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Balance sheet Flashcards

1
Q

What are assets?

A

They are resources under a company’s control as a result of past transactions that are expected to generate future economic benefits for the company.

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2
Q

What are liabilities?

A

They are company obligations from previous transactions expected to result in outflows of economic benefits in the future.

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3
Q

Which conditions must Assets and liabilities respect to be on the financial statements?

A

It must be probable that the future economic benefits associated with them will flow to or from the firm and that the item’s cost or value can be measured with reliability.

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4
Q

What is equity?

A

It represents the residual claim of shareholders on a company’s assets after deducting all liabilities.

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5
Q

What does the value of items reported on the BS reflect?

A

It reflects their value at the end of the reporting period.

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6
Q

What is the report format for the balance sheet?

A

Assets, liabilities, and equity are presented in a single column. This format is the most commonly used balance sheet presentation format.

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7
Q

What is the account format for the balance sheet?

A

Assets are presented on the left-hand side of the balance sheet, with liabilities and equity on the right-hand side.

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8
Q

What is the classified balance sheet?

A

Different types of assets and liabilities are grouped into subcategories to give a more effective overview of the company’s financial position. Classifications typically group assets and liabilities into their current and noncurrent portions.

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9
Q

What is the liquidity-based presentation?

A

All assets and liabilities are broadly presented in order of liquidity. This format is mostly used by banks.

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10
Q

Under IFRS, when doe the current/non-current classifications not required?

A

It is if a liquidity-based presentation provides more relevant and reliable information.

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11
Q

What are current assets?

A

They are liquid assets that are likely to be converted into cash or realized within one year or one operating cycle, whichever is longer.

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12
Q

What are noncurrent assets?

A

They are less liquid assets and are not expected to be converted into cash within one year or within one operating cycle. They are also called long-term or long-life assets.

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13
Q

What are current liabilities?

A

They are obligations that are likely to be settled within one year or within one operating cycle.

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14
Q

What are noncurrent liabilities?

A

They are not expected to be settled within a year or within one operating cycle. They are a source of long-term finance for a company.

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15
Q

What is working capital?

A

It is the difference between current assets and current liabilities. It is necessary for the smooth functioning of a firm’s daily operations.

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16
Q

What are the main types of current assets?

A
  • Cash and cash equivalents
  • Marketable securities
  • Inventories
  • Trade receivable
  • Other current assets
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17
Q

What are cash and cash equivalents?

A

They are highly liquid securities that usually mature in less than 90 days. Since they are financial assets, they may be measured at amortized cost or fair value.

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18
Q

What are marketable securities?

A

They include investments in debt and equity securities that are traded on public markets.

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19
Q

What are trade receivables?

A

They are amounts owed to the company by customers to whom sales have been made. They are reported at net realizable value.

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20
Q

What is the net realizable value?

A

It is an estimate of fair value based on the company’s expectations regarding collectability.

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21
Q

Interpret a significant increase in accounts receivable relative to sales.

A

It may imply that the company is having problems collecting cash from customers.

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22
Q

What is the advantage of having a more diversified customer base?

A

It causes a lower credit risk of accounts receivable not being retrieved.

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23
Q

What are inventories?

A

They are the physical stock held by the company in the form of finished goods, work-in-progress, or raw materials.

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24
Q

How are inventories measured under IFRS?

A

They are measured at the lower of cost and net realizable value (NRV):
- The cost of inventories comprises all costs of purchase, cost of conversion, and other costs incurred in bringing the inventories to their present location and condition.
- NRV is the estimated selling price less the estimated cost of competition and costs necessary to complete the sale.

