Chapter 2 - The Balance Sheet Flashcards
Importance of Balance Sheet
Shows the credit worthiness of a firm when deciding to grant the firm credit.
Balance Sheet Contains:
Assets, Liabilities, Net Worth (Stockholder’s Equity)
Assets
Resources owned by the firm so that they can conduct business.
Characteristics of an Asset
Ownership by the firm.
Monetary value.
Tangible Assets
Have a physical form.
Plants and Equipment
Intangible Assets
Have no physical form.
Patents, copyrights, and trademarks.
Current Assets
Assets most easily converted to cash.
Can be liquidated in one year or less.
Funds for day-to-day operations.
Fixed Assets
Cannot be easily liquidated.
Characteristics of Fixed Assets
Recorded at Book Value. Useful life of more than a year. Acquired for use in business. Not meant for resale. Capacity of re-use for at least a year. Support the operating cycle, instead of being a part of it.
Assets Appearing on the Balance Sheet
Cash and Cash Equivalents. Short Term Investments. Accounts Receivable. Inventories. Prepaid Expenses. Long-Term Investments. Property Plant and Equipment (PPE). Goodwill.
Cash and Cash Equivalents
Assets in the form of cash, bank deposits, bearer bonds, and other money market funds.
Short Term Investments
Stocks and bonds that the company has bought and will sell shortly. Little less liquid than cash.
Accounts Receivable
Money that is owed to the company by customer and others.
Bad Debt
Accounts Receivables that will not be paid.
Inventories
Consist of raw materials, partly manufactured goods, and finished goods.
FIFO and LIFO methods.
Prepaid Expenses
Involves the prepayment of goods and services.
Not liquid but means that revenues should fall below the bottom line.
Long-Term Investments
Consists of real estate, stocks, and bonds that will be retained by the firm for a long time period.
PPE
Property Plant and Equipment.
Fixed assets owned by the company.
Gets affected by depreciation.
Depreciation factors
Cost, Estimated Useful Life, Residual Value, Depreciable Cost.
Goodwill
Intangible asset that is prepaid for buying another company.
Price Paid - Book Value
Liabilities
Amount of money that the company owes to others for goods, service, and on-going operations.
Types of Liabilities
Current Liabilities. Accounts Payable. Notes Payable. Accrued Liabilities. Unearned Revenue. Long Term Liabilities. Long-Term Debt.
Current Liabilities
Claims against assets that should be satisfied within a year or within an operating cycle.
Accounts Payable
Short-term obligation by purchasing goods and services on credit.
Amount of money company owes to suppliers, employees, creditors, and partners.
Notes Payable
Short-term obligations due on promissory notes and short-term obligations to suppliers. Also Bank loans.
Accrued Liabilities
Expense is recognized in an accounting period but not yet paid for.
Bills that were due, but not yet paid for.
Unearned Revenue
Payment received in advance for services not yet rendered or goods not yet sold.
Long Term Liabilities
Debts that are repaid after a year.
Long-Term Debt
Debt obligations to other parties and funds that are borrowed from banks and other financial institutions. 20-30 year loans
Shareholders Equity
Cash collected by the company on the sale of stock.
Retained Earnings.
Represents the claim of the shareholders to the assets of the company.
=Total Assets-Total Liabilities
Common Stock
Represent equity ownership in a company.
Have voting rights, and have share of dividends. Own assets after bondholders, debt holders, and preferred stockholders.
Preferred Stock
Provides a specific dividend that is paid before any dividends are paid to common stock. No voting rights.
Treasury Stock
Stock reacquired by a company of to be retired or to be resold to the public.
Capital Surplus
Account for any funds the issuing company has received over and above the par value of the common stock.
Retained Earnings
Sum of the company’s profits, after dividend payments, since the company’s inception.
Profits that have been reinvented in the company’s businesses.
