Balance Sheet/Statement of Financial Position

Question 1

What is another name for the balance sheet?

Answer 1

Statement of Financial Position. Only statement dated as of a point of time

Question 2

What does the title of the Balance Sheet consist of?

Answer 2

ABC Company
Balance Sheet
As of December 31, 2014

Question 3

Do most account balances on the Balance Sheet represent current market value?

Answer 3

No

Question 4

What useful information does the Balance Sheet provide?

Answer 4

Information useful in assessing the entity’s financial strengths and weaknesses, especially risk. And the allocation of assets

Question 5

What does a classified Balance Sheet distinguish?

Answer 5

Current and noncurrent assets and liabilities, which helps users assess liquidity

Question 6

Does the Balance Sheet report all assets of the firm?

Answer 6

No, only the assets acquired through a transaction. I.e., internally generated goodwill is not recorded, and the recorded value of other intangibles such as trademarks may be significantly less than their current value.

Question 7

What factors limit the interpretation of balance sheet information?

Answer 7

1. ) Assets are liabilities are acquired at different times and are not affected in the same way by inflation. This causes the recorded value of these accounts to be different from their current or real value and makes comparisons difficult
2. ) Several different measurement bases are used (historical cost, depreciated historical cost, market value, realizable value) which comprises the comparability characteristic of accounting information
3. ) Consolidation of subs compounds the difficulties with interpretation of account balances when the parent and subs use different accounting methods
4. ) The value of many assets is derived primarily through use, this value may differ considerably from book value and market value.

Question 8

What is a measurement base?

Answer 8

The attribute of an account being measured and reported

Question 9

What is Historical Cost?

Answer 9

Some accounts are measured and reported at a fixed, unchanging historical amount. Ex. Land, Cash, Prepaids, many current liabilities, contributed capital, and treasury stock

Question 10

What is Depreciated, Amortized, or Depleted Historical Cost?

Answer 10

Some accounts reflect the remaining portion of a fixed unchanging historical amount. EX. property, plant and equipment; intangibles; natural resources

Question 11

What is market value (Type of current value)?

Answer 11

Selling price for assets and amount currently required to retire a liability. These are “Exit” values rather than “entry”. Ex. marketable securities for which holding firm does not intend to hold to maturity.

Question 12

What is Net Realizable Value?

Answer 12

The amount the firm expects to receive from the sale or collection of the item. Ex. A/R and inventories

Question 13

What is present value?

Answer 13

This is the primary measurement basis for noncurrent debt. The measure of current sacrifice when extinguishing the debt at the balance sheet date.

Question 14

What is aggregate of more than one valuation basis?

Answer 14

Retained earnings-net income reflects all measurement bases through revenue and expense recognition

Question 15

Does U.S. GAAP define current and noncurrent assets and liabilities?

Answer 15

No, only current.

Question 16

What is the purpose of classifying assets and liabilities between current and noncurrent?

Answer 16

To distinguish items that will affect the firm’s liquidity in the near term from those that will not

Question 17

What is a current asset?

Answer 17

Asset expected to be realized in cash or to be consumed or sold during the normal operating cycle, or within one year on BS, whichever is longer.

Question 18

What is the operating cycle of a company?

Answer 18

The period of time from purchasing inventory to paying for the payable incurred on inventory purchase to the sale of goods to the collection of receivable and then to purchasing inventory all over again.

Question 19

What is a current liability?

Answer 19

Liabilities expected to be extinguished with current assets or another liability within one operating cycle or year, whichever is longer

Question 20

What is a noncurrent asset or liability?

Answer 20

Accounts that are not current are classified as non-current.
Noncurrent asset ex. - PPE, Intangibles
Noncurrent Liab ex. - Note Payable, Pension

Question 21

What is contributed capital?

Answer 21

The amount contributed by owners. Examples - Common stock, preferred stock, APIC

Question 22

What is retained earnings?

Answer 22

The amount of earnings retained by the entity. Cumulative net income less dividends paid

Question 23

What is the current ratio?

Answer 23

CA/CL. This ratio is used to measure liquidity. Most analysts use a minimum value of 2

Question 24

What is the Quick or Acid-test ratio?

Answer 24

(Cash +- Short Term Investments +- AR)/CL. Provides a more rigorous test of liquidity, this should be at least 1

Question 25

Examples of Current Assets?

Answer 25

Cash, Cash equivalents, Short-Term Investments, Inventories, Prepaids

Question 26

What is the only account for which nominal value, market value, realizable value, present value and future value are the same?

Answer 26

Cash

Question 27

Examples of Noncurrent Assets?

Answer 27

Long-term investments, PPE, Intangibles, Goodwill.

Question 28

When is the only time Goodwill is recognized on the balance sheet?

Answer 28

Only when a firm is purchased by another

Question 29

What is a contra account?

Answer 29

Has a balance opposite that of the associated account. Can be debit or credit balances, and can be considered valuation accounts.

Question 30

What is an Adjunct account?

Answer 30

Has a balance that is the same as that of the associated account. An adjunct account is added, whereas a contra is subtracted

Question 31

What is a valuation account?

Answer 31

An account used to increase or decrease the book value of an item to a measure of current value. Not all contra or adjunct accounts are valuation, but all valuation accounts are contra or adjunct

Question 32

What are the 3 important valuations for a firm?

Answer 32

1. ) Total OE or net assets - Amount determined by current US GAAP and is found in the balance sheet
2. ) Market value of Net Identifiable Assets - amount of cash that would remain after selling all identifiable assets
3. ) Total value of the firm - It’s market capitalization - the total value of the firm’s outstanding stock.

Question 33

What is a valuation account used for?

Answer 33

Used to increase or decrease the book value of an item to a measure of current value

Question 34

What type of measurement (costs) can items use that are reported on the balance sheet?

Answer 34

1. ) Historical cost (Land)
2. ) Amortized Historical Cost (Fixed Assets)
3. ) FMV (Marketable Securities)
4. ) Net Realizable Value (A/R)
5. ) Present Value (Bonds)