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ACG 4101 > 3 | Balance Sheet & Financial Disclosures > Flashcards

3 | Balance Sheet & Financial Disclosures Flashcards

0
Q

The Balance Sheet is also known as the …

A

… Statement of Financial Position.

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1
Q

Usefulness & Limitations

The purpose of the Balance Sheet is to report…

A

…the company’s financial position on a certain date.

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2
Q

Usefulness & Limitations

An important limitation of the Balance Sheet is that it does not portray…

A

… the market value of the entity as a going concern, nor it’s liquidation value.

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3
Q

Usefulness & Limitations

The Balance Sheet provides information useful for …

A

… assessing future cash flows, liquidity, and long-term solvency.

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4
Q

Liquidity refers to…

A

… the period of time before an asset is converted to cash or until a liability is paid.

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5
Q

Usefulness & Limitations

Long-term solvency refers to the riskiness of a company with regards to…

A

… the amount of liabilities in its capital structure.

Risk increases as the percentage of liabilities, relative to equity, increases.

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6
Q

Classifications

Assets are …

A

… probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

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7
Q

Classifications

Liabilities are…

A

… probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

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8
Q

Classifications

Equity is the…

A

… residual interest in assets of an entity that remains after deducting liabilities.

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9
Q

Classifications

Current Assets are assets that…

A

… will provide cash or be used within one year or one operating cycle, whichever is longest.

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10
Q

Classifications

An Operating Cycle is the period …

A

… that it takes from start to finish to create/obtain merchandise/service and get cash.

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12
Q

Classifications | Cash Equipvalents

Cash Equivalents are …

A

… instruments that can be negotiated into cash in 3 months or less.

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13
Q

Classifications | Accounts Receivable

Accounts Receivables are usually due within …

A

… 30 - 60 days and are classified as a Current Asset.

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14
Q

Classifications | Accounts Receivable

Receivables not expected to be collected within one year or the operating cycle (which ever is longest) are classified as …

A

… Non-current asset, investments.

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15
Q

Classifications | Investments

Investments are assets…

A

… not directly used in operations.

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16
Q

Classifications | Property, Plant, & Equipment

Property, Plant, & Equipment are…

A

… tangible, long-lived assets used in the operations of the business.

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17
Q

Classifications | Property, Plant, & Equipment

Includes (name 8)…

A

…land, buildings, equipment, machinery, furniture, mineral mines, timber tracts, and oil wells.

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18
Q

Classifications | Property, Plant, & Equipment

PP&E is usually reported as a …

A

… single amount in the Balance Sheet with the details listed on the notes.

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19
Q

Classifications | Property, Plant, & Equipment

Values are listed at…

A

… original cost less depreciation/depletion on the Balance Sheet.

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20
Q

Classifications | Property, Plant, & Equipment

Land is sometimes listed separately on the Balance Sheet because it…

A

…has an unlimited useful life and thus is not depreciated.

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21
Q

Classifications | Intangible Assets

Generally represent…

A

…exclusive rights (toa process, product, or name) that a company can use to generate future revenues.

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22
Q

Classifications | Intangible Assets

Examples include (name 3)…

A

…patents, copyrights, and franchises.

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23
Q

Classifications | Intangible Assets

Are reported in the Balance Sheet…

A

…net of accumulated amortization.

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24
Q

Classifications | Intangible Assets

Companies list it on the Balance Sheet as part of …

A

PP&E, Intangible Assets, or simply Other Noncurrent Assets.

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25
Q

Classifications | Other Assets

The catch-all classification of noncurrent assets. This includes…

A

…long-term prepaid expenses.

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26
Q

Classifications | Current Liabilities

Examples include (name 5)…

A

…Accounts payable, Notes Payable, Unearned Revenues, Accrued Liabilities, and the current maturities of long-term debt.

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27
Q

Classifications | Current Liabilities

An short-term liability is classified as a long-term liability when…

A

…management intends to refinance on a long-term basis.

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28
Q

Classifications | Current Liabilities

Unearned revenues are also known as…

A

…deferred revenues.

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29
Q

Classifications | Current Liabilities

Accured liabities represent obligations…

A

…created when expenses have been uncurred but will not be paid untill a subsequent reporting period.

