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Financial Acc Systems 1 > Ch 5 > Flashcards

Ch 5 Flashcards

0
Q

Analysts use the balance sheet to assess three things about the company?

A

The company’s
1 liquidity
2 solvency
3 financial flexibility

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1
Q

Balance sheet AKA Statement of financial position

A

Reports assets, liabilities and stockholders equity

Of business enterprise on specific date

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2
Q

Liquidity

A

Amount of time expected to elapse until asset is
Realized or converted to cash

Or a liability has to be paid

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3
Q

Solvency

A

Ability of company to pay its debts as they mature

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4
Q

Financial flexibility

A

Measures ability of enterprise to take effective actions
To alter amounts and timing of cash flows

to respond to unexpected needs and opportunities

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5
Q

3 major limitations of balance sheet?

A

1 historical cost reporting

2 judgements and estimates used for reporting

3 omitting items of financial value

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6
Q

Historical cost limitation on balance sheet?

A

Because of historical cost principle fair value is not

Accounted for unless an asset is sold

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7
Q

Judgements and estimates, limitation on balance sheet?

A

Estimates can be inaccurate for useful life, depreciation,

Amount of receivables collected

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8
Q

4 Examples of “omits items that are of financial value” limitation on balance sheet?

A

Employees who are skilled and know how to develop
Computer chip can’t be recorded on the balance
Sheet but are company’s most valuable asset

Reputation, customer base, research superiority

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9
Q

Classified balance sheet

A

Balance sheets group together similar items to arrive

At significant subtotals

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10
Q

3 ways companies should separate items with different characteristics on the balance sheet?

A

1 type or expected function

2 different implications for companies financial flexibility

3 different general liquidity characteristics

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11
Q

Example of assets type or expected function classification?

A

IBM reports merchandise inventories separately

From property, plant and equipment

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12
Q

Assets and liabilities with different implications of company’s financial flexibility example?

A

Company that uses assets in operations Should report
those assets separately from asset’s Held for investments

And assets subject to restrictions such as leased equipment

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13
Q

Assets and liabilities with different general liquidity characteristics example?

A

Boeing reports cash separately from inventories

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14
Q

3 elements of balance sheet?

A

Assets
Liabilities
Equity

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15
Q

Assets

A

Probable future economic benefits obtained or controlled

By a particular entity as a result of past transactions or events

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16
Q

Liabilities

A

Probable future sacrifices of economic benefits arising
from present obligations of particular entity

to transfer Assets or provide services to other entities in the
Future as result of past transactions or events

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17
Q

Equity

A

Residual interest in the assets of an entity that remains after
Deducting its liabilities

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18
Q

Equity in a business enterprise

A

Equity is the ownership interest

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19
Q

Current assets

A

Cash and other assets a company expects to convert

Into cash, sell or consume in 1 year it operating cycle

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20
Q

Order of Operating cycle

A

Cash through inventory, production, receivables

And back to cash

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21
Q

How are current assets presented in the balance sheet

A

In order of liquidity

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22
Q

Cash equivalents

A

Short term highly liquid investments that mature in

3 months or less

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23
Q

3 separate portfolios for valuation and reporting purposes of short term investments of debt and equity securities?

A

1 Held to maturity

2 trading

3 available for sale

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24
Q

short term investments of debt and equity securities: held to maturity?

A

Debt securities that company has positive intent and

ability to hold to maturity

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25
Q

short term investments of debt and equity securities: trading?

A

Debt and equity securities bought and held primarily for
Sale in near term to generate income on short term price
Differences

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26
Q

short term investments of debt and equity securities: available-for-sale?

A

Debt and equity securities not classified as held to maturity
Or trading securities

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27
Q

Long term investments consist of one of four types?

A

1 investments in securities, such as bonds, common
stock, or Longterm notes

2 investments in tangible fixed assets not currently
Used in operations, such as land held for speculation

3 investments set aside in special funds, such as
sinking fund, pension fund or plant expansion fund
Includes cash surrender value of life insurance

4 investments in non consolidated subsidiaries
Or affiliated companies

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28
Q

Long term investments are usually called?

A

Investments

29
Q

When are investments included in current assets?

A

If company intends to convert them to cash in short term

30
Q

Property, plant and equipment, define, 6 general examples?

A

Tangible, Longterm assets used in regular operations
of business

Consist of land, buildings, machinery, furniture, tools,
Wasting resources (timberland, minerals)
31
Q

Intangible assets, 7 examples?

A

Lack physical substance and are not financial instruments

Patents, copyrights, franchises, goodwill, trademarks,
Trade names and customer lists

32
Q

What is it called when you write off/ depreciate an intangible asset?

A

Amortize

33
Q

Current liabilities

A

Obligations that a company expects to liquidate either
Though use of current assets or creation of other
Current liabilities

34
Q

What’s included in current liabilities?

A

1 payables
2 unearned rent or revenue
3 long term debts whoes payments occur within a year

35
Q

Working capital, equation, definition?

A

Working capital = total current assets - total current liabilities

Net amount of company’s relatively liquid resources

36
Q

Longterm liabilities

A

Obligations that a company doesn’t expect to liquidate

During operating cycle

37
Q

When do companies classify long term liabilities as

Current liabilities?

