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ACCT 301 > Ch 5 > Flashcards

Ch 5 Flashcards

1
Q

Balance sheet is sometimes referred to as?

A

Statement of financial position, that reports assets, liabilities and stockholders equity of a business enterprise at a specific date.

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2
Q

The balance sheet provides a basis for?

A

Computing rates of return and evaluating the capital structure of the enterprise.

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3
Q

Analysts use the information on the. A lance sheet to assess?

A

Companies risk and future cash flows

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4
Q

Liquidity

A

Describes “the amount of time that is expected to elapse until an asset is realized or otherwise converted into Cash or until a liability has to be paid.

It is how quickly will my assets convert to cash?

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5
Q

Creditors are interested in short term liquidity ratios such as ratio of cash to short term liabilities bc?

A

The ratios indicate whether a company has the resources to pay its current and maturing obligations

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6
Q

Solvency

A

Refers to the ability of the company to pay its debts as they mature.

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7
Q

When a company has high level of long term debt relative to assets it has what kind of solvency?

A

Lower

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8
Q

What affects the company’s financial flexibility?

A

Liquidity and solvency

Which measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows it it can respond to unexpected needs and opportunities.

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9
Q

A company with higher degree of financial flexibility is able to

A

Survive the bad times and to recover from unexpected setbacks and to take advantage of profitable and unexpected investment opportunities

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10
Q

What are the limitations of the balance sheet?

A
  1. Most assets and liabilities are reported at historical cost. So the information provided is criticized for not reporting a more relevant fair value
  2. Companies use judgments and estimates to determine many of the items reported in the balance sheet
  3. The balance sheet omits many items that are of financial value but that a company cannot record objectively.
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11
Q

Balance sheets are what?

A

Classified.

That means that balance sheets group together similar items to arrive at significant sub totals

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12
Q

FASB has often noted what?

A

Parts and subsections of the financial statements are more informative than the whole.

FASB therefore discourages the reporting of summary accounts alone (total asserts, net assets , total liabilities etc)

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13
Q

FASB suggest that company’s should report and classify….

A

Individual items in sufficient detail to permit users to assess the amounts, timing and uncertainty of cash flows.

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14
Q

Companies should report separately

A

Assets that differ in their diff type or expected function in comp central operations . (Ex: mercy inv recorded separately from property, plant and equipment)

Assets and liabilities with different implications for the company’s financial flexibility.

Assets and liabilities with diff general liquidity characteristics.

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15
Q

Current assists

A

Are cash and other assets a company expects to convert to cash sell or consume either in one year or in the operating cycle.

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16
Q

The operating cycle is the

A

Average time between when a company acquires materials and supplies and when it receives cash for sales of the product. (For which it acquired the materials and supplies) was

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17
Q

The cycle operates from what?

A

Cash through inventory, production, receivables and back to cash

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18
Q

Cash

A

Generally consisted of currency and demand deposit is

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19
Q

Cash equivalents

A

Short term high liquid investment that will mature within three months or less.

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20
Q

When there is any restrictions or commitments related to the availability of cash, what should the company do?

A

Disclose

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21
Q

Short term investments
1
2
3

A

Held to maturity : debt securities that a company has the positive intent and ability to hold to maturity

Trading: debt securities bought and held primarily for sale in the near term to generate income on short term price differences

Available for sale: not classified as the first two.

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22
Q

Trading securities should be reported as what?

A

Current assets

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23
Q

Reporting held to maturity securities at

A

Amortized cost

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24
Q

All trading and available for sale debt securities should be reported as

A

Fair value

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25
Q

Receivables ppjiuffyfycyfycyfcfttcxgxa

A

A company should clearly identify any expected loss due to uncollectivkes, the amount and nature of any nontrade receivables and any receivables used as collateral s

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26
Q

In order to present inventories properly,

A

A company discloses the basis of valuation ( lower cost or net realizeable value or lower cost or market) and the cost flow assumption (FIFO AND LIFO)

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27
Q

Prepaid expenses are included in current assets only when

A

They will receive benefits (usually services) within one year or the operating cycle whichever is longer.

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28
Q

How are prepaid expenses recorded

A

At the amount of unexpired or unconsumed cost.

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29
Q

Non current Assets:

Long term investments

A

Referred to simply as investments which includes the four types:

1) investments in securities, such as bonds, common stock, or long term notes
2) investments in tangible fixed assets not currently used in operations such as land held for speculation
3) investments set aside in special funds such as sinking fund, pension fund, or plant expansion.
4) investments investments in non consolidated subsidiaries or affiliated companies. J

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30
Q

Companies expect to hold long term investments and they are put in a section called

A

Investments

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31
Q

Companies do not include long term investments as current assets

A

Unless it intends to covert them to cash in short term.

