Module 2 Balance Sheet

Question 1

What are the 3 groups of accounts on the balance sheet?

Answer 1

Assets
Liabilities
Equity

Total assets must equal total liabilities and equity

Question 2

Define Assets and types of assets

Answer 2

What the organization owns
- it’s possessions, it’s assets

Types of assets

• current
• non current

Question 3

What is a current asset?

Answer 3

Cash or items expected to be turned to cash within 1 year

Accounts receivable, inventory, and prepaid expenses)

Question 4

What is a non-current asset?

Answer 4

Production assets with a useful life over 1 year - called long term or fixed assets

Question 5

List 6 current assets

Answer 5

Cash
Market securities
Accounts receivable 
Notes receivable within 1 yr
Prepaid expenses
Inventory

Question 6

Define the current asset - Cash

Answer 6

Cash and bank balances

Question 7

Define the current asset - marketable securities

Answer 7

Investments valued at lower of (original cost or current market)

And

Have a maturity date of more than 90 days but will be used by the company when cash is needed

Question 8

Define current asset - accounts receivable

Answer 8

Monies owed to the company

Less allowance for doubtful accounts

Question 9

Define current asset - Notes Recievable

Answer 9

Unconditional promise to pay a definite sum of money on demand at a future date

To be paid within one year

Question 10

Define current asset - prepaid expenses

Answer 10

Expenses related to a period of time after the date of the balance sheet, which have already been paid

Question 11

Define current asset - inventory

Answer 11

Products including direct labor

• raw material
• work in progress
• finished goods

Indirect materials
- supplies used in the manufacturing process that do not become part of the product (shop rags…)

Question 12

What are the main “issues” with inventory?

Answer 12

Minimize inventory but have enough inventory for customers

Question 13

What are the 6 primary “cost” associated with inventory?

Answer 13

Spoilage
Obsolescence
Money is tied up
Insurance costs
Risk of theft
Warehouse costs

Question 14

What is just in time (JIT) inventory?

Answer 14

To reduce inventory cost the company waits until an order is received to produce the product

Question 15

What are the 3 methods of valuing inventory allowed by GAAP?

Answer 15

Weighted average

FIFO (first in first out)

LIFO (last in first out)

Question 16

Does the method of valuing inventory have to be the same for both sets of books? (Shareholders and Tax purposes)

Answer 16

Yes

Question 17

Define inventory valuation using weighted average

Answer 17

Average cost of goods available for sale during the period

Calculation (total cost divided by number of units)

Question 18

Define inventory valuation using FIFO

Answer 18

Items produced first are sold first

Question 19

Define inventory valuation using LIFO

Answer 19

Last items produced are sold first

Question 20

Define Goods Available for Sale (GAS)

Answer 20

Beginning inventory plus additions to inventory

Question 21

Define Ending Inventory (EI)

Answer 21

Goods available for sale (GAS) minus units sold

Question 22

Define cost of goods sold (COGS)

Answer 22

Goods available for sale (GAS) minus Ending Inventory (EI)

GAS - EI

Question 23

Which inventory valuation method is used during times of increasing cost?

Answer 23

FIFO

Most profit and consequently highest taxes

Question 24

Which inventory valuation method is used to reduce taxes in the current period?

Answer 24

LIFO

Assumes older inventory items are lower value

Question 25

What are the 2 groups of non-current assets?

Answer 25

Tangible and intangible assets

Question 26

Define Tangible non-current assets

Answer 26

Asset used in production that does not become part of the product and has a useful life greater than 1 yr. Examples - property, plant, equipment

Question 27

Define Intangible non-current assets

Answer 27

Assets with a value to the company that have no physical presence (Example - goodwill, patents, franchises)

