CH 5 Flashcards
Define Balance sheet
a. Reports the assets, liabilities, and stockholder’s equity of a business enterprise at a specific date
b. It provides info about the nature and amounts of investments in enterprise resources, obligations to creditors, and the owners’ equity in net resource
How is balance sheet useful
a. Balance sheet provides a basis of computing rates of return and evaluating thecapital structure of the enterprise.
i. Identify risk and determine future cash flows
1. Risks
a. Liquidity
b. Solvency
c. Financial flexibility
Define Liquidity
a. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid.
Define Solvency
a. Refers to the ability of a company to pay its debts as they mature
Does “ financial flexibility” measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows
a. Yes
Define limitations of the balance sheet
a. Most assets and liabilities are reported at historical cost
b. Companies use judgements and estimates to determine many of the items reported in the balance sheet
c. The balance sheet necessarily omits many items that are of financial value
Does FASB discourage the reporting of summary accounts alone? Why?
a. To outline significant detail to permit users to assess the amounts, timing and uncertainty of future cash flows
What are requirements of classification
i. Assets that differ in their type or expected function in the company’s central operations or other activities.
ii. Assets and liabilities with different implications for the company’s financial flexibility
iii. Assets and liabilities with different general liquidity characteristics
Why should financial statements be grouped together
a. Makes it easier for users to evaluate company’s liquidity, financial flexibility, profitability, and risk
Define current assets
a. Cash and other assets that a company expects to convert into cash, sell, or consume either in one year or in the operating cycle whichever is longer
What is the basis of valuation for Cash and cash equivalents
a. Fair value
What is the basis of valuation for short term investments
a. Generally, fair value
What is the basis of valuation for receivables
a. Estimated amount collectible
What is the basis of valuation for inventories
a. Lower of cost or market
What is the basis of valuation for prepaid expenses
a. Cost
Is converting current assets into cash, subjective for interpretation?
a. Yes
How are prepaid expenses in the current assets justified as current assets?
a. A company didn’t pay in advance, but it has subjective issues
Define restricted cash
a. Consist of certificate of deposit restricted as lease arrangements
Identify three short term investments
a. Held to maturity (hold debt securities to maturity)
b. Trading ( to generate income on short term price differences of traded debt and equity
c. Available for sale ( not classified as held to maturity or trading securities)
Are reported trading securities-current assets?
a. Yes
What four types of long term investments
a. Securities ( bonds, CS, or long term notes)
b. Investments in tangible fixed assets not currently used in operations
c. Investments set aside in special funds such as sinking fund, pension fund, or plant expansion fund including cash for value of life insurance
d. Investments in nonconsolidated subsidiaries or affiliated companies
When securities are available for sale should be report as…
a. The securities’ fair value
When held to maturity securities are reported, what should security’s cost be reported as?
a. Amortized cost
Define property, plant, and equipment
a. Tangible long lived asset used in the regular operations of business
Define intangible assets
a. Lack physical substance and are not financial instruments
What are three current liabilities
a. Payables resulting from the acquisition of goods and/or services
b. Collections received in advance for the delivery of goods or performance of services such as unearned rent revenue or unearned subscriptions revenue
c. Port of long term bonds to be pain in the current period or short term obligations arising from the purchase of equipment. ( it means refinance the debt through another long term issuance)
Define working capital
a. Excess of total current assets over total current liabilities
b. When it is negative, users would be concerned for a company’s ability to pay bills
Identify four types of Long term liabilities
a. Obligations that a company does not reasonably expect to liquidate within the normal operating cycle
b. Obligations arising from the ordinary operations of the company such as pension obligations and deferred income tax liabilities
c. Obligations that depend on the occurrence or non occurrence of one or more future events to confirm the amount payable, the payee, or the date payable, such as service or product warranties and other contingencies
Define Owner’s equity
a. Ownership claim on a company’s total assets
Define capital stock
a. The par or stated value of the shares issued
Define Additional paid in capital
a. The excess of amounts paid in over the par or stated value
Define retained earnings
a. Corporation’s undistributed earnings
Define Accumulated other comprehensive income
a. Aggregate amount of the other comprehensive income items
Define treasury stock
a. Generally the amount of ordinary shares repurchased
Define non-controlling interest ( minority interest)
a. A portion of the equity of subsidiaries not wholly owned by the reporting company
Why do companies have to disclose the par value and the authorized issued
a. To show sources of additional capital are varied and material
What is difference between unappropriated and restricted dividends
a. The amount that is usually available for dividend distribution, but restriction apply to bond indentures or loan agreements
What does information from cash flows statement help users and investor’s determine
a. Evaluate liquidity, solvency, and financial flexibility
Is this statement true: Happiness is a positive cash flow
a. True
Define Current cash debt coverage
a. Financial statements often assess liquidity
How do you measure for financial flexibility
a. Cash debt coverage
i. ( net cash provided by operating activities)
Cash debt coverage
a. Measure of solvency that indicates a company’s ability repay its liabilities from cash generated from operations
Define Free cash flow
a. It measures for financial flexibility
b. Amount of discretionary cash flow a company has
c. Net cash provided minus capital expenditures minus dividends
What does analysis from free cash flows answer
a. Able to pay dividends without resorting to external financing
b. If business operations decline, the company be able to maintain its needed capital investment
c. Identify problems of discretionary cash flows for investments
A positive sign of free cash flow
a. Can help a company to invest more
Identify four supplemental balance sheet information ( more explanation on accounts)
a. Contingencies ( existing situation to gain or loss when event’s fail to occur)
b. Accounting policies( disclose all significant principles and methods)
c. Contractual situations ( disclose commitments to relate to business obligations
d. Fair values
Define Parenthetical explanations
a. To completeness of financial statements
Cross-reference and contra items
a. Identify a direct relationship between an asset and a liability on the balance sheet
Define adjunct account
a. Increase either an asset, liability, or owners’ equity account
