3.4 understanding the Balance Sheet Flashcards
The balance sheet
provides information on resources (assets) and sources of capital (equity and liabilities)
povides a snapshot of its financial position at a specific point in time
Assets
resources controlled by the company to generate future economic benefits for the company
Liabilities
obligations of the company from past events
Equity
owner’s residual interest in the company
A classified balance sheet
separately classifies current and non-current assets and liabilities.
Current assets
expected to be sold or used up within one year or one operating cycle, whichever is longer.
Current assets are normally consumed as a part of a company’s regular operations.
Non-current assets
include items that are expected to be used over multiple operating cycles (e.g., machinery, vehicles).
Current liabilities
expected to be settled within one year or one operating cycle.
Liabilities held primarily for trading purposes are also considered current.
Trade payables are also classified as current liabilities, even if the settlement date is more than one year off.
Non-current liabilities
include long-term debt.
Working capital
current assets less current liabilities.
Higher levels of working capital indicate that a company has a greater ability to meet its short-term obligations.
Cash and Cash Equivalents
These are highly liquid financial assets with minimal risk.
They can be valued at either amortized cost or fair value, but the difference is likely immaterial. S
ome examples of cash equivalents include U.S. Treasury bills and commercial paper.
Marketable securities
are equity and debt securities traded in public markets at observable prices.
Trade receivables
are also called accounts receivable.
Customers owe these amounts from products and services already delivered.
The level of accounts receivable is important.
The company must also make an allowance for doubtful accounts.
how is the allowance for doubtful accounts a contra asset account
because it offsets the accounts receivable balance.
Inventories
are physical products that will be eventually sold to customers
Trade payables (or accounts payable)
are owed to vendors for goods and services
Notes payable
are owed to entities like banks
Property, Plant, and Equipment (PPE)
tangible assets used in operations that last more than one period
This includes items such as land, buildings, and natural resources.
Intangible assets
are identifiable non-monetary assets without physical substance (e.g., patents, licenses, trademarks)
Under IFRS, identifiable intangible assets must be recognized on the balance sheet if:
- They are likely to generate future benefits.
- Their cost can be measured reliably.
Goodwill
When a company makes an acquisition, the purchase price is allocated first to the fair value identifiable assets and liabilities.
The excess of the purchase price over the fair value is placed on the acquirer’s balance sheet as a goodwill asset.
A company will pay more than the fair value in an acquisition for items such as reputation, research and development, and potential synergies.
Held-to-maturity assets
are held at amortized cost
They have principal and interest payments on fixed dates.
Financial assets measured at fair value
either held for trading or available-for-sale
If a financial asset is held for trading
any unrealized gains or losses are recognized on the income statement
If a financial asset is held for available-for-sale classification
unrealized gains or losses bypass the income statement and get recorded as other comprehensive income.
deferred tax asset
A company that pays income taxes before the associated income tax expense is recorded for financial reporting purposes
This can happen if certain income is reported immediately for tax purposes and deferred until a later period on the company’s financial statements
Long-term Financial Liabilities
include loans and bonds, which are both usually reported at amortized cost.
Financial liabilities held for trading and derivatives are reported at fair value.
Deferred Tax Liabilities
Deferred tax liabilities arise when actual taxable income is less than reported financial statement income.
This represents a timing difference in the tax payments.
This occurs when items are expensed earlier on tax statements than they are on other financial statements.
For example, accelerated depreciation could be used for tax statements while straight-line depreciation is used for financial statements.
Capital Contributed by Owners (Common Stock)
The issuance of common shares represents ownership.
Those shares may or may not have a par value.
The number of shares authorized, issued, and outstanding must be disclosed.
The number of shares outstanding is the number of issued shares less treasury shares.
Preferred Shares
are classified as either equity or financial liabilities.
Preferred shareholders have greater rights than common shareholders with respect to receiving dividends and liquidation claims.
Treasury Shares
These are shares repurchased by the company.
A company could repurchase shares if management thinks the shares are undervalued or to prevent dilution from stock options.
Treasury shares are non-voting and do not receive any dividends.
Retained Earnings
Retained earnings are the cumulative amount of earnings not paid to owners in the form of dividends.
Noncontrolling Interest
This is the equity interest of minority shareholders in subsidiaries that the company does not wholly own.
The statement of changes in equity
shows the increases or decreases in equity over a period
The statement of changes in equity requires which of the following info according to the IFRS
Total comprehensive income
Effects of retrospectively applied accounting changes
Capital transactions with owners
Reconciliation of carrying amounts of each component
Liquidity Ratios
Current ratio
Quick ratio/Acid test ratio
Cash ratio
Current ratio
current assets / current liabilities
Quick ratio/Acid test ratio
(cash + marketable securities + receivables) / current liabilities
Cash ratio
(cash + marketable securities) / current liabilities
Solvency Ratios
Long-term debt-to-equity ratio
debt-to-equity ratio
Total debt ratio
Financial leverage ratio
Long-term debt-to-equity ratio
Total long-term debt / total equity
debt-to-equity ratio
total debt / total equity
Total debt ratio
total debt / total assets
Financial leverage ratio
total assets / total equity
A purchase of treasury shares most likely:
A
reduces shareholders’ equity.
B
has no net impact on shareholders equity.
C
reduces the number of non-voting shares.
A
reduces shareholders’ equity.
