Balance Sheet Flashcards
What is the balance sheet also known as?
Statement of financial position
What does the balance sheet report?
Assets, liabilities, and stockholders’ equity
What is the accounting equation reflected in the balance sheet?
Assets = Liabilities + Stockholders’ Equity
What are the major sections of a balance sheet?
- Current assets
- Investments
- Property, plant and equipment
- Intangible assets
- Other assets
- Current liabilities
- Noncurrent liabilities
- Stockholders’ equity
What principles must U.S. companies follow when preparing financial statements?
Generally Accepted Accounting Principles (GAAP)
What method of accounting does US GAAP require for financial statements?
Accrual method of accounting
What does the accrual method of accounting report?
Liabilities when incurred and assets when earned
What is one limitation of US GAAP regarding asset reporting?
Internally developed brand names, trademarks, and patents are not included as assets
What does the balance sheet heading typically include?
- Company name
- Name of the financial statement
- Date
True or False: The balance sheet reflects a period of time.
False
What does a comparative balance sheet allow the reader to see?
Changes in amounts from an earlier date
What are current assets?
Cash and assets expected to be converted to cash within one year
Fill in the blank: Assets are recorded in the general ledger at their _______.
Cost when acquired
What is the purpose of accumulated depreciation?
To reduce the reported amount of long-term assets
What is the definition of a current asset?
Cash and assets expected to turn to cash within one year or operating cycle
What type of balance sheet format displays assets on the left and liabilities and equity on the right?
Account form
What is the total assets amount in the example balance sheet?
$770,000
What is included in the stockholders’ equity section?
- Common stock
- Retained earnings
- Accumulated other comprehensive income
- Treasury stock
What does the report form of a balance sheet emphasize?
Presentation of assets at the top followed by liabilities and equity
What is the significance of the date on a balance sheet?
It indicates a specific point in time for the reported amounts
What is the typical format for the balance sheet date?
Final day of the accounting period
What does the term ‘interim financial statements’ refer to?
Financial statements issued between end-of-year statements
What is a common example of a current asset?
Cash, Accounts Receivable, Inventory
What does the term ‘noncurrent liabilities’ refer to?
Liabilities that are not due within one year
Fill in the blank: Current liabilities are obligations expected to be settled within _______.
One year
What does the term ‘liabilities’ encompass on the balance sheet?
Obligations of the company
What are ‘intangible assets’?
Assets that do not have physical substance, like goodwill and trademarks
True or False: The balance sheet can include estimates of future economic value.
True
What is the purpose of reporting assets at cost?
To reflect the actual expenditure incurred to acquire them
What is a contra asset account?
An account that reduces the value of an asset, such as accumulated depreciation
What is the operating cycle for a distributor of goods?
The average time it takes for the distributor’s cash to return to its checking account after purchasing goods for sale
For example, if a distributor takes 4 months to sell goods and collect receivables, that is its operating cycle.
What are the typical components of current assets?
- Cash and cash equivalents
- Short-term investments
- Accounts receivable - net
- Other receivables
- Inventory
- Supplies
- Prepaid expenses
Define cash and cash equivalents.
The combined amount of cash, checking account balances, currency, checks received but not deposited, and petty cash, along with investments maturing within three months.
What are short-term investments?
Temporary investments expected to turn to cash within one year but do not qualify as cash equivalents.
What does accounts receivable – net represent?
The amount in Accounts Receivable minus the Allowance for Doubtful Accounts, also known as the net realizable value.
What is included in other receivables?
Amounts other than accounts receivable that a company has a right to receive, such as loans to employees.
What constitutes inventory on a balance sheet?
The cost of merchandise that was purchased but not yet sold to customers.
How are prepaid expenses defined?
Future expenses that have been paid in advance and have not yet expired.
What are long-term assets?
Assets not expected to turn to cash within one year of the balance sheet date, also known as noncurrent assets.
List the categories of long-term assets.
- Investments
- Property, plant and equipment – net
- Intangible assets
- Other assets
What is goodwill in accounting?
An intangible asset recorded when a company acquires another business for more than the fair value of its identifiable assets.
What are intangible assets?
Assets without physical substance, including goodwill and other purchased intangible assets.
What is the definition of liabilities?
Obligations a company owes, appearing on the balance sheet if owed as a result of a past transaction and as of the balance sheet date.
What are the two major categories of liabilities?
- Current liabilities
- Long-term liabilities
What are current liabilities?
Obligations that will come due within one year of the balance sheet date.
What is the current portion of long-term debt?
The principal amount that must be paid within 12 months of the balance sheet date.
Define accounts payable.
Amounts owed to vendors or suppliers for goods or services received on credit.
What is accrued compensation and benefits?
Liabilities reporting wages and salaries owed to employees but not yet paid.
Fill in the blank: The amount in accounts receivable minus the allowance for doubtful accounts is known as _______.
net realizable value
True or False: Goodwill is amortized to expense.
False
What does accounts payable represent?
Amounts owed to vendors or suppliers for goods or services received on credit
Supported by vendors’ invoices that have been received and recorded.
