Ch 5 Balance Sheet

Question 1

What are the two aspects of a company’s position described on the balance sheet that make it useful?

Answer 1

Liquidity and solvency

Question 2

What is liquidity?

Answer 2

How quickly assets will be converted to cash.

Question 3

Name the three limitations of the balance sheet.

Answer 3

1. Most assets and liabilities or reported at historical cost
2. Companies use judgments and estimates to determine many of the items reported on the balance sheet.
3. The balance sheet omits many items that are financial value but that a company cannot record objectively.