Balance sheet Flashcards
What are assets?
They are resources under a company’s control as a result of past transactions that are expected to generate future economic benefits for the company.
What are liabilities?
They are company obligations from previous transactions expected to result in outflows of economic benefits in the future.
Which conditions must Assets and liabilities respect to be on the financial statements?
It must be probable that the future economic benefits associated with them will flow to or from the firm and that the item’s cost or value can be measured with reliability.
What is equity?
It represents the residual claim of shareholders on a company’s assets after deducting all liabilities.
What does the value of items reported on the BS reflect?
It reflects their value at the end of the reporting period.
What is the report format for the balance sheet?
Assets, liabilities, and equity are presented in a single column. This format is the most commonly used balance sheet presentation format.
What is the account format for the balance sheet?
Assets are presented on the left-hand side of the balance sheet, with liabilities and equity on the right-hand side.
What is the classified balance sheet?
Different types of assets and liabilities are grouped into subcategories to give a more effective overview of the company’s financial position. Classifications typically group assets and liabilities into their current and noncurrent portions.
What is the liquidity-based presentation?
All assets and liabilities are broadly presented in order of liquidity. This format is mostly used by banks.
Under IFRS, when doe the current/non-current classifications not required?
It is if a liquidity-based presentation provides more relevant and reliable information.
What are current assets?
They are liquid assets that are likely to be converted into cash or realized within one year or one operating cycle, whichever is longer.
What are noncurrent assets?
They are less liquid assets and are not expected to be converted into cash within one year or within one operating cycle. They are also called long-term or long-life assets.
What are current liabilities?
They are obligations that are likely to be settled within one year or within one operating cycle.
What are noncurrent liabilities?
They are not expected to be settled within a year or within one operating cycle. They are a source of long-term finance for a company.
What is working capital?
It is the difference between current assets and current liabilities. It is necessary for the smooth functioning of a firm’s daily operations.
What are the main types of current assets?
- Cash and cash equivalents
- Marketable securities
- Inventories
- Trade receivable
- Other current assets
What are cash and cash equivalents?
They are highly liquid securities that usually mature in less than 90 days. Since they are financial assets, they may be measured at amortized cost or fair value.
What are marketable securities?
They include investments in debt and equity securities that are traded on public markets.
What are trade receivables?
They are amounts owed to the company by customers to whom sales have been made. They are reported at net realizable value.
What is the net realizable value?
It is an estimate of fair value based on the company’s expectations regarding collectability.
Interpret a significant increase in accounts receivable relative to sales.
It may imply that the company is having problems collecting cash from customers.
What is the advantage of having a more diversified customer base?
It causes a lower credit risk of accounts receivable not being retrieved.
What are inventories?
They are the physical stock held by the company in the form of finished goods, work-in-progress, or raw materials.
How are inventories measured under IFRS?
They are measured at the lower of cost and net realizable value (NRV):
- The cost of inventories comprises all costs of purchase, cost of conversion, and other costs incurred in bringing the inventories to their present location and condition.
- NRV is the estimated selling price less the estimated cost of competition and costs necessary to complete the sale.
How is inventory calculated under US GAAP?
They are measured at the lower cost and NRV unless they are using LIFO or retail inventory methods:
- When using LIFO or the retail inventory method, inventories are measured at the lower of cost or market value.
How does US GAAP define the market value of an inventory?
It is the current replacement cost but with upper and lower limits. The recorded value cannot exceed NRV and cannot be lower than NRV, less a normal profit margin.
What are other current assets?
They are current assets that are not material enough to be recognized in a separate line. Ex: prepaid expenses, Deferred tax assets (DTA).
What are prepaid expenses?
They are normal operating expenses, but they have been paid in advance, so they are recognized as assets on the BS.
What are deferred tax assets (DTA)?
It happens when a company’s taxes payable exceed its income tax expense. They are a bit like a prepayment of taxes and therefore count as assets.
What are trade payables?
They are amounts owed by the business to its suppliers for purchases on credit.
What are notes payables?
They are borrowings from creditors that are documented by a loan agreement. They can also be included in noncurrent liabilities depending on the agreement.
What is the current portion of long-term liabilities?
It is the portion of long-term debt obligations that are expected to be paid within a year of the balance sheet date or within one operating cycle, whichever is greater.
