Balance Sheet Flashcards
How does balance sheet help users?
Provides information useful in assessing entity’s financial strengths and weaknesses, especially risk (e.g. relative proportion of debt to equity) and allocation of assets.
Helps users assess liquidity.
How do you analyze the effect of certain transactions on ratios?
Analyze the effect by determining whether the numerator or denominator has experienced the greater percentage change.
What are the three important valuations for a firm?
Total OE or net assets: This is the amount determined by current US GAAP and is found on the balance sheet.
Market value of net identifiable assets: The amount of cash that would remain after selling all identifiable assets (including identifiable intangibles) and paying off all liabilities.
Market capitalization: Total value of the firm’s outstanding stock.
The difference between total OE and the market value of net identifiable assets is caused by identifiable assets and liabilities with market values different from their book values.
The difference between a firm’s market capitalization and the market cost of net identifiable assets is goodwill, an amount that cannot be identified with any recorded asset. Goodwill is recorded for accounting purposes only when one firm purchases all or a controlling interest of another firm.
Difference between contra account, adjunct account, and valuation account
Contra account: Has a balance opposite that of the associated account in terms of debit and credit. Can be debit or credit balance. Contra accounts are subtracted.
Adjunct account: Has a balance that is the same as that of the associated account in terms of debit and credit. Can be debit or credit balance. Adjunct accounts are added.
Valuation account: Used to increase or decrease book value of an item to a measure of current value.