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32
Q

Property plant and equipment

A

Tangible long lived assets used in regular operations of the business.

Such as land buildings machinery furniture tools and wasting resources

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33
Q

Intangible assets

A

Lack a physical substance are not financial instruments.

Such as patents copyrights franchises good will trademarks trade names and customer lists.

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34
Q

How does a company write off intangible assets?

A

Over their useful lives .

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35
Q

What is included in other assets?

A

Long term prepaid expenses

Prepaid pension cost

Noncurrent receivables

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36
Q

Current liabilities

A

Are obligations that a company hexpects to liquidate either through the use of current assets or the creation of other current liabilities

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37
Q

Sometimes a liability that is phablet within the next year is not included in the current liabilities section becaus

A

A company expects to refinance the debt through another long term issue.

Or to retire the debt out of non current assets.

38
Q

Why is that approach used?

A

Because liquidation does not result from the use of current assets.or the creation of other current liabilities.

39
Q

Companies do not report current liabilities in

A

A consistent order

40
Q

Working capital

A

Is the excess of total current assets over total current liabilities

41
Q

What does working capital represents

A

The net amount of a company’s relatively liquid resources

Which is the liquidity buffer available to meet the financial demands of the operating cycle.

42
Q

How do you determine the actual liquidity and availability of working capital to meet current obligations

A

Is the analysis of the composition of current assets and their nearness to cash

43
Q

Long term liabilities

A

Are obligations that a company does not reasonably expect to liquidate with the normal accounting cycle.

44
Q

Examples of long term liabilities

A

Bonds payable

Notes payable

Deferred income tax liabilities

Lease obligations

Pension obligations

45
Q

Companies classify long term liabilities that mature within the current operating cycle as

A

Current liabilities if the payment of obligation requires the use of current assets

46
Q

Long term liabilities are 3 types

A
  1. Obligations arising from specific financing situations such as issuance of bonds
  2. Obligations arising from ordinary operations of company such as pension obligations
  3. Obligations that depend on occurrence or non occurrence of one or more future events to confirm the amount payable
47
Q

Owners equity

A

Most difficult sections to prepare and understand

48
Q

Owners equity includes

A

Capital stock: par or stated value of shares issued.

APIC: excess of amounts paid in over the par or stated value

R/E: undsitributed earnings

Accumulated other comprehensive income: aggregate amount of the other comprehensive items

Treasury stock: cost of shares repurchased

Non controlling interest: portion of the equity of subsidiaries not wholly owned by the reporting company.

49
Q

For capital stock, what must the companies disclose?

A

Par value and authorized issued and outstanding share amounts

50
Q

Retained earnings may be divided into a

A

Unappropriated (amount usually available for dividend distribution)

Redistributed (by bond indentures or other loan agreements)

51
Q

Any capital stock that is reacquired is

A

Is a reduction of stockholders equity

52
Q

Accumulated other comprehensive income includes

A

Items such as unrealized gains and losses on available for sad debt investments and unrealized gains and losses on derivative transactions

53
Q

Non controlling interest is sometimes referred as

A

Minority interest

54
Q

The common arrangement that companies used in presenting a classified balance sheet is

A

Account form.

The assets are listed by sections in the left side, and liabilities and stockholders equity on the right side

Often two pages

55
Q

The main disadvantage for the account form

A

Is the need for wide space to present items side by side

56
Q

A way to avoid the disadvantage of the account form is to use report form because

A

It lists the sections one above the other on the same page.

57
Q

Statement of cash flows

A

Cash inflows and outflows, and uses of cash during the period

58
Q

Purpose of statement of cash flows is

A

Provide relevant information about the cash receipts and cash payments of an enterprise during period.

59
Q

Cash flows reports the following to achieve the purpose of cash flows

A

1) cash effects on operations during a period
2) investing transactions
3) financing
4) the net increase or decrease in cash during the period.

60
Q

Cash flows provides answers to the following:

A

Where did the cash come from during the period

What was the cash used for during the period?

What was the change in cash balance during the period?

61
Q

Three activities in statements of cash flows

A

Operating : Involved the cash effects of transactions that enter into the determination of net income

Investing: Includes making and collecting loans and acquiring and disposing of investments (both debt and equity) and property plant and equipment

Financing: involves liability and owners equity items.

Such as obtaining resources from owners and providing them a return on investment

And

Borrowing money from creditors repaying the amounts borrowed.

