9 - The Balance sheet Flashcards
(42 cards)
What information does a balance sheet convey to users of accounting information?
A business’s balance sheet is important because it provides internal and external users with information to help them evaluate the business’s ability to achieve its primary goals of earning a satisfactory profit and remaining solvent.
A balance sheet provides information about a business’s economic resources and the claims on those resources (its financial position) on a specific date.
Users need to know that a business’s classified balance sheet shows important subtotals, in related groupings, for the assets, liabilities of the business. The groupings include current assets and non-current assets, as well as current liabilities and non-current liabilities.
What is the purpose of the balance sheet?
A balance sheet provides information that helps internal and external users to evaluate a business’s ability to achieve its primary goals of earning a satisfactory profit and remaining solvent.
Why is the balance sheet important?
A business’s balance sheet is important because it provides internal and external users with information to help them evaluate the business’s ability to achieve its primary goals of earning a satisfactory profit and remaining solvent.
A balance sheet provides information about a business’s economic resources and the claims on those resources (its financial position) on a specific date.
What is the link between the balance sheet and the income statement?
An income statement presents a summary of a business’s operating activities for an accounting period: revenues earned, expenses incurred and the net income that results. So the income statement reports on a business’s actions over a period of time, representing the ‘flow’ of a business’s operating activities.
In contrast, a balance sheet presents a business’s financial position on a specific date, allowing users to take stock of a business’s assets, liabilities, and owner’s equity on that date. By examining the balance sheet, businesses can find out how much money customers owe the business (accounts receivable), see the total dollar amount of the inventory on hand at year-end, and discover how much money the business owes its creditors (accounts payable).
What are drawing analogies?
Making connections among facts, ideas, or experiences that are normally considered separately
What is the balance sheet?
Accounting report that summarises a business’s financial position (assets, liabilities and owner’s equity) on a given date; also known as a statement of financial position.
What is the accounting equation?
Assets = Liabilities + Owner’s equity
What is a classified balance sheet?
A balance sheet that shows subtotals for assets, liabilities, and owner’s equity in related groupings
Why is it important to classify assets and liabilities into groups when preparing a balance sheet?
Current assets are cash and other assets that a business expects to convert into cash, sell or use up within one year. Current assets include cash, marketable securities, receivables, inventory, and prepaid items. Non-current assets are assets other than current assets; these include items such as long-term investments, and property and equipment.
Current liabilities are obligations that a business expects to pay within one year by using current assets. They include accounts payable and salaries payable, unearned revenues, and short-term notes (and interest) payable. Non-current liabilities are obligations that a business does not expect to pay within the next year and include items such as long-term notes payable, mortgages payable, and bonds payable.
What are assets?
A business’s economic resources that it expects will provide future benefits to the business
What are long-term investments?
Items such as notes receivable, government bonds, bonds and capital stock of companies, and other securities which a business intends to hold for more than one year
What are current assets?
Cash and other assets that a business expects to convert into cash, sell or use up within one year.
What are financial assets?
Items such as notes receivable, government bonds, bonds and share capital of companies, and other securities.
What are property and equipment?
All the physical (tangible), long-term assets a business uses in its operations
What is book value?
Asset’s original cost minus the related accumulated depreciation
What is accumulated depreciation?
The total amount of depreciation expense recorded over the life of an asset to date.
What are intangibles?
Intangibles are assets that do not have a tangible or physical substance, but the ownership of which entitles the owner to future economic benefits.
What are liabilities?
A business’s economic obligations (debts) owed to its creditors
What is creditors’ equity?
Claims by creditors against the assets of a business
What are current liabilities?
Obligations that a business expects to pay within one year by using current assets.
What are non-current liabilities?
Obligations that a business does not expect to pay within one year.
What is owner’s equity?
Owner’s current investment in the assets of a business
What is the relationship between the accounting equation and the balance sheet?
The balance sheet is the report that documents a business’s economic resources and the claims on those resources over a given time. So that it looks like:
Economic resources = Claims on economic resources
This can be broken down into the accounting equation we know:
Economic resources = Assets
Claims on economic resources = Liabilities + Owner’s equity
Therefore,
Assets = Liabilities + Owner’s equity
What is liquidity?
The measure of how quickly an asset can be converted into cash or a liability can be paid.
