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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
short term investments of debt and equity securities: held to maturity?
Debt securities that company has positive intent and | ability to hold to maturity
25
short term investments of debt and equity securities: trading?
Debt and equity securities bought and held primarily for Sale in near term to generate income on short term price Differences
26
short term investments of debt and equity securities: available-for-sale?
Debt and equity securities not classified as held to maturity Or trading securities
27
Long term investments consist of one of four types?
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
28
Long term investments are usually called?
Investments
29
When are investments included in current assets?
If company intends to convert them to cash in short term
30
Property, plant and equipment, define, 6 general examples?
Tangible, Longterm assets used in regular operations of business ``` Consist of land, buildings, machinery, furniture, tools, Wasting resources (timberland, minerals) ```
31
Intangible assets, 7 examples?
Lack physical substance and are not financial instruments Patents, copyrights, franchises, goodwill, trademarks, Trade names and customer lists
32
What is it called when you write off/ depreciate an intangible asset?
Amortize
33
Current liabilities
Obligations that a company expects to liquidate either Though use of current assets or creation of other Current liabilities
34
What's included in current liabilities?
1 payables 2 unearned rent or revenue 3 long term debts whoes payments occur within a year
35
Working capital, equation, definition?
Working capital = total current assets - total current liabilities Net amount of company's relatively liquid resources
36
Longterm liabilities
Obligations that a company doesn't expect to liquidate | During operating cycle
37
When do companies classify long term liabilities as | Current liabilities?
When Longterm liabilities mature within current operating | Cycle and require payment with current assets
38
3 types of Longterm liabilities
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
6 parts of stockholder's equity section?
``` 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
Stockholder's equity section: capital stock
Par or stated value of shares issued
41
Stockholder's equity section: additional paid in capital
Excess amounts paid over the par or stated value
42
Stockholder's equity section: retained earnings
Corporation's undistributed earnings
43
Stockholder's equity section: accumulated and other comprehensive income
Aggregate amount of other comprehensive income items
44
Stockholder's equity section: treasury stock
Generally amount of ordinary shares repurchased
45
Stockholder's equity section: non controlling interest (minority interest)
Portion of the equity of subsidiaries not wholly owned | By the reporting company
46
Unappropriated retained earnings
Amount of RE available for dividend distribution
47
Restricted RE
Restricted from being paid as dividends from | bond indentures and other loan agreements
48
Account form of balance sheet
List of assets, by sections on the left side And liabilities and stockholders equity section on the right side
49
Report form of balance sheet
Lists assets above liabilities and stockholders equity on | same page
50
Primary purpose of statement of cash flows
Provide relevant information about cash receipts and | Cash payments of enterprise during period
51
What 4 areas do cash flow statements report?
1 cash effects of operations during period 2 investing transactions 3 financing transactions 4 net increase or decrease in cash during period
52
3 questions cash flow statement provides an answer to?
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
Statement of cash flows: Operating activities
Involve the cash effects of transactions that enter into | Determination of net income
54
Statement of cash flows: investing activities
Include making and collecting loans and acquiring And disposing of investments (both debt and equity), Property, plant and equipment
55
Statement of cash flows: financing activities
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
Statement of cash flows helps users evaluate?
Liquidity, solvency and financial flexibility
57
4 steps to preparing a statement of cash flows?
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
4 examples of significant non cash activities?
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
Current cash debt coverage, equation, definition?
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
Cash debt coverage equation, definition?
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
Free cash flow equation, it's use?
Free cash flow = (net cash provided by operating activities) - (capital expenditures) - (dividends) Examines company's financial flexibility
62
3 questions cash flow analysis answers?
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
4 types of information that are usually supplemental to account titles and amounts presented on the balance sheet?
1. Contingencies 2 accounting policies 3 contractual situations 4 fair values
64
Contingencies
Material events that have uncertain outcomes
65
Accounting policies
Explanations of valuation methods used or basic Assumptions made concerning inventory valuations, Depreciation methods, investments in subsidiaries
66
Contractual situations
Explanations of certain restrictions or covenants attached | To specific assets or liabilities (more likely)
67
Fair values
Disclosures of fair values, particularly for financial | Instruments
68
Contra account, Adjunct account?
Contra - Reduces either an asset, liability or owners' equity account Adjunct - increases either asset, liability or owner's equity Account
69
Reserve
Means appropriation of retained earnings

Financial Acc Systems 1 (22 decks)

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