposed ASU (Accounting Standards Updates) defines a discontinued operation as a component that either (a) has been disposed of or (b) is classified as held for sale, & represents one of the following: 1. a separate major line of business or major geographical area of operations, or 2. part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or 3. a business that meets the criteria to be classified as held for sale on acquisition.

32 Reporting Discontinued Operations Reporting for Components Sold Income or loss from operations of the component from the beginning of the reporting period to the disposal date. 2. Gain or loss on the disposal of the component s assets. Reporting for Components Held For Sale 1. Income or loss from operations of the component from the beginning of the reporting period to the end of the reporting period. 2. An impairment loss if asset s carrying value (book value) > ( fair value - cost to sell, i.e., net realizable value). 1 & 2 can be combined or separately reported. If combined, the impairment loss must be disclosed.

33 Extraordinary Items An extraordinary item is a material event or transaction that is both: 1.Unusual in nature, and 2.Infrequent in occurrence Extraordinary items are reported net of related taxes

34 U. S. GAAP vs. IFRS The scarcity of extraordinary gains and losses reported in corporate income statements and the desire to converge U.S. and international accounting standards could guide the FASB to the elimination of the extraordinary item classification. Report extraordinary items separately in the income statement. Prohibits reporting extraordinary items in the income statement or notes.

35 12-35 Special Reporting Issues Earnings Per Share: In 2012, Hollis Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000. During 2012, Hollis had a weighted average of 190,000 common shares outstanding. Compute Hollis s 2012 earnings per share. Net income - Preferred dividends Weighted average number of shares outstanding $1,000, ,000 - $250,000 = $3.95 per share

36 Special Reporting Issues Divide by weightedaverage shares outstanding (given info: 100,000 shares) EPS

37 Earnings Per Share Disclosure One of the most widely used ratios is earnings per share (EPS), which shows the amount of income earned by a company s each share of common stock. Must be disclosed on the income statement Basic EPS Diluted EPS Net income - preferred dividends Weighted-average number of common shares outstanding for the period Reflects the potential dilution that could occur for companies that have certain securities outstanding that are convertible into common shares or stock options that could create additional common shares if the options were exercised.

38 Special Reporting Issues Comprehensive Income Comprehensive Income: is the changes in equity during a period from nonowner sources. Excludes: those resulting from investments by owners and distributions to owners. It is a broader measure of the effects of all recognized changes except investments by and distributions to owners. Includes: all gains and losses that bypass net income but affect stockholders equity; i.e., other comprehensive income (e.g., unrealized gains or losses from Held-to-maturity Securities). Notes: Earnings or net income is a measure of entity performance, the extent to which asset inflows (revenues & gains) exceed asset outflows (expense & losses) during the period.

39 Income Statement (in thousands) Special Reporting Issues Comprehensive Income Sales $ 285,000 Cost of goods sold 149,000 Gross profit 136,000 Operating expenses: Selling expenses 10,000 Administrative expenses 43,000 Total operating expense 53,000 Income from operations 83,000 Other revenue (expense): Interest revenue 17,000 Interest expense (21,000) Total other (4,000) Income before taxes 79,000 Income tax expense 24,000 Net income $ 55,000 + Other Comprehensive Income Unrealized gains and losses on available-forsale securities. Translation gains and losses on foreign currency (OCI). Pension adjustments (OCI) Reported in Stockholders Equity PBO > Expected: Loss PBO < Expected: Gain Return on Plan Assets > Expected: Gain Return on Plan Assets < Expected: Loss These Gains and Losses are not reported as Pension Expense, instead, they are reported as OCI, a shareholder equity account.

40 12-40 Special Reporting Issues Review Gains and losses that bypass net income but affect stockholders' equity are referred to as a. comprehensive income. b. other comprehensive income. c. prior period income. d. unusual gains and losses.

41 12-41 Special Reporting Issues Companies must display the components of other comprehensive income in one of three ways: 1. A 2nd separate income statement; 2. A combined income statement of comprehensive income; or 3. As part of the statement of stockholders equity

42 12-42 Special Reporting Issues Comprehensive Income Illustration nd income statement

43 12-43 Special Reporting Issues Comprehensive Income Combined statement Other comprehensive income V. Gill Inc. Combined Statement of Comprehensive Income For the Year Ended December 31, 2012 Sales revenue $ 800,000 Cost of goods sold 600,000 Gross profit 200,000 Operating expenses 90,000 Net income 110,000 Unrealized holding gain, net of tax 30,000 Comprehensive income $ 140,000

44 12-44 Special Reporting Issues Comprehensive Income As part of Statement of Stockholder s Equity For the Year Ended December 31, 2012 V. Gill Inc. Statement of Stockholders' Equity Retained Earning - Beginning balance 50,000 Net income 120,000 Dividend -10,000 Retained Earning - Ending balance 160,000 Accumulated Other Comprehensive Income 90,000 NOT: Net of Taxes (assuming $90,000 AOCI includes $30,000 OCI).

45 Special Reporting Issues Comprehensive Income Balance Sheet Presentation Regardless of the display format used, the accumulated other comprehensive income of $90,000 is reported in the stockholders equity section of the balance sheet.

46 3 N 2 E 1 D 4 T Other Comprehensive Income Comprehensive income includes traditional net income as well as following 4 additional gains and losses that change shareholders equity: ($ in millions) Net income $xxx Other comprehensive income: Net unrealized holding gains (losses) on investments (net of tax)* $x Gains (losses) from and amendments to postretirement benefit plans (net of tax) (x) Deferred gains (losses) from derivatives (net of tax) (x) Gains (losses) from foreign currency translation (net of tax) x xx Comprehensive income $xxx *Changes in the market value of certain investments (). Gains and losses due to revising assumptions or market returns differing from expectations and prior service cost from amending the plan (). When a derivative designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction (). Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders equity. ()

47 U. S. GAAP vs. IFRS Both U.S. GAAP and IFRS allow companies to report comprehensive income in either a single statement of comprehensive income or in two separate statements. Other comprehensive income items are similar under the two sets of standards Includes four possible Other Comprehensive Income items. Includes same four. Includes a fifth possible item, changes in revaluation surplus, from the optional revaluation of property, plant, and equipment & intangible assets.

48 Accumulated Other Comprehensive Income In addition to reporting comprehensive income that occurs in the current period, we must also report these amounts on a cumulative basis in the balance sheet as an additional component of shareholders equity. This is consistent with the way we report net income that occurs in the current reporting period in the income statement and also report accumulated net income (that hasn t been distributed as dividends) in the balance sheet as retained earnings. Similarly, we report OCI as it occurs in the current reporting period and also report accumulated other comprehensive income (AOCI) in the balance sheet. ASTRO-MED INC. Consolidated Balance Sheets (in part) Years ended January 31 ($ in thousands) Shareholders equity: Common stock Additional paid-in capital 36,586 34,713 Retained earnings 26,843 26,817 Accumulated other comprehensive income Treasury stock (9,840) (8,030) Total shareholders equity $54,288 $54,233