Extra - Balance sheet Flashcards
(13 cards)
What is the balance sheet and what is its purpose?
The balance sheet is a financial statement that shows a company’s financial position at a specific point in time. It lists the company’s assets, liabilities, and equity, providing insight into what the company owns and owes.
What is the fundamental accounting equation that underpins the balance sheet?
Assets = Liabilities + Equity
This equation must always balance.
What are assets?
Assets are resources owned or controlled by a business that are expected to bring future economic benefits (e.g., cash, receivables, inventory, buildings).
How are assets classified on the balance sheet?
Current assets: expected to be used or converted to cash within 12 months (e.g., cash, inventory).
Non-current assets: used over longer periods (e.g., property, equipment, long-term investments).
What are liabilities?
Liabilities are obligations the company must settle in the future — they represent claims by outsiders on the company’s assets (e.g., loans, accounts payable).
Why is the balance sheet a “snapshot” in time?
Because it shows the company’s financial position as of a specific date, unlike the income statement which covers a period.
How are liabilities classified?
Current liabilities: due within 12 months (e.g., payables, short-term loans).
Non-current liabilities: due after one year (e.g., long-term debt, pension obligations).
What is equity in the balance sheet?
Equity represents the owners’ residual interest in the assets after liabilities are deducted. It includes share capital, retained earnings, and reserves.
What is the difference between liquidity and solvency?
Liquidity refers to the ability to meet short-term obligations (e.g., current ratio).
Solvency refers to long-term financial health and ability to meet future debts.
What is working capital, and how is it calculated?
Working Capital = Current Assets – Current Liabilities
It indicates the liquidity available for day-to-day operations.
How is retained earnings shown on the balance sheet?
As part of equity. It represents accumulated profits kept in the business rather than distributed as dividends.
How does the balance sheet link with other financial statements?
The net income from the income statement flows into retained earnings.
The ending cash balance from the cash flow statement matches the cash asset on the balance sheet.
Why must a balance sheet always balance?
Because of the dual aspect principle — every transaction affects at least two accounts, ensuring the equality of assets with liabilities and equity.
