Balance Sheet

Question 1

Background on the balance sheet:

• Many different measurement (valuation) bases are represented - total assets of $10 million is not really $10 million of the types of same dollars. Most reported account balances do not represent _______ market value.
• The balance sheet provides information useful in assessing the entity’s financial s_______ and w_______, especially risk and the allocation of assets.
• Account balances reflect only the t_______-based U.S. GAAP recognition and measurement system. A transaction or event is required for recognition. The balance sheet does not report all assets of the firm - only the assets acquired through a t_______. For example, internally generated goodwill is not recorded (recognized).

Answer 1

• current
• strengths; weaknesses
• transaction; transaction

Question 2

Limitations of balance sheet information:

• Assets and liabilities are acquired at different times and are not affected in the same way by inflation. This causes the r______ value of the balance sheet accounts to be different from their c______ or real value and makes comparisons difficult.
• Several different m______ b_____ are used (historical cost, depreciated historical cost, fair value, net realizable value, present value) which compromises the c________ characteristic of accounting information. Because so many different measurement bases are represented in the balance sheet, the totals for assets and liabilities are difficult to interpret and compare across firms.
• Consolidation of subsidiaries can cause difficulties with interpretation of account balances if the parent and subsidiaries use different a_______ m_______.
• The value of many assets is derived primarily through use (exceptions are investments, receivables); this value may differ considerably from b_____ value and m_____ value.

Answer 2

• recorded; current
• measurement bases; comparability
• accounting methods
• book; market

Question 3

Measurement bases for balance sheet valuation:

• Definition: a measurement base is the a_______ of an account being measured and reported.
• Types of balance sheet measurement bases:
  
  • Historical cost or other historical value - Some accounts are measured and reported at a fixed, u_____ h______ amount. Examples include land, some investments, cash, prepaids, many current liabilities, contributed capital accounts, and treasury stock.
  • Depreciated, amortized, or depleted historical cost - Other accounts reflect the remaining portion of a fixed unchanging historical amount. In some cases, the original cost is maintained in one account, with a c____ or a_____ account being subtracted from or added to that account for the purpose of reporting net book value (carrying value). Examples include PP&E, intangibles, and natural resources.
  • Market (fair) value, a type of current value - Examples include marketable securities (stocks & bonds). “Fair value,” often used synonymously with “market value,” is the s_____ price for assets and amount currently required to retire a liability. These are “e_____” values rather than “_____” values.
  • Net realizable value - This is another type of current value but one that is l_____ in amount than the historical value. Net realizable value is the amount the firm expects to r_____ from the sale or collection of the item. Examples include accounts receivable and inventories.
  • Present value - The present value of a f_____ cash flow is its discounted value. This is the primary measurement basis for n____ d____ (mainly bonds and long-term notes). The present value is the measure of current sacrifice when extinguishing the debt at the balance sheet date.

Answer 3

• attribute
• types of balance sheet measurement bases:
  
  • unchanging historical
  • contra; adjunct
  • selling; exit; entry
  • less; receive
  • future; noncurrent debt

Question 4

Classification of assets and liabilities:

• Assets and liabilities are classified as c_____ or n______. US GAAP defines only current items; the noncurrent classification represents items that are not classified as current.
• CA:
  
  • an asset in the form of cash
  • an asset expected to be consumed or converted into cash within one year or operating cycle of the balance sheet date, whichever is longer.
  • The operating cycle is the period of time from purchasing inventory to the collection of receivable and then to purchasing inventory all over again.
  • For most firms the operating cycle is less than one year, but some firms, such as construction and engineering companies, have operating cycles exceeding one year. E.g., CIP (construction in process) is an inventory account found in construction firms’ balance sheets. CIP is a current asset even though the constructed asset may require several years to complete.
• CL:
  
  • A liability expected to be extinguished through the use of c______ assets or by the incurrence of other c______ liabilities.
• NCA and NCL:
  
  • Defined by default as assets and liabilities that are not current. The current/noncurrent distinction is important because firms would rather report more CA and less CL to appear more liquid and less risky in the short run. There is great incentive to move CLs into the NCL category, for example.