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25
How is inventory calculated under US GAAP?
They are measured at the lower cost and NRV unless they are using LIFO or retail inventory methods: - When using LIFO or the retail inventory method, inventories are measured at the lower of cost or market value.
26
How does US GAAP define the market value of an inventory?
It is the current replacement cost but with upper and lower limits. The recorded value cannot exceed NRV and cannot be lower than NRV, less a normal profit margin.
27
What are other current assets?
They are current assets that are not material enough to be recognized in a separate line. Ex: prepaid expenses, Deferred tax assets (DTA).
28
What are prepaid expenses?
They are normal operating expenses, but they have been paid in advance, so they are recognized as assets on the BS.
29
What are deferred tax assets (DTA)?
It happens when a company's taxes payable exceed its income tax expense. They are a bit like a prepayment of taxes and therefore count as assets.
30
What are trade payables?
They are amounts owed by the business to its suppliers for purchases on credit.
31
What are notes payables?
They are borrowings from creditors that are documented by a loan agreement. They can also be included in noncurrent liabilities depending on the agreement.
32
What is the current portion of long-term liabilities?
It is the portion of long-term debt obligations that are expected to be paid within a year of the balance sheet date or within one operating cycle, whichever is greater.
33
What are taxes payable?
They are taxes that have not actually been paid yet.
34
What are accrued liabilities?
They are expenses that have been recognized on the IS but have still not been paid for as of the BS date.
35
What is unearned revenue?
It is deferred revenue or deferred income. It happens when a company receives cash in advance for goods and services that are still to be delivered.
36
What are the most common current liabilities?
- Trade payables - Notes payables - Current portion of long-term liabilities - Income taxes payable - Accrued liabilities - Unearned revenue
37
What is PP&E?
They are property, plant, and equipment. They have physical substance
38
How is PP&E valued under IFRS and US GAAP?
- IFRS: using the cost model or the revaluation model - US GAAP: only the cost model
39
What is investment property under IFRS?
It is a property that is owned for retail income and/or capital appreciation. It can be valued using the cost model or the fair value model.
40
What are intangible assets?
They are identifiable, nonmonetary assets that lack physical substance.
41
How are intangible assets reported under IFRS and US GAAP?
- IFRS: with the cost model or the revaluation model. - US GAAP: Allows only the cost model.
42
How are amortized intangible assets with finite useful lives?
They are amortized systematically over their lives and may also be impaired depending on circumstances.
43
Are intangible assets with indefinite useful lives amortized?
No, but they are tested for impairment at least annually.
44
How can acquired intangible assets be reported as separate intangibles?
- If they arise from contractual rights. - If they can be separated and sold.
45
What is Goodwill?
It is the excess of the amount paid to acquire a business over the fair value of its net assets.
46
What is accounting goodwill?
It is based on accounting standards and is only reported for acquisitions when the purchase price exceeds the fair value of the acquired company's net assets.
47
What is economic goodwill?
It is based on a company's performance and its future prospects. It is more pertinent for analysis since it contributes to the company's value.
48
What is the treatment for goodwill under US GAAP and IFRS?
- Accounting goodwill resulting from acquisitions is capitalized. - Goodwill is not amortized. - Impairment of goodwill is a noncash expense and therefore does not affect CF.
49
What is a financial instrument under IFRS?
It is a contract that gives rise to a financial asset for one entity and a financial liability or equity instrument for another entity.
50
What is a derivative?
It is a complex financial instrument that derives its value from some underlying factor and requires little or no initial investment.
51
How are financial instruments recognized, and how are they measured?
They are recognized when the entity enters the relevant contract. It is measured at fair value or amortized cost.
52
What is fair value?
It is the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction.
53
What is amortized cost of a financial asset (or liability)?
It is the amount at which it was initially recognized, minus any principal repayments, plus or minus any amortization of discount or premium, and minus any reduction for impairment.
54
How are financial instruments recognized under US GAAP?
They are referred to as held-to-maturity. - Unrealized gains or losses from changes in market value are ignored and not recognized on the financial statement. - Only interest income and realized gains and losses are recognized on the income statement.
55
What are the 2 alternatives in how net changes in fair value are recognized for financial instruments?
- It can be recognized as profit or loss on the income statement. - It can be recognized as other comprehensive income which bypasses the income statement.
56
How are investments in equity securities and trading securities measured under US GAAP?
- Investment in equity securities: are measured at fair value with unrealized holding gains or losses recognized in the income statement. - Trading securities: measured at fair value with unrealized holding gains or losses recognized in the income statement.
57
What items are measured at cost or amortized cost?
- Debt securities that are to be held to maturity. - Loans and notes receivable. - Unquoted equity instruments.
58
What items are measured at fair value through OCI?
- "available-for-sale" debt securities (for US GAAP). Debt securities where the business model involves both collecting interest and principal and selling the security (IFRS). - Equity investments for which the company irrevocably elects this measurement at acquisition (IFRS only).
59
What items are measured at fair value through profit and loss?
Under US GAAP: - All equity securities unless the investment gives the investor significant influence. - "trading" debt securities Under IFRS: - Securities not assigned to either of the other 2 categories or investments for which the company irrevocably elects this measurement at acquisition.
60
What are non-current liabilities?
They include long-term financial liabilities and deferred tax liabilities.
61
Which financial liabilities are measured at fair value?
- Derivatives - Financial liabilities held for trading - Nonderivative instruments with face value exposures hedged by derivatives
62
Which financial liabilities are measured at cost or amortized cost
All other liabilities (bonds payable and notes payable).
63
What is deferred tax liabilities?
They arise when a company's income tax expense exceeds taxes payable.
64
What is equity?
It is the owners' residual claim on the assets of an entity after deducting all liabilities.
65
What at capital contributed by owners?
It is when capital is obtained by getting invested in common shares. The company needs to disclose the number of authorized, issued, and outstanding shares for each class of stock issued by the company.
66
What are authorized shares?
It is the maximum number of shares that can be sold under the company's article of incorporation.
67
What are issued shares?
It is the total number of shares that have been sold to shareholders.
68
What are outstanding shares?
It is the number of shares that were issued less the number of shares repurchased (treasury stock).
69
What are preferred shares?
They receive dividends and have priority over ordinary shareholders in the event of liquidation.
70
What are treasury shares?
They are the shares that have been bought back by the company. This results in a reduction in owner's equity and in the number of shares outstanding.
71
What are retained earnings?
It is the cumulative earnings of the firm over the years that have not been distributed to shareholders as dividends.
72
What is accumulated other comprehensive income?
It represents cumulative other comprehensive income.
73
What are minority interests?
It is the minority shareholders' pro rata share of the net assets of a subsidiary that is not wholly owned by the company.
74
What elements are required on the statement of changes in owners' equity under IFRS?
- Total comprehensive income for the period. - The effects of any accounting changes that have been retrospectively applied to previous periods. - Capital transactions with owners and distribution to owners. - Reconciliation of the carrying amounts of each component of equity at the beginning and end of the year.
75
What elements are required on the statement of changes in owners' equity under US GAAP?
Companies are required to provide an analysis of changes in each component of stockholders' equity that is shown in the BS.
76
What is a vertical common-size balance sheet?
It expresses each balance sheet item as a percentage of total assets. It allows to perform historical analysis (time-series analysis) and cross-sectional analysis across firms within the same industry.
77
What a higher liquidity ratio shows on the company?
The higher the liquidity ratio, the greater the likelihood that the company will be able to meet its short-term obligations.
78
What are the examples of liquidity ratios?
- Current ratio - Quick ratio - Cash ratio
79
What a higher solvency ratio shows on the company?
Higher solvency ratios are undesirable and indicate that the company is highly leveraged and risky.
80
What are examples of solvency ratios?
- Long-term debt-to-equity ratio - Debt-to-equity ratio - Total debt ratio - Financial leverage ratio

FRA (18 decks)

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