Ch. 4 The Balance Sheet and Statement of Cash Flows

Question 1

Balance Sheet

• Resources and the claims against those resources.
• Assets and how they were finances
• The right side lists the sources of financing used to acquire the assets listed on the left side.

A = L + E

E = A - L

Question 2

Assets

Current Assets

• Cash and other assets expected to be converted to cash within one accounting period
• Investments reported at initial cost

Net working Capital

• Total current assets - Total current liabilities

Long Term Securities

• Investment in financial assets
• Reported at fair market value

Fixed Assets:

• Listed at historical cost

Question 3

Contra-Asset account:

• Negative asset: Ex: Accumulated depreciation
• The greater the value of this account, the smaller an organization’s net property and equipment account.
• Reduce the value of “parent” account i.e. gross fixed assets

Question 4

Liabilities

Liabilites & Equity: Capital (money) that has been raised to acquire assets

Current Liabilities

Accounts payable and Accrued expenses: Payment obligations that have been incurred as of the balance sheet date but that have not been paid.

• Include trade credit
• Salaries expense
• Interest due
• utilities expense
• taxes

When the obligation to pay extends into the next accounting period, an accrual is created

Question 5

Long-Term debt

• The portion of long-term debt that must be paid in the coming year (accounting period) is recorded on the balance sheet as current portion of long-term debt.

Question 6

Net Assets (Equity): Ownership claim on an organizations assets

Net: Value of assets once the libilites (fixed claims) are stripped out.

Also: Total Assets - Total Liabilities = OE

Recognize the connection between the bottom line of the income statement and the equity section of the balance sheet.

Retained Earnings, like all equity accounts, represent a claim against assets, and they are not available to buy new equipment, pay dividends, or for any other purpose.

Only the portion that is sitting in cash account is available for use

Question 7

Fund Accounting: A system for recording financial statement data that categorized accounts as restricted or unrestricted.

fund: A self-contained pool set up to account for a specific activity or project.

3 Sub-accouns under Net assets:

Unrestricted

Temporarily restricted

Permanently restricted

Question 8

Statement of Cash flows:

Where a business gets its cash and what happens to it

3 Major sections:

1. Cash flows from Operating Activities
   * Sources and uses of cash tied directly to operations
2. Cash flows from Investing Activities
   * Property and Securities
3. Cash flows from Financing Activities

Cash flow from Operating activites is most important

Cash and Cash equivalents from Statement of Cash flows should equal the Cash and Cash equivalents on the balance sheet.

Question 9

Debt ratio: Debt-to-asset

Total debt / total assets

Ex: 65% = Each dollar of asset was financed by 65 cents of debt and 35 cents of equity