Answer 4

• current or noncurrent
• current; current

Question 5

The use of contra (-) & adjunct accounts (+) & valuation accounts:

• A contra account has a balance opposite that of the associated account in terms of debit and credit. Contras can be debit or credit balances, and can be considered valuation accounts or merely accumulations of items such as depreciation and amortization over time.
• An adjunct account has a balance that is the same as that of the associated account in terms of debit and credit. An adjunct can have either a debit or a credit balance. An adjunct account is added whereas a contra is subtracted.
• A valuation account is one used to increase or decrease the b_____ v______ of an item to a measure of c_____ m_____ value. Not all contra or adjunct accounts are valuation accounts, but all valuation accounts are contras or adjuncts.
  
  • Accumulated depreciation is a contra account to PP&E but is not a valuation account because net book value in this case is not equal to market value.
  • Allowance for uncollectible accounts is a contra account to AR and is a valuation account because Net AR is an approximation to net realizable value, a measure of current market value.
  • Bond premium and discount are adjunct and contra accounts respectively but are not valuation accounts because the net bond liability is generally not equal to market value.

Answer 5

• book value; current market

Question 6

Control and subsidiary accounts:

• AR control account balance is the s___ of the subsidiary AR account balances. For example, a firm has 100 subsidiary AR accounts, each one for a different customer. The sum of the 100 subsidiary AR balances equals the balance in the control AR account balance, which is reported on the balance sheet.
• A chart of accounts a_____ account numbers to accounts for use in c_______ information systems. For example, assets may be assigned numbers 100-199. AR may be assigned number 104. Each subsidiary AR account then could be numbered 104-1, 104-2 etc.

Answer 6

• sum
• assigns; computerized

Question 7

• What is the accounting cycle?

Accounting cycle is the periodic accounting p_______ leading to the preparation of f______ s_______.

• The accounting cycle steps：
  
  • step 1: analyze s_____ d_____ (e.g., invoices) and record j_____ e_____ in a journal.
  • step 2: p_____ the information from the journal to the accounts in the ledger, on a periodic basis. Only after posting, the account balances are u_____.
  • step 3: record a______ entries at the end of the period. These entries record changes in resources and obligations not signaled by a new transaction or event. Examples include accrual of wages expense from the last payday to the end of the fiscal period, expiration of prepaids, and recognition of estimated expenses such as depreciation and warranty expense. These entries also need to be p_____ to the accounts.
  • step 4: prepare a t____ b____ to test the equality of the sum of debit balances and credit balances before and after adjusting entries. A trial balance is a quick test for the presence of an e____ in recording or posting.
  • step 5: prepare the income statement, balance sheet, and statement of cash flows (often in that order). The first two are prepared directly from the ledger accounts or trial balance; the cash flow statement requires additional analysis.
  • step 6: c____ the temporary account balances (revenues, expenses, gains, losses) setting them to zero, and transfer the net income amount to r_____ e______.
• Throughout the accounting cycle, U.S. GAAP is applied primarily at the ___________, and in preparing the __________ and note disclosures. Otherwise, the cycle is largely mechanical and usually not performed manually.

Answer 7

• process; financial statements
• accounting cyle steps:
  
  • step 1: source documents; journal entries
  • step 2: post; updated
  • step 3: adjusting; posted
  • step 4: trial balance; error
  • step 5: none
  • step 6: close; retained earnings
• two journal entry steps (steps 1 & 3); financial statements

Question 8

Special journals:

• h____ volume s______ transactions are recorded in s_____ journals (for example, the sales journal). Special journals facilitate the review and control of similar transactions (all sales, all cash receipts etc.).
• very in______ transactions are recorded in the g______ journal.

Advantages of special journals:

• simplify the recording of journal entries because each recording affects the s______ accounts each time. Your check register is an example - it is a cash receipts/payments journal. Each entry you make always affects cash.
• number of postings also is reduced because only the sum of the changes in the special journal accounts for the period need to be posted to the respective accounts.
• separation of duties for improved internal control is fostered with the use of special journals. Only particular individuals may be authorized to access the sales journal for example, but not the cash receipts journal, or the general journal.

Answer 8

Special journals:

• high; similar; special
• infrequent; general

Advantages of special journals:

• same
• none