Chapter 5: Balance Sheet and Statement of Cash Flows Flashcards
What are the advantages of the balance sheet?
- Helps judge market value
- Helps predict future cash flows
- Helps determine lliquidity, solvency, and financial flexibility due to classfications
What are the limitations of the balance sheet?
- Does not state market value
- Does not state liquidation value
- Items report at historical cost
- Many off-balance sheet resources
- Relies on estimates
What are the elements of the balance sheet?
- Assets - future benefit from past event, controlled by entity
- Liability - future sacrifice from past event, obligation to transfer asset or provide service
- Equity - residual claim to asset after liabilities are deducted
What are current assets?
What are the items?
Converted to cash within a year or the operating cycle, whichever is longer.
- Cash and cash equivalents
- Short-term investments
- Accounts receivable (trade receivables)
- Inventories
- Prepaid expenses
What are current liabilities?
What are the exceptions?
Paid within a year or the operating cycle, whichever is longer.
The only exception is if management intends to and has the ability to refinance.
What is the operating cycle?
- Use cash to acquire raw materials
- Convert raw materials to finished product
- Deliver product to customer
- Collect cash from customer
To be classified as a cash equivalent, what is the maturity of an investment?
Maturity of 3 months or less.
What is a short-term investment?
Ability and intent to sell investment in the next 12 months or the operation cycle whichever is longer.
What are non-current assets?
- Long term investments
- Property, plant, and equipment
- Intangibles
- Other Assets
What are long term investments?
- Investment in securities
- Investment in fixed assets not used in operations
- Investment in special funds
- Investment in nonconsolidated subsidiaries/affiliated companies
What is property, plant, and equipment?
How are they presented in the financial statements?
Tangible, long-lived assets used in the operations of the business.
They are presented:
- Detailed notes
- Historical cost less depreciation (depletion)
- Land is separate and has no depreciation
What are intangibles?
How are they presented on the balance sheet?
The ownership of an exclusive right to product, process, or name.
They are presented:
- Net of accumulated amortization
- Sometimes included with PPE or other non-current assets
- Some of the value is expensed
What are current liabilities?
- Accounts payable
- Notes payable
- Unearned revenues
- Accrued liabilities
- Current maturity of long term debt
What are the long-term liabilities?
What are the requirements?
Long term notes, bonds, pension and leas obligations.
- Do not require use of current assets or creation of current liabilities
- Detailed disclosure needed in notes
What are the stockholders’ equity items?
- Capital stock - par or stated value of the share issued
- Additional paid-in capital - excess of amounts paid in over the par or stated value
- Retained earnings - corporation’s undistributed earnings
- Accumulated other comprehensive income - aggregate amount of the other comprehensive income items
- Treasury stock - cost of shares repurchased
- Nonconrolling interest
