Balance Sheet

Question 1

Solvency

Answer 1

The ability of companies to pay their debts as they mature.

Question 2

Financial Flexibility

Answer 2

Ability of a company to take actions to alter the amounts and timing of cash flows to be able to respond to unexpected needs and opportunities

Question 3

Limitations of the Balance Sheet

Answer 3

1) mostly reported at historical cost (less relevant, more faithful representation)

2) extensive use of judgement/estimates (bias)

3) items that cannot be measured objectively are omitted

Question 4

Operating cycle

Answer 4

The avg time it takes a company from initiation of sales process to cash collection.

• retail: from purchase of inventory to cash collection from sale of inventory

Question 5

Current vs Long Term Assets

Answer 5

• will item convert to cash/sell/be consumed within 1 year or operating cycle (whichever is longer)?
• intent to convert
• exceptions exist (ex: current consumption of long term assets)

Question 6

Cash equivalents

Answer 6

Short term, highly liquid investments that mature within 3 months or less

• treasury notes/commercial paper

Question 7

Restricted cash (LT A)

Answer 7

Cash that can only be used for a specific purpose (must be disclosed)
- not part of cash balance

Question 8

Current liabilities

Answer 8

Expected to be liquidated within one year or the operating cycle (whichever is longer) through the use of current assets or creation of other current liabilities.

Question 9

Working capital or liquidity buffer =

Answer 9

CA - CL