Balance Sheet Terms

Question 1

The Balance Sheet Equation

Answer 1

Assets = Liabilities + Owners’ Equity

Question 2

are probable, measurable, future economic benefits (things of value that the company owns or controls) to which the business holds the rights, which have been acquired through a current, or past, transaction. These are the resources of the firm.

Answer 2

Assets

Question 3

are probable, measurable, future economic sacrifices arising from a company’s obligations to convey assets or perform services to a person or other organization outside of the company at some time in the future. These are the creditors’ claims on the resources of the firm.

Answer 3

Liabilities

Question 4

is the residual balance remaining after total liabilities are deducted from total assets. It represents the stockholders’ claims on the resources of the business.

Answer 4

Owners’ equity

Question 5

is the most liquid asset of an enterprise; thus, it is the first item presented in the current asset section of the Balance Sheet. It includes cash on hand, undeposited checks at the date of the balance sheet, cash in banks, and checks in transit to banks.

Answer 5

Cash

Question 6

Represent short-term, highly liquid investments that are both (a) readily convertible into known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Examples include treasury bills, commercial paper, and money market funds.

Answer 6

Cash Equivalents

Question 7

Short-term investments of surplus cash in equity and debt securities.

Answer 7

Marketable Securities

Question 8

Represents claims against customers generated by credit sales of goods or services for amounts still due to the company. The account balance includes only billings for services performed or products sold on or before the balance sheet date. The amount presented is net of the company’s estimated losses from uncollectible accounts. Receivables not arising from normal operations, such as amounts due from stockholders, officers, or employees, are reported separately from trade accounts receivables.

Answer 8

Accounts Receivable

Question 9

Amounts owed to the reporting company that are evidenced by a formal note. The account balance is net of the company’s estimated uncollectible amounts. Notes receivables are claims usually not arising from sales in the ordinary course of business. Typically, notes receivable result from dispositions of operating assets, special arrangement concerning overdue accounts receivable, loans to stockholders, employees, and others.

Answer 9

Notes Receivable

Question 10

Items of tangible personal property that are held for sale in the ordinary course of business, in the process of production for sale, or which are to be consumed in the production of goods or services to be available for sale. The inventory account may include three types of inventory: a finished goods inventory, consisting of products ready for sale; a work-in-process inventory, consisting of products in various stages of production; and a raw material and supplies inventory, consisting of items that will enter directly or indirectly into the production of finished goods. Inventories are carried at cost, unless their utility is no longer as great as their cost, in which case the lower-of-cost-or-market rule requires the carrying value of the inventory to be written down below cost.

Answer 10

Inventories

Question 11

Amounts paid to vendors, such as a three-year insurance policy with two years to expiration that will benefit accounting periods beyond the current period.

Answer 11

Prepaid Expenses

Question 12

Investments in common stock or debt securities made for long-term investment purposes where the company’s objective is one of control, affiliation, or some continuing business relationship with the issuing company.

Answer 12

Investments

Question 13

Long-lived tangible assets used in the company’s operations. Land is reported at its original cost and is not depreciated owing to an indefinite life assumption. Other long-lived assets are reported at their net book value (their original cost less their related accumulated depreciation).

Answer 13

Property, Plant and Equipment

Question 14

represents the allocation to accounting periods of the costs of long-lived assets due to use and obsolescence. An annual charge for depreciation is included in the expenses of current operations. The amount of this depreciation expense is related to the anticipated useful life of the assets, which may be computed on the basis of either expected years of service or actual use (i.e., hours of operation, units of production, etc.). The accumulated amount of previously recognized depreciation expense related to the fixed assets still carried on the books of the company is presented on the balance sheet in an account called “accumulated depreciation.” Often, the company will provide only the property plant and equipment amount net of accumulated depreciation.

