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Intermediate Accounting I :!: > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

The balance sheet provides information useful for:

A
  1. assessing future cash flows
  2. liquidity
  3. long-term solvency
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2
Q

What is liquidity?

A

refers to the period of time an asset is converted to cash or until a liability is paid.

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3
Q

What is book value?

A

a company’s assets minus is liabilities

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4
Q

What is long-term solvency?

A

refers to the riskiness of a company with regard to the amount of liabilities in its capital structure.

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5
Q

What is financial flexibility?

A

the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs.

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6
Q

What is the key classification of assets and liabilities in the balance sheet?

A

Current vs Non current distinction

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7
Q

What are current assets?

A

include cash and all other assets expected to become cash or be consumed within one year or the operating cycle, whichever is longer.

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8
Q

What is the operating cycle?

A

the period of time necessary to convert cash to raw materials, raw materials to a finished product, the finished product to receivables, and then finally receivables back to cash.

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9
Q

What are cash equivalents?

A

frequently include certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills.

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10
Q

Investments are classified as __________ if management has the ability and intent to liquidate the investment in the near term.

A

current

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11
Q

What is accounts receivable?

A

result from the sale of goods or services on credit.

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12
Q

What are inventories?

A

consist of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale.

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13
Q

What are typical classifications of non current assets?

A
  1. investments
  2. property, plant, and equipment
  3. intangible assets
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14
Q

What are some examples of investments?

A
  1. Investments in equity and debt securities of other corporations
  2. Land held for speculation
  3. Non current receivables
  4. Cash set aside for special purposes (such as future plant expansion)
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15
Q

What are some examples of property, plant, and equipment?

A
  1. Land
  2. Buildings
  3. Machinery
  4. Furniture
  5. Natural resources (e.g. mineral mines, timber tracts, and oil wells)
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16
Q

What are intangible assets?

A

Generally represent exclusive rights that a company can use to generate future revenues. (e.g. patents, copyrights, and franchises)

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17
Q

What are current liabilities?

A

are expected to be satisfied within one year or the operating cycle, whichever is longer.

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18
Q

What are examples of current liabilities?

A
  1. Accounts payable
  2. Notes payable
  3. Unearned revenues
  4. Accrued liabilities
  5. Current maturities of long-term debt
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19
Q

What is shareholder’s equity composed of?

A
  1. Paid-in capital (invested capital)

2. Retained earnings (earned capital)

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20
Q

What is the summary of significant accounting policies?

A

Conveys valuable information about the company’s choices from among various alternative accounting methods.

21
Q

What is a subsequent event?

A

A significant development that occurs after a company’s fiscal year-end but before the financial statements are issued or available to be issued.

22
Q

What are irregularities?

A

are INTENTIONAL distortions of financial statements

23
Q

What are illegal acts?

A

bribes, kickbacks, illegal contributions to political candidates, and other violations of the law.

24
Q

What is the full-disclosure principle?

A

requires that financial statements provide all material relevant information concerning the reporting entity.

25
Q

The management discussion and analysis (MD&A) provides a biased but informed perspective of a company’s:

A
  1. operations
  2. liquidity
  3. capital resources
26
Q

The management’s responsibilities sections avows the responsibility of management for the company’s:

A
  1. financial statements

2. internal control system

27
Q

What is the auditor’s report?

A

Provides the analyst with an independent and professional opinion about the fairness of the representations in the financial statements and about the effectiveness of internal controls.

28
Q

Which circumstances cause the auditor’s report to include and explanatory paragraph in addition to the standard wording, even though the report is unqualified:

A
  1. Lack of consistency
  2. Uncertainty
  3. Emphasis of a matter concerning financial statements
29
Q

Some audits result in the need to issue other than an unqualified opinion due to exceptions such as:

A
  1. nonconformity with generally