1.2 Statement of Financial Position (Balance Sheet) Flashcards
What items are reported on the statement of financial position (balance sheet)?
Assets
Liabilities
Equity
Basic accounting equation
Assets = Liabilities + Equity
Basic accounting equation is based on what theory?
Fund theory
The basic equation can be derived to form the proprietary theory
_____ are resources controlled by the entity as a result of past events. They represent probable future economic benefits to the entity.
Assets
_______ are present obligations of the entity arising from past events. The settlement of liabilities is expected to result in an outflow of economic benefits.
Liabilities
_______ is the residual interest in the assets of the entity after subtracting all its liabilities
Equity
Limitations of balance sheet
- The financial position reported is at a single point in time; accounts may vary soon before or after the balance sheet date.
- Many items are reported at historical costs rather than fair value
- Balance sheet preparation requires estimates and management judgement
- Items that have financial value but cannot be recorded objectively are omitted from the statement.
When classifying assets as current and non-current for reporting purposes
A. Prepayments for items such as insurance or rent are included in an “other assets” group rather than as current assets as they will ultimately be expensed.
B. The time period by which current assets are distinguished from noncurrent assets is determined by the seasonal nature of the business.
C. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the normal operating cycle
D. The amounts at which current assets are carried and reported must reflect realizable cash values.
C. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during the normal operating cycle
For financial reporting purposes, current assets consist of cash and other assets or resources expected to be realized in cash, sold, or consumed during the longer of 1 year or the normal operating cycle of the business.
A statement of financial position provides a basis for all of the following except
A. Determining profitability and assessing past performance.
B. Evaluating capital structure.
C. Assessing liquidity and financial flexibility.
D. Computing rates of return
A. Determining profitability and assessing past performance.
The statement of financial position, also known as the balance sheet, reports an entity’s financial position at a moment in time. It is therefore not useful for assessing past performance for a period of time. A balance sheet can be used to help users assess liquidity, financial flexibility, and risk.
A statement of financial position is intended to help investors and creditors
A. Assess the amount, timing, and uncertainty of prospective net cash inflows of a firm
B. Evaluate changes in the ownership equity of a firm
C. Evaluate economic resources and obligations of a firm
D. Evaluate economic performance of a firm.
C. Evaluate economic resources and obligations of a firm
A corporation uses a calendar year for financial and tax reporting purposes and has $100 million of mortgage bonds due on January 15, Year 2. By January 10, Year 2, the corporation intends to refinance this debt with new long-term mortgage bonds and has entered into a financing agreement that clearly demonstrates its ability to consummate the refinancing. This debt is to be
A. Considered off-balance-sheet debt
B. Retired as of December 31, Year 1
C. Classified as a long-term liability on the statement of financial position at December 31, Year 1.
D. Classified as a current liability on the statement of financial position at December 31, Year 1.
C. Classified as a long-term liability on the statement of financial position at December 31, Year 1.
Noncurrent debt should be included in the current section of the statement of financial position if
A. A bond retirement fund has been set up for use in its scheduled retirement during the next year
B. It is to be converted into common stock before maturity
C. It matures within the year and will be retired through the use of current assets
D. Management plans to refinance it within the year.
C. It matures within the year and will be retired through the use of current assets
Current liabilities include those obligations that are expected to be satisfied by the (1) payment of cash, (2) use of current assets other than cash, or (3) creation of new current liabilities within 1 year from the balance sheet date (or operating cycle, if longer).
Long-term obligations that are or will become callable by the creditor because of the debtor’s violation of a provision of the debt agreement at the balance sheet date should be classified as
A. Current liabilities unless the creditor has waived the right to demand repayment for more than 1 year from the balance sheet date
B. Long-term liabilities.
C. Contingent liabilities until the violation is corrected.
D. Current liabilities unless the debtor goes bankrupt
A. Current liabilities unless the creditor has waived the right to demand repayment for more than 1 year from the balance sheet date
Long-term obligations that are or will become callable by the creditor because of the debtor’s violation of a provision of the debt agreement at the balance sheet date normally are classified as current liabilities.
However, the debt need not be reclassified if the violation will be cured within a specified grace period or if the creditor formally waives or subsequently loses the right to demand repayment for a period of more than a year from the balance sheet date (also, reclassification is not required if the debtor expects and has the ability to refinance the obligation on a long-term basis).