Question 28

List 7 Tangible non-current assets

Answer 28

``` Land Buildings Furniture Machinery Leasehold Improvements Long Term Investments Over funded pension plan ```

Question 29

What is the Intangible non current asset Goodwill?

Answer 29

A company buys another company for an amount that exceeds fair market value

Question 30

How are goodwill intangible assets treated in accounting (both IRC and GAAP)

Answer 30

IRC (tax books) - 15 year straight line amortization GAAP Shareholder Books - booked as an impairment

Question 31

Intangible non-current asset - How are patents (both purchased and developed) booked?

Answer 31

Purchased - booked at the fair market value at date of acquisition and amortized over the rest of useful life Internally developed - not shown on balance sheet, not listed as an asset.

Question 32

Intangible non-current assets Franchises - what is reported on the balance sheet?

Answer 32

Fees paid upfront are an asset Amortized over the useful life of the franchise

Question 33

Define Liabilities

Answer 33

Obligation to pay an amount at a future date for current or past benefits received Liabilities are what an org owes to others (current and non-current)

Question 34

List 6 current liabilities

Answer 34

Accounts Payable - money owed to suppliers Notes Payable - obligations via promissory notes Accrued payables or obligations Severance pay Taxes Current maturities of long term obligations (car loans mortgages)

Question 35

List 7 non-current liabilities

Answer 35

Notes payable - greater than one year Mortgages payable - long term debt secured by property Bonds - money borrowed by company from public domain Deferred taxes - tax obligation to be paid at a future date (greater than a year) Financial or capital lease - finance operating equipment Severance pay (more than a year) Post employment benefits (retiree benefits)

Question 36

Define contingent liability: | Potential vs Real liability

Answer 36

Potential - lawsuit filed Real - lawsuit won

Question 37

What is shareholder equity?

Answer 37

Money provided to the company by the owners through issuance of equity securities through earnings retained by the company

Question 38

What is included in the shareholder “book value”?

Answer 38

Preferred shares Common shares Treasury shares Retained earnings

Question 39

Define preferred shares

Answer 39

Shares that have a fixed dollar dividend that must be paid after creditors but before common shareholders (in case of liquidation of company)

Question 40

Define common shares

Answer 40

Shares with voting rights and dividends

Question 41

Define treasury shares

Answer 41

Company’s purchase of its own shares shows as a reduction in shareholder equity

Question 42

Define retained earnings

Answer 42

Companies after tax earnings that have not been paid out in dividends Kept for use in the business

Question 43

What is the relationship between total assets, total liabilities, and shareholder equity?

Answer 43

Always Balance: Total Assets = total liabilities + shareholder equity Company with more liabilities than assets would have negative equity to balance the balance sheet.

Question 44

Can you nail the exercise on page 51

Answer 44

Yes - No

Question 45

What is the purpose of Liquidity measures? What are the measures?

Answer 45

Asses company’s ability to need current obligations relate to the balance sheet Measurements: - working capital - Current Ratio - Quick Ratio

Question 46

Define working capital

Answer 46

Current Assets minus Current Liabilities From the balance sheet

Question 47

Define Liquidity Current Ratio

Answer 47

Ratio of current assets to current liabilities

Question 48

Define Liquidity Quick Ratio

Answer 48

Ratio of short term liquid assets to current liabilities

Question 49

What are short term assets

Answer 49

Assets minus inventory and prepaid taxes

Question 50

How to determine debt to equity ratio

Answer 50

Divide total liabilities by total shareholder equity Liabilities/equity

Question 51

What is the long term debt ratio used for?

Answer 51

Used by banks to assess credit worthiness. Lower ratio = more equity less debt and is desireable

Question 52

How to calculate “long term” debt ratio?

Answer 52

Long term debt is Non-current liabilities Long term debt / Long term debt + shareholder equity

Question 53

What is an example of a non current asset? A cash B machinery C inventory D marketable securities

Answer 53

B machinery

Question 54

In times of rising cost which would produce the most profit? A weighted average B FIFO C LIFO D Just In Time

Answer 54

B FIFO

Question 55

Which asset is neither depreciated or amortized? A land B buildings C office equipment D patents

Answer 55

A Land

Question 56

Within what time period are taxes payable if they are listed as current liabilities? A one month B six months C one year D two years

Answer 56

C one year

Question 57

Which of the following describes a companies purchase of its own shares? A common shares B treasury shares C retained shares D preferred shares

Answer 57

B treasury shares

Question 58

Total Liabilities plus Shareholders Equity is equal to which of the following? A total income B total costs C profit or loss D total assets

Answer 58

D total assets (balance sheet) Assets = Liabilities Equity

Question 59

What is the formula for calculating working capital?

Answer 59

Current assets - current liabilities