What is accrued compensation and benefits?
Wages, salaries, bonuses, employers’ payroll taxes, and benefits earned by employees but not yet paid
Reported as a current liability.
What does income taxes payable refer to?
The amount of income taxes a corporation must pay to federal and state governments within one year
Not applicable to sole proprietorships and partnerships.
What are other accrued expenses and liabilities?
Amounts incurred by a company other than those recorded in accounts payable
Examples include interest owed on loans and unprocessed repair expenses.
Fill in the blank: The current liability deferred revenues reports the amount of money a company received from a customer for _______.
[future services or future shipments of goods]
What are three examples of long-term liabilities?
- Notes payable
- Bonds payable
- Deferred income taxes
What does notes payable represent as a long-term liability?
The amount of loan principal not payable within one year of the balance sheet date.
How are bonds payable defined?
Long-term debt securities issued by a corporation requiring interest payments and principal repayment at maturity.
What is deferred income taxes related to?
The difference between depreciation expense reported on financial statements versus tax returns.
True or False: Commitments and contingencies appear on the balance sheet with a specific amount.
False
They are referenced in notes but do not show a specific amount.
What components are typically found in the stockholders’ equity section?
- Common stock
- Retained earnings
- Accumulated other comprehensive income
- Treasury stock (a subtraction)
What does retained earnings represent?
Cumulative earnings minus dividends declared from the corporation’s inception to the balance sheet date.
What is accumulated other comprehensive income?
Cumulative total of amounts reported as other comprehensive income or loss over the years.
What is treasury stock?
The amount spent by a corporation to buy back its own shares of stock.
Fill in the blank: The owner’s equity section of a sole proprietorship includes J. Ott, Capital and _______.
[J. Ott, Drawing]
What typically causes a change in owner’s equity for a sole proprietorship?
- Owner investments
- Owner withdrawals
- Company earnings
- Company expenses
How do revenues affect retained earnings?
Increase retained earnings immediately upon being earned.
How do expenses affect retained earnings?
Decrease retained earnings immediately upon being incurred.
What is the purpose of notes to the financial statements?
To provide essential disclosures and details regarding the financial statements.
What is included in the summary of significant accounting policies?
Describes estimates, revenue recognition, inventories, property and equipment, and more.
True or False: U.S. corporations with publicly traded stock must file an annual report with the SEC.
True
The report is known as Form 10-K.
What should be done to ensure a company’s balance sheet is accurate?
- Compare amounts to earlier balance sheets
- Ensure amounts agree with supporting documentation
What is the first step recommended before issuing a balance sheet?
Do a final review of the amounts being reported
What should the amount of cash and cash equivalents be supported by?
Bank reconciliations for the company’s bank accounts
Accounts receivable – net should be compared to what?
An aging of accounts receivable
Inventory should be supported by what type of schedule?
A schedule of calculations to support the cost reported as inventory
The amount of prepaid expenses should agree with what?
Workpapers showing the calculations of the amounts that had been paid in advance
Accounts payable should be supported by what?
A listing of amounts owed
What should accrued liabilities agree with?
Workpapers showing the calculation of the amounts owed but not yet recorded
Deferred revenues should be supported by what type of documentation?
A workpaper documenting the amounts received from customers in advance
What is liquidity often assessed by?
Comparing a company’s current assets to its current liabilities
Define working capital.
The amount of current assets minus the amount of current liabilities
What is the current ratio?
The amount of current assets divided by the amount of current liabilities
What does the quick ratio exclude?
Inventory and prepaid expenses from the amount of current assets
What is another name for the quick ratio?
The acid-test ratio
What does the receivables turnover ratio measure?
The amount of sales on credit for a year divided by the average balance in accounts receivable
What is the inventory turnover ratio?
The cost of goods sold for a year divided by the average cost of inventory
What is the debt to equity ratio?
Compares a corporation’s total debt to the amount of stockholders’ equity
What does a high level of financial leverage indicate?
A high level of risk as viewed by lenders
What are two financial ratios used to determine financial leverage?
- Debt to equity ratio
- Debt to total assets ratio
What is an advantage of issuing common stock?
Increases the amount of stockholders’ equity, reducing financial leverage
What is a disadvantage of issuing common stock?
Dilutes an existing stockholder’s percent of ownership
What is an advantage of issuing bonds?
Low cost since the interest is a deductible expense
What is a disadvantage of issuing bonds?
Increases the corporation’s liabilities, raising financial leverage
What principle prevents some valuable trademarks from being reported as assets?
The cost principle (or historical cost principle)
How are internally developed trademarks treated in accounting?
They are not reported as assets on the balance sheet
What type of financial statements should be read alongside the balance sheet?
- Income statement
- Statement of comprehensive income
- Statement of cash flows
- Statement of stockholders’ equity
What does the FASB’s Statement of Financial Accounting Concepts No. 5 state?
No one financial statement is likely to provide all the financial information useful for a decision
True or False: A company’s balance sheet includes the value of its highly effective management.
False
Fill in the blank: The _______ is the amount of current assets minus the amount of current liabilities.
[working capital]
