Balance Sheet Flashcards
What do balance sheets show?
Balance sheets show the financial position (listing of resources and obligations) on a specific date.
Assets = 100, Liabilities = 50. What is Stockholders’ Equity?
Assets (100) = Liabilities (50) + Stockholders’ Equity (X).
The stockholders’ equity is 50.
• Liabilities increase by 100 and Stockholders’ Equity is unchanged. What is the change in Assets?
Assets (X) = Liabilities (+100) + Stockholders’ Equity (0).
The change in assets is +100.
All noncash assets = 70, Total Liabilities = 60, Total Stockholders’ Equity = 30. What is Cash?
Cash (X) + Noncash assets (70) = Liabilities (60) + Stockholders’ Equity (30).
The Cash is 20.
Cash decreases by 10 and noncash Assets increase by 15. What is the change in Liabilities?
Cash (-10) + Noncash assets (+15) = Liabilities (X) + Stockholders’ Equity (?).
Not enough information!
Retained Earnings increase by 100, Dividends = 50. What is Net Income?
Retained Earnings = Prior Retained Earnings + Net Income – Dividends.
(Retained Earnings - Prior Retained Earnings) (100) = Net Income (X) – Dividends (50).
The Net Income is 150.
• Revenue increases by 100 and all other categories are unchanged, except Assets. What is the change in Assets?
Assets (X) = Liabilities (0) + Contributed Capital (0) + Prior Retained Earnings (0) + Revenues (+100) – Expenses (0) – Dividends (0).
The change in Assets is +100
Expenses increase by 60 and all other categories are unchanged, except Cash. What is the change in Cash?
Cash (X) + Non-cash assets (0) = Liabilities (0) + Contributed Capital (0) + Prior Retained Earnings (0) + Revenues (0) – Expenses (+60) – Dividends (0).
The change in cash is -60.
Changes over a period between two Balance Sheets are summarized in the
Income Statement, Statement of Stockholders’ Equity and Statement of Cash
Flows. True or False?
True
Assets = Liabilities + Stockholders’ equity.
True or False?
True
Stockholders’ Equity = Contributed Capital + Retained Earnings.
True or False?
True
Retained Earnings = Prior Retained Earnings + Net Income – Dividends.
True or False?
True
Net Income = Revenues – Expenses.
True or False?
True
Assets = Liabilities + Contributed Capital + Prior Retained Earnings
+ Revenues – Expenses – Dividends.
True or False?
True
What is an asset?
An asset is a resource that is expected to provide future economic benefits (i.e. generate future cash inflows or reduce future cash outflows).
What are the two criteria recognised in an asset?
– It is acquired in a past transaction or exchange;
– The value of its future benefits can be measured with a reasonable degree of
precision.
BOC sells $100,000 of merchandise to a customer that promises to pay cash within 60 days. Is it an asset?
It’s an asset called Accounts Receivable, $100,000.
BOC signs a contract to deliver $100,000 of natural gas to DEF each month for the next year. Is it an asset?
Is is not an asset because these is no past transaction or exchange.
BOC buys $100,000 of chemicals to be used as raw materials. BOC pays in cash at time of delivery and receives a 2% discount on the purchase price. Is it an asset?
It is an asset called Inventory, $98,000.
BOC pays $12 million for the annual rent on its office building. It has already occupied it for one month. Is it an asset?
It is an asset called Prepaid Rent, $11 million.
BOC buys a piece of land for $100,000. Its broker says this was a “steal” because the land is probably worth $150,000. Is it an asset?
It is an asset called Land, $100,000.
BOC is advised by a marketing firm that its brand name is worth $63 million. Is it an asset?
It is not an asset, not acquired and not reasonable degree of precision.
What is a liability?
A liability is a claim on assets by “creditors” (non-owners) that represents an obligation to make future payment of cash, goods, or services.
What are the two criteria recognised in an liability?
– The obligation is based on benefits or services received currently or in the past;
– The amount and timing of payment is reasonably certain.
BOC receives $300,000 of raw materials from its supplier and promises to pay within 60 days. Is it a liability?
It is a liability called Accounts Payable, $300,000.
Based on this quarter’s operations, BOC estimates that it owes the IRS $3 million in taxes. Is it a liability?
It is a liability called Income Tax Payable, $3 million.
BOC signs a three-year, $120 million contract to hire Dakota Dokes as its new CEO, starting next month. Is it a liability?
It is not a liability, benefits not received yet.
BOC has not yet paid employees who earned salaries of $1,000,000 during the most recent pay period. Is it a liability?
It is a liability called Salaries Payable, $1,000,000.
BOC borrows $500,000 from a bank on a one-year note with a 10% interest rate. Is it a liability?
It is a liability called Notes Payable, $500,000.
BOC is sued by a group of customers who claim their products were defective. The suit claims damages of $6 million. Is it a liability?
It is not a liability, amount is not reasonably certain.
What is a stockholder’s equity?
Stockholders’ equity is the residual claim on assets after settling claims of creditors (= assets - liabilities).
What is a net worth?
It is the same as stockholders’ equity.
What is a net assets?
It is the same as stockholders’ equity.
What is a net book value?
It is the same as stockholders’ equity.
What are the two sources of stockholders’ equity?
- Contributed capital (arises from sale of shares)
- Retained earnings (arises from operations).
What are dividends?
Dividends are distributions of retained earnings to shareholders.
Why dividends are not an expense?
Dividends are not considered an expense because it is not used to generate revenue.
Can dividends generate a liability?
Yes. Dividends are recorded as a reduction of retained earnings on the declaration date and create a liability until payment date.