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30
Q

Classifications | Current Liabilities

Name 3 examples of accrued liabilites.

A

1) Salaries Payable
2) Interest Payable
3) Taxes Payable

31
Q

Classifications | Current Liabilities

Long-term liabilities or its installments payable within one year (or operating cycle if that’s longer) are reclassified as…

A

current liabilities.

32
Q

Classifications | Long-Term Liabilites

Name 4 long-term liabilities.

A

1) Long-Term Notes
2) Bonds
3) Pension Obligations
4) Lease Obligations

33
Q

Classifications | Shareholders’ Equity

What is Equity?

A

The stocholder’s claim in the asset of business.

34
Q

Classifications | Shareholders’ Equity

Equity =

A

+ paid-in-capital

+ retained earnings (Rev. - Exp. - Dividends) + Accum. Other Comprehensive Income/Loss.

35
Q

Classfications | Shareholders’ Equity

Equity is also known as…

A

Net Assets, Shareholder’s Equity, or Stockholder’s Equity.

36
Q

Classifications | Shareholders’ Equity

What is Paid-In-Capital?

A

Amounts invested by shareholders in the corporation.

37
Q

Classifications | Shareholders’ Equity

What are Retained Earnings?

A

Amounts earned by the corporation.

38
Q

Financial Disclosure Notes

The ‘Summary of Significant Accounting Policies’ conveys…

A

… valuable information about the company’s choices from among various alternative accounting methods.

39
Q

Financial Disclosure Notes

The ‘Subsequent Event’ describes…

A

…significant developments that occured after a company’s fiscal year-end but before the financial stateemnts are issued or available to be issued.

40
Q

Financial Disclosures

Name 5 examples of events recorded in “Subsequent Events”

A

1) Issuance of debt/equity securities
2) business combination
3) Sale of a business
4) Sale of an asset
5) An event that sheds light on the outcome of a loss contingency.

41
Q

Financial Disclosures

‘Noteworthy Events & Transactions’ report transactions and events that occur…

A

…occasionally and are potentially important to evaluating a company’s financial statements.

42
Q

Financial Disclosures

Give 4 examples of ‘Noteworthy Events & Transactions’

A

1) Related-party transactions
2) Errors
3) Irregularities
4) Illegal acts

43
Q

Financial Disclosures

The economic substance of related-party transactions should be disclosed, including…

A

…dollar amounts involved.

44
Q

Financial Disclosures

The distinction between errors and irregularitis is that …

A

…errors are unintentional while irregularities are intentional distortions of financial statements.

45
Q

Financial Disclosures

MD&A stands for…

A

…Management Discussion & Analysis

46
Q

Financial Disclosures

The Management Discussion & Analysis report is…

A

…management’s discussion & analysis on significant events, trends, & uncertainties pertaining to operations, liquidity, & capital resources. It is required.

47
Q

Financial Disclosures

The Manaagement’s Responsibilities asserts the responsibility of management…

A

…for the information contained in the annual report as well as an assessment of internal control procedures.

48
Q

Financial Disclosures

Sarbanes-Oxley Act of 2002 requires corporate executives to personally…

A

…certify the financial statements.

49
Q

Financial Disclosures

Sarbanes-Oxley Act of 2002 provides that submission of false statements carries a penalty of up to…

A

20 years in jail.

50
Q

Financial Disclosures

The ‘Auditor’s Report’ provides the analyst with an…

A

independent and professional opinion about the fairness of the representations in the financial statements and about the effectiveness of internal controls.

51
Q

Financial Disclosures

Give 3 reasons an ‘Explanatory Paragraph’ can be added to the ‘Auditor’s Report’.

A

1) Lack of consistency due to a change in accounting principle.
2) Uncertainty as to the resolution/estimate of a contingency
3) Emphasis of a significant event such as a related-party transaction

52
Q

Financial Disclosures

Give 3 reasons why audits may not receive an unqualified opinin

A

1) nonconformity with GAAP
2) Inadequate disclosures
3) Limitation/restriction of the scope of the examination

53
Q

Financial Disclosures

An ‘Unqualified’ Audit opinion means that the…

A

…company conforms to GAAP and the Statements “present fairly” the financial position of the company. It is a “Clean” result.