62
Q

What helps users evaluate liquidity solvency and financial flexibility

A

The statement value

63
Q

Companies obtain information to prepare statement of cash flows from several source

A

Comparative balance sheets

Current income statement

Selected transaction data

64
Q

Preparing statement of cash flows involves 4 steps

A

Determine net cash provided by (or used in) operating activities

Determine the net cash provided (or used in) investing and financing activities

Determine the change (increase or decrease) in cash during the period

Reconcile the change in cash with the beginning and ending cash balances

65
Q

The net cash provided by operating activities is what

A

Excess of cash receipts over cash payments from operating activities

To determine this amount they convert income on accrual basis to cash basis

Company must analyze the current years kncome statament but also comparative balance sheets and selected transaction data.

66
Q

Examples of significant non cash activities

A

1 issuance of common stock to purchase assets

  1. Conversion of bonds into common stock
  2. Issuance of debt to purchase assets
  3. Exchange of long lived assets.
67
Q

Significant investing and financing activities that do not affect cash are not reported where?

A

Body of statement of cash flows but reported in separate schedule ag the bottom of statament of cash flows or seperate notes to financial statament s

68
Q

Net income provides

A

Long term measure of a company success or failur e

69
Q

A company will not survive without

A

Cash

70
Q

Why do creditors examine cash flow statament

A

Because they are concerned about getting paid

They begin the examination in finding net cash provided operating activities

A high amount indicates that a company is able to generate sufficient cash from operations to pay its bills without further borrowing

71
Q

A low or negative amount of net cash provided by operating activities indicates that

A

They may have to borrow or issue equity securities to acquire sufficient cash to pay its bills

72
Q

Creditors wants answers to the following

A

How successful is the company able to generate cash flows by operating activities

What are the trends in net cash provided by operating activities over time

What are the major reasons for positive or negative net cash provided by operating activities

73
Q

Companies can fail even if they report what?

A

Net income

74
Q

Current cash debt coverage

A

It indicates whether a company can pay off its current liabilities from its operations given in a year

The higher the current debt cash ecoverage is the less likely a company will have liquidity problems

75
Q

Cash debt coverage

A

Provides information on financial flexibility.
It indicates that s company ability to repay its liabilities from net cash provided by operating activities without having to liquidate assets employees in its operations

The higher the ratio the less likely the company will experience dodficulting in meeting its obligations

76
Q

Free cash flow

A

Mount of discretionary cash flow a company has

77
Q

The greater the amount of free cash flow

A

The greater the company’s financial flexibility will be

78
Q

Free cash flow wuestions

A

Is the company able to pay its dividends without resorting to external financing

If a business operations decline will the company. S able to maintain its needed capital investment.

What is the amount of discretionary cash flow that can be used for additional investments, retirement of debt, purchase of treasury stock or addition to liquidity

79
Q

4 types of info that is supplemental balcne sheet info

A

Contingencies: material events that have uncertain outcome

Accounting policies: explanation of the valuation methods used or basis assumptions made corncerning inventory valuations

Contractual situations: explanations of certain restrictions or covenants attached to specific asset or more likely to liabilities

Fair values: disclosures of fair values particularly for financial instrument s

80
Q

Contingency

A

An exsiditing situation involving uncertainty as to possible gain or loss that will be resolved when one or more future events occur or fail to occur

81
Q

Contractual situations should be disclosed if significant

A

In the notes to fisncnail statements

82
Q

Financial instruments

A

Defined as cash , ownership interest or contractual right to receiver or obligation to deliver cash or another financial instruments

83
Q

Examples of financial instruments

A

Cash
Investments
Account receivable

Payables

84
Q

To increase the consistency and comparability in the use of fair value measures

A

Companies follow a fair value hierarchy that provides insight. How to determine fair value

85
Q

Hierarchy has 3 levels

A
  1. Measure the observable inputs (least subjective)
  2. Level 2: measures are based on market inputs other than those (more subjective)
  3. Measures are based on unserbable inputs (most subjective)
86
Q

Companies must make the following fair value disclosures

A
  1. Fair value measurement
  2. Fair value hierarchy level of the measurements as a whole

3 most provided disclosure to level 3 , must identify what assumptions the company used to. Generate fair value numbers and any related income effects

87
Q

Paranthetical explanations

A

Following the item , provides clarity and completeness

88
Q

Paranthetical explanations has an advantage over a note because it brings additional info to body of statament

A

Shah

89
Q

Notes are used when

A

If they cannot conveniently show additional explanations as parenthetical explanations

90
Q

Contra asset on a balance sheet reudeces

A

Either asset liability or owners equity

91
Q

Adjunct account

A

Increases asset or liability or equity.

Such as premium on Bonds payable

ACCT 301 (12 decks)

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