CFA 26: Understanding Balance Sheets

Question 1

working capital

Current Assets and Current Liabilities

Answer 1

The excess of current assets over current liabilities.

Question 2

classified balance sheet

Current Assets and Current Liabilities

Answer 2

A balance sheet with separately classifed current and non-current assets and liabilities.

Question 3

amortised cost

Current Assets and Current Liabilities

Answer 3

The historical cost (initially recognised cost) of the asset adjusted for amortisation and impairment.

Question 4

fair value

Current Assets and Current Liabilities

Answer 4

The amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction; the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Question 5

standard cost

Current Assets and Current Liabilities

Answer 5

With respect to inventory accounting, the planned or target unit cost of inventory items or services.

Question 6

retail method

Current Assets and Current Liabilities

Answer 6

An inventory accounting method in which the sales value of an item is reduced by the gross margin to calculate the item’s cost.

Question 7

deferred tax assets

Current Assets and Current Liabilities

Answer 7

A balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit. The taxable income is higher than accounting profit and income tax payable exceeds tax expense. The company expects to recover the difference during the course of future operations when tax expense exceeds income tax payable.

Question 8

income tax payable

Current Assets and Current Liabilities

Answer 8

The income tax owed by the company on the basis of taxable income.

Question 9

current liabilities

Current Assets and Current Liabilities

Answer 9

Those liabilities that are expected to be settled in the entity’s normal operating cycle, held primarily for trading, or due to be settled within 12 months after the balance sheet date.

Question 10

current assets

Current Assets and Current Liabilities

Answer 10

Assets that are expected to be consumed or converted into cash in the near future, typically one year or less. Also called liquid assets.

Question 11

accounts payable

Current Assets and Current Liabilities

Answer 11

Accounts that a business owes to its vendors for goods and services that were purchased from them but which have not yet been paid.

Question 12

notes payable

Current Assets and Current Liabilities

Answer 12

Amounts owed by a business to creditors as a result of borrowings that are evidenced by (short-term) loan agreements.

Question 13

goodwill

Non-Current Assets

Answer 13

An intangible asset that represents the excess of the purchase price of an acquired company over the value of the net assets acquired.

Question 14

derivatives

Non-Current Assets

Answer 14

A financial instrument whose value depends on the value of some underlying asset or factor (e.g. a stock price, an interest rate, or exchange rate).

Question 15

held-to-maturity

Non-Current Assets

Answer 15

Debt (fixed-income) securities that a company intends to hold to maturity; these are presented at their original cost, updated for any amortization of discounts or premiums.

Question 16

held for trading

Non-Current Assets

Answer 16

Debt or equity financial assets bought with the intention to sell them in the near term, usually less than three months; securities that a company intends to trade.

Question 17

mark to market

Non-Current Assets

Answer 17

The revaluation of a financial asset or liability to its current market value or fair value.

Question 18

deferred tax liabilities

Non-Curent Liabilities

Answer 18

A balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit. The taxable income is less than the accounting profit and income tax payable is less than tax expense. The company expects to eliminate the liability over the course of future operations when income tax payable exceeds tax expense.

Question 19

Six Components of Owners’ Equity

Equity

Answer 19

1) Capital contributed by owners (or common stock, or issued capital). The number of authorized shares is the number of shares that may be sold by the company under its articles of incorporation. The number of issued shares refers to those shares that have been sold to investors. The number of outstanding shares consists of the issued shares less treasury shares.
2) Preferred shares
3) Treasury shares
4) Retained earnings: The cumulative amount of earnings recognized in the company’s income statements which have not been paid to the owners of the company as dividends.
5) Accumulated other comprehensive income (or other reserves)
6) Noncontrolling interest (or minority interest)

Question 20

statement of changes in equity

Equity

Answer 20

A financial statement that reconciles the beginning-of-period and end-of-period blance sheet values of shareholders’ equity; provides information about all factors affecting shareholders’ equity. Also called statement of owners’ equity.

Question 21

balance sheet ratios

Analysis of the Balance Sheet

Answer 21

Financial ratios involving balance sheet items only.

These include liquidity ratios and solvency ratios.