Chapter 2 - The Balance Sheet

Question 1

Importance of Balance Sheet

Answer 1

Shows the credit worthiness of a firm when deciding to grant the firm credit.

Question 2

Balance Sheet Contains:

Answer 2

Assets, Liabilities, Net Worth (Stockholder’s Equity)

Question 3

Assets

Answer 3

Resources owned by the firm so that they can conduct business.

Question 4

Characteristics of an Asset

Answer 4

Ownership by the firm.

Monetary value.

Question 5

Tangible Assets

Answer 5

Have a physical form.

Plants and Equipment

Question 6

Intangible Assets

Answer 6

Have no physical form.

Patents, copyrights, and trademarks.

Question 7

Current Assets

Answer 7

Assets most easily converted to cash.
Can be liquidated in one year or less.
Funds for day-to-day operations.

Question 8

Fixed Assets

Answer 8

Cannot be easily liquidated.

Question 9

Characteristics of Fixed Assets

Answer 9

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.

Question 10

Assets Appearing on the Balance Sheet

Answer 10

Cash and Cash Equivalents.
Short Term Investments.
Accounts Receivable.
Inventories.
Prepaid Expenses.
Long-Term Investments.
Property Plant and Equipment (PPE).
Goodwill.

Question 11

Cash and Cash Equivalents

Answer 11

Assets in the form of cash, bank deposits, bearer bonds, and other money market funds.

Question 12

Short Term Investments

Answer 12

Stocks and bonds that the company has bought and will sell shortly. Little less liquid than cash.

Question 13

Accounts Receivable

Answer 13

Money that is owed to the company by customer and others.

Question 14

Bad Debt

Answer 14

Accounts Receivables that will not be paid.

Question 15

Inventories

Answer 15

Consist of raw materials, partly manufactured goods, and finished goods.
FIFO and LIFO methods.

Question 16

Prepaid Expenses

Answer 16

Involves the prepayment of goods and services.

Not liquid but means that revenues should fall below the bottom line.

Question 17

Long-Term Investments

Answer 17

Consists of real estate, stocks, and bonds that will be retained by the firm for a long time period.

Question 18

PPE

Answer 18

Property Plant and Equipment.
Fixed assets owned by the company.
Gets affected by depreciation.

Question 19

Depreciation factors

Answer 19

Cost, Estimated Useful Life, Residual Value, Depreciable Cost.

Question 20

Goodwill

Answer 20

Intangible asset that is prepaid for buying another company.

Price Paid - Book Value

Question 21

Liabilities

Answer 21

Amount of money that the company owes to others for goods, service, and on-going operations.

Question 22

Types of Liabilities

Answer 22

Current Liabilities.
Accounts Payable.
Notes Payable.
Accrued Liabilities.
Unearned Revenue.
Long Term Liabilities.
Long-Term Debt.

Question 23

Current Liabilities

Answer 23

Claims against assets that should be satisfied within a year or within an operating cycle.

Question 24

Accounts Payable

Answer 24

Short-term obligation by purchasing goods and services on credit.
Amount of money company owes to suppliers, employees, creditors, and partners.

Question 25

Notes Payable

Answer 25

Short-term obligations due on promissory notes and short-term obligations to suppliers. Also Bank loans.

Question 26

Accrued Liabilities

Answer 26

Expense is recognized in an accounting period but not yet paid for.
Bills that were due, but not yet paid for.

Question 27

Unearned Revenue

Answer 27

Payment received in advance for services not yet rendered or goods not yet sold.

Question 28

Long Term Liabilities

Answer 28

Debts that are repaid after a year.

Question 29

Long-Term Debt

Answer 29

Debt obligations to other parties and funds that are borrowed from banks and other financial institutions. 20-30 year loans

Question 30

Shareholders Equity

Answer 30

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

Question 31

Common Stock

Answer 31

Represent equity ownership in a company.

Have voting rights, and have share of dividends. Own assets after bondholders, debt holders, and preferred stockholders.

Question 32

Preferred Stock

Answer 32

Provides a specific dividend that is paid before any dividends are paid to common stock. No voting rights.

Question 33

Treasury Stock

Answer 33

Stock reacquired by a company of to be retired or to be resold to the public.

Question 34

Capital Surplus

Answer 34

Account for any funds the issuing company has received over and above the par value of the common stock.

Question 35

Retained Earnings

Answer 35

Sum of the company’s profits, after dividend payments, since the company’s inception.
Profits that have been reinvented in the company’s businesses.