Answer 14

Accumulated Depreciation

Question 15

are assets without physical substance that provide economic benefits through the rights and privileges associated with their possession. Examples of intangible assets include patents, copyrights, trademarks, franchises, licenses, and leaseholds. Intangible assets may be classified as having either a finite or indefinite life. The cost of intangible assets that have a finite life, such as patent, is amortized as an expense over their useful life. The cost of intangibles with indefinite lives, such as goodwill, is not amortized. Rather, it is tested periodically for impairment and, if impaired, written down to its lower value with a corresponding charge to earnings.

Answer 15

Intangible Assets

Question 16

Liabilities incurred in obtaining goods and services from vendors in the entity’s ordinary course of business.

Answer 16

Accounts Payable

Question 17

Amounts owed to employees and others for services that have been recorded as assets or expenses but have not yet been paid in cash.

Answer 17

Accrued Expenses

Question 18

Unpaid obligations to creditors that are evidenced by a note, such as a short- term bank loan. These notes may be either interest-bearing or non-interest-bearing instruments.

Answer 18

Notes Payable

Question 19

Amounts of long-term debt that must be paid during the next 12 months.

Answer 19

Current Maturities on Long-Term Debt

Question 20

must be paid to taxing authorities during the next 12 months.

Answer 20

Taxes Payable

Question 21

Once declared, they represent legal obligations due within one year.

Answer 21

Dividends Payable

Question 22

Revenue collected in cash or billed but not yet earned, such as magazine subscriptions that will be earned in the future, typically, within the next 12 months. Sometimes referred to as unearned revenue.

Answer 22

Deferred Revenue

Question 23

Represent a contractual obligation to make periodic interest payments on the amount borrowed and to repay the principal upon maturity. Long-term debt balance reports the obligations of a company that will mature beyond one year’s time. They are recorded at the present value of all future cash payments.

Answer 23

Long-Term Debt

Question 24

Estimates of future costs, asset impairments, or liabilities that have been recorded and charged to income. For example, environmental liabilities or restructuring charges associated with a downsizing.

Answer 24

Provisions and Contingencies

Question 25

The present value amount of the future payments specified in the lease contract. A lease contract that meets any one of four capital lease tests must be recorded on the balance sheet as both an intangible asset, capital lease, and a liability, obligation under capital lease. The liability is broken down on the balance sheet into its current portion and long-term portion.

Answer 25

Obligations under Capital Lease

Question 26

The application of deferred tax accounting arises due to temporary differences, which result from the company’s usage of different accounting methods and estimates for book and tax purposes. Deferred income tax liabilities will be recorded when taxable income is lower than book income due to the rapid charge off of depreciable assets for tax purposes. For example, the usage of the accelerated method of depreciation for taxes will result in lower taxable income in the early years of a depreciable asset’s life versus book income that uses the straight-line methods of depreciation.

Answer 26

Deferred Income Taxes

Question 27

is a security that has preferences as to dividends at a stated rate and priorities as to assets at time of liquidations not found in common stock

Answer 27

Preferred Stock

Question 28

The par value or stated value of the common stock (basic ownership interest in the corporation).

Answer 28

Common Stock

Question 29

The difference between the amount received by a company from the issuance of common stock and the amount from the issuance assigned to the common stock account. This account is also referred to as Paid-in Capital in Excess of Par or Capital Surplus.

Answer 29

Additional Paid-In Capital

Question 30

The cost of acquisitions by a company of its own common stock. This account is a contra equity account thus having a negative effect on the owners’ equity balance.

Answer 30

Treasury Stock

Question 31

The cumulative net income of a company since inception less dividends paid to shareholders. This account is often referred to as “accumulated losses” when the aggregate earnings of the company are negative.

Answer 31

Retained Earnings

Question 32

Changes in owners’ equity of a company during an accounting period from transactions and other events and circumstances from non-owner sources, such as gains and losses arising from translating foreign subsidiary financial statements expressed in local currency into U.S. dollars.

Answer 32

Accumulated Other Comprehensive Income or Loss