Flashcards in Balance Sheet/Statement of Financial Position Deck (34):
What is another name for the balance sheet?
Statement of Financial Position. Only statement dated as of a point of time
What does the title of the Balance Sheet consist of?
As of December 31, 2014
Do most account balances on the Balance Sheet represent current market value?
What useful information does the Balance Sheet provide?
Information useful in assessing the entity's financial strengths and weaknesses, especially risk. And the allocation of assets
What does a classified Balance Sheet distinguish?
Current and noncurrent assets and liabilities, which helps users assess liquidity
Does the Balance Sheet report all assets of the firm?
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.
What factors limit the interpretation of balance sheet information?
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.
What is a measurement base?
The attribute of an account being measured and reported
What is Historical Cost?
Some accounts are measured and reported at a fixed, unchanging historical amount. Ex. Land, Cash, Prepaids, many current liabilities, contributed capital, and treasury stock
What is Depreciated, Amortized, or Depleted Historical Cost?
Some accounts reflect the remaining portion of a fixed unchanging historical amount. EX. property, plant and equipment; intangibles; natural resources
What is market value (Type of current value)?
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.
What is Net Realizable Value?
The amount the firm expects to receive from the sale or collection of the item. Ex. A/R and inventories
What is present value?
This is the primary measurement basis for noncurrent debt. The measure of current sacrifice when extinguishing the debt at the balance sheet date.
What is aggregate of more than one valuation basis?
Retained earnings-net income reflects all measurement bases through revenue and expense recognition
Does U.S. GAAP define current and noncurrent assets and liabilities?
No, only current.
What is the purpose of classifying assets and liabilities between current and noncurrent?
To distinguish items that will affect the firm's liquidity in the near term from those that will not
What is a current asset?
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.
What is the operating cycle of a company?
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.
What is a current liability?
Liabilities expected to be extinguished with current assets or another liability within one operating cycle or year, whichever is longer
What is a noncurrent asset or liability?
Accounts that are not current are classified as non-current.
Noncurrent asset ex. - PPE, Intangibles
Noncurrent Liab ex. - Note Payable, Pension
What is contributed capital?
The amount contributed by owners. Examples - Common stock, preferred stock, APIC
What is retained earnings?
The amount of earnings retained by the entity. Cumulative net income less dividends paid
What is the current ratio?
CA/CL. This ratio is used to measure liquidity. Most analysts use a minimum value of 2
What is the Quick or Acid-test ratio?
(Cash +- Short Term Investments +- AR)/CL. Provides a more rigorous test of liquidity, this should be at least 1
Examples of Current Assets?
Cash, Cash equivalents, Short-Term Investments, Inventories, Prepaids
What is the only account for which nominal value, market value, realizable value, present value and future value are the same?
Examples of Noncurrent Assets?
Long-term investments, PPE, Intangibles, Goodwill.
When is the only time Goodwill is recognized on the balance sheet?
Only when a firm is purchased by another
What is a contra account?
Has a balance opposite that of the associated account. Can be debit or credit balances, and can be considered valuation accounts.
What is an Adjunct account?
Has a balance that is the same as that of the associated account. An adjunct account is added, whereas a contra is subtracted
What is a valuation account?
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
What are the 3 important valuations for a firm?
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.
What is a valuation account used for?
Used to increase or decrease the book value of an item to a measure of current value