Financial Accounting: Tools for Business

Decision Making
Ninth Edition
Kimmel ● Weygandt ● Kieso

Chapter 2
A Further Look at Financial Statements
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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 3
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 4
 Franklin Corporation
Balance Sheet
October 31, 2022
Classified Assets
Current assets
Balance Cash $ 6,600
Debt investments 2,000
Sheet – Accounts receivable
Notes receivable 1,000
7,000

Assets Inventory
Supplies
3,000
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
Total assets $61,400

LO1 5
 Franklin Corporation
Balance Sheet

Classified October 31, 2022

Liabilities and Stockholders’ Equity

Balance Current liabilities

Notes payable $ 11,000

Sheet – Accounts payable

Unearned sales revenue
2,100
900
Salaries and wages payable 1,600
Liabilities & Interest payable
Total current liabilities
450
$16,050
Stockholders’ Long-term liabilities
Mortgage payable 10,000

Equity 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 34,050
Total liabilities and stockholders’ equity $61,400

LO1 6
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 7
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 8
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:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

LO1 9
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:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

LO1 10
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
• Long-term notes receivable

LO1 11
Long-Term Investments Presentation

Alphabet Inc.
Balance Sheet (partial)
(in millions)
Long-term investments
Non-marketable investments $5,183

LO1 12
Nature of Property, Plant & Equipment
• Asset with long useful lives
• Currently used in operations
• Includes land, buildings, equipment, delivery vehicles,
and furniture
• Are depreciated
• Cost is allocating to a number of years
• Accumulated depreciation
• Total amount of depreciation expensed to date in
an asset’s life
LO1 13
Property, Plant, and Equipment
Presentation
Cooper Tire & Rubber Company
Balance Sheet (partial)
(in thousands)
Property, plant, and equipment Blank
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 1,433,661
Net property, plant, and equipment $ 864,227

LO1 14
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 15
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
Net amortizable intangible assets 6,949
Goodwill 27,810
Net intangible assets $34,759
LO1 16
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 17
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 18
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
Cash 800 asset section
Equipment 10,700 of Hoffman
Accounts receivable 1,100 Corporation’s
classified
Trademarks 4,700
balance sheet.
Debt investments (long-term) 2,100
Accumulated depreciation—Equipment 2,700

LO1 19
 Hoffman Corporation
Do It! Partial Balance Sheet
December 31, 2022
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
Trademarks 4,700
Total assets $22,400
LO1 20
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
• Payments to be made within the next year
on long-term obligations

LO1 21
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 $19,310

LO1 22
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 23
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 $7,381

LO1 24
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 25
Long-Term Liabilities (2 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 26
Stockholders’ Equity
Components of stockholders’ equity
• Common stock
• Investments of assets into the business by the
stockholders
• Retained earnings
• Income retained for use in the business

LO1 27
Do It! 1b: Balance Sheet Classifications
(1 of 3)

Match each of the account names on the next slide 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

LO1 28
Do It! 1b: Balance Sheet Classifications
(2 of 3)

Match each account to its proper balance sheet classification. If

the item would not appear on a balance sheet, use “NA.”
Account Name Classification
Salaries and wages payable
Investment in real estate
Unearned service revenue
Debt investments (short-term)
Mortgage payable (due in 3 years)
Accumulated depreciation—
equipment
LO1
Current liabilities (CL)
Long-term investments (LTI)
Current liabilities (CL)
Current assets (CA)
Long-term liabilities (LTL)
Property plant, and
equipment (PPE)
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Do It! 1b: Balance Sheet Classifications
(3 of 3)

Match each account to its proper balance sheet classification. If

the item would not appear on a balance sheet, use “NA.”
Account Name Classification
Service revenue Not on balance sheet (NA)
Interest payable Current liabilities (CL)
Goodwill Intangible assets (IA)
Depreciation expense Not on balance sheet (NA)
Retained earnings Stockholders’ equity (SE)
Equipment Property plant, and equipment (PPE)

LO1 30
Homework:
E2-1, E2-4, E2-5;
P2-1A; P2-2A (9eth)

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