A

When Longterm liabilities mature within current operating

Cycle and require payment with current assets

38
Q

3 types of Longterm liabilities

A

1 obligations arising from specific financing situations
Ex issuance of bonds, LT lease obligations, LT notes payable

2 obligations arising form ordinary operations of company
Ex pension obligations, deferred income tax liabilities

3 obligations that depend on occurrence or non occurrence
Of one or more future events to confirm amt payable, payee
Or date payable
Include product warranties and other contingencies

39
Q

6 parts of stockholder’s equity section?

A 
1 capital stock
2 additional paid in capital
3 retained earnings
4 accumulated other comprehensive income
5 treasury stock
6 noncontrolling interest (minority interest)
40
Q

Stockholder’s equity section: capital stock

A

Par or stated value of shares issued

41
Q

Stockholder’s equity section: additional paid in capital

A

Excess amounts paid over the par or stated value

42
Q

Stockholder’s equity section: retained earnings

A

Corporation’s undistributed earnings

43
Q

Stockholder’s equity section: accumulated and other comprehensive income

A

Aggregate amount of other comprehensive income items

44
Q

Stockholder’s equity section: treasury stock

A

Generally amount of ordinary shares repurchased

45
Q

Stockholder’s equity section: non controlling interest (minority interest)

A

Portion of the equity of subsidiaries not wholly owned

By the reporting company

46
Q

Unappropriated retained earnings

A

Amount of RE available for dividend distribution

47
Q

Restricted RE

A

Restricted from being paid as dividends from

bond indentures and other loan agreements

48
Q

Account form of balance sheet

A

List of assets, by sections on the left side

And liabilities and stockholders equity section on
the right side

49
Q

Report form of balance sheet

A

Lists assets above liabilities and stockholders equity on

same page

50
Q

Primary purpose of statement of cash flows

A

Provide relevant information about cash receipts and

Cash payments of enterprise during period

51
Q

What 4 areas do cash flow statements report?

A

1 cash effects of operations during period
2 investing transactions
3 financing transactions
4 net increase or decrease in cash during period

52
Q

3 questions cash flow statement provides an answer to?

A

1 where did the cash come form during the period?

2 what was the cash used for during the period?

3 what was the Change in the cash balance during the period?

53
Q

Statement of cash flows: Operating activities

A

Involve the cash effects of transactions that enter into

Determination of net income

54
Q

Statement of cash flows: investing activities

A

Include making and collecting loans and acquiring
And disposing of investments (both debt and equity),
Property, plant and equipment

55
Q

Statement of cash flows: financing activities

A

Involve liabilities and owners’ equity items

Include obtaining resources from owners and
providing them with return on their investment

Borrowing money from creditors and repaying amounts
borrowed

56
Q

Statement of cash flows helps users evaluate?

A

Liquidity, solvency and financial flexibility

57
Q

4 steps to preparing a statement of cash flows?

A

1 determine net cash provided by (or used in)
operating activities

2 determine the net cash provided by (or used in)
investing and financing activities

3 determine the change (increase or decrease) in cash
During the period

4 reconcile the change in cash with beginning and ending
Cash balances

58
Q

4 examples of significant non cash activities?

A

1 issuance of common stock to purchase assets
2 conversion of bonds into common stock
3 issuance of debt to purchase assets
4 exchanges of long lived assets

59
Q

Current cash debt coverage, equation, definition?

A

Current cash debt coverage =
(Net cash provided by operating activities)/(avg. current liabilities)

Indicates whether a company can pay off its current
Liabilities from operations in a given year

Indicates financial liquidity

60
Q

Cash debt coverage equation, definition?

A

Cash debt coverage =
(net cash provided by operating activities)/(avg. total liabilities)

Higher the ratio the better

Measures financial flexibility

Indicates company’s ability to repay its liabilities from
Net cash provided by operating activities without
Having to liquidate assets employed in its operations

61
Q

Free cash flow equation, it’s use?

A

Free cash flow =
(net cash provided by operating activities) - (capital expenditures)
- (dividends)

Examines company’s financial flexibility

62
Q

3 questions cash flow analysis answers?

A

1 is the company able to pay its dividends without resorting
To external financing?

2 if business operations decline, will the company be
able to maintain it’s needed capital investment?

3 what is the amount of discretionary cash flow that
can be used for additional investment, retirement
Of debt, purchase of treasury stock or addition to liquidity?

63
Q

4 types of information that are usually supplemental to account titles and amounts presented on the balance sheet?

A
  1. Contingencies

2 accounting policies

3 contractual situations

4 fair values

64
Q

Contingencies

A

Material events that have uncertain outcomes

65
Q

Accounting policies

A

Explanations of valuation methods used or basic
Assumptions made concerning inventory valuations,
Depreciation methods, investments in subsidiaries

66
Q

Contractual situations

A

Explanations of certain restrictions or covenants attached

To specific assets or liabilities (more likely)

67
Q

Fair values

A

Disclosures of fair values, particularly for financial

Instruments

68
Q

Contra account, Adjunct account?

A

Contra - Reduces either an asset, liability or owners’ equity account

Adjunct - increases either asset, liability or owner’s equity
Account

69
Q

Reserve

A

Means appropriation of retained earnings

Financial Acc Systems 1 (22 decks)

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