54
Q

Financial Disclosures

A ‘Qualified’ Audit opinion means that the…

A

…company contains exceptions but not of sufficient sseriousness to invalidate the Statements.

55
Q

Financial Disclosures

A ‘Adverse’ Audit opinion means that the…

A

…company’s nonconformity to GAAP and inadequate disclsures are so serious that a qualified opinion is unjustified.

56
Q

Financial Disclosures

A ‘Disclaimer’ Audit opinion means that the

A

…auditor disclaims an opinion since limitation/restrictions of the scope of the examination was such that insufficient information was gathered to express an opinion.

57
Q

Financial Disclosures

Auditors are required to evalute the company’s ability to…

A

… continue for a reasonable time as a going concern.

58
Q

Disclosures

 The Proxy Statement
A

1) must be sent annually to shareholders
2) Invites holders to meeting to elect board & vote on issues
3) contains disclosures on compensation to Directors & Executives.

59
Q

Using Financial Statement Information

 What are Comparative Financial 
 Statements?
A

Statements issued with the corresponding previous 1 - 2 year(s)’ Statements to allow users to compare the year-to-year financial position, results of operations, & cash flows.

60
Q

Using Financial Statement Information

 What is a Horizontal Analysis?
A

Each item of the Financial Statement is expressed as a percentage of the same item from a previous year in order to more easily see year-to-year changes.

61
Q

Using Financial Statement Information

 What is a Vertical Analysis?
A

Each item of the Financial Statements is expressed as a percentage of the appropriate corresponding total (i.e. Net Income)

62
Q

Liquidity Ratio:

 Current Ratio
A

Current Assets
______________

Current Liabilities

63
Q

Liquidity Ratio:

 Acid-test / Quick Ratio
A

Quick Assets
(Current Assets - Prepaid Exp - Inventory)
__________________________________

                Current Liabilities
64
Q

Liquidity Raio:

Working Capital

A

Current Assets - Current Liabilities

A popular measure of a company’s ability to satisfy its short-term obligations.

65
Q

Liquidity Ratio:

How does adding Inventory on Account affect the Current Ratio when it is above/below 1?

A

If it’s above 1 - adding inventory decreases it

If it’s below 1 - adding inventory increases it

66
Q

Financing Ratio:

The ‘Debt to Equity Ratio’ indicates…

A

…the extent of reliance on creditors, rather than owners, in providing resources.

67
Q

Financing Ratio:

Debt To Equity =

A

Total liabilities
_________________

Shareholders’ equity

  • The higher this ratio - the higher this risk
68
Q

Financing Ratio:

Times interest earned ratio

A

Net Income + Interest expense + Income Taxe
_____________________________________

               Interest Expense
69
Q

Reporting Segments

Companies engaged in more than one significant business must provide…

A

…supllemental information concerning individual operating segments (not complete financial statements)

70
Q

Reporting Segments

Give 5 Criterias in assessing if a segment needs to be reported.

A

1) Activities generates revenues & expenses (including transactions with other components of the same enterprise.
2) Results are regularly reviewed by enterprise chief operating decision maker for decisions about resources & performance.
3) Discrete financial information is available
4) Size must be 10% or more than total revenues, assets, or net income.
5) 75% of consolidated revenue must be covered in segment disclosures

71
Q

Reporting Segments

Give 4 pieces of information that must be reported.

A

1) General info about the segment
2) Info about profit/loss that includes related revenues/expenses, segment assets, & basis of measuremnt.
3) Reconciliations of segment totals to corresponding enterprise amounts.
4) Interim period informaiton.

72
Q

Reporting Segments

US GAAP requires an enterprise to report certain geographic informaiton unless…

A

… it is impracticable to do so.

73
Q

Reporting Segments

Geographic Area reports should segment Revenue and Long-lived Asset information segmented by

A

…the country of domicile & foreign contries.

74
Q

Reporting Segments

If 10% or more of revenue is from a single customer, you must disclose…

A

the total amount of revenue from each such customer and the segment earning the revenue.

ACG 4101 (11 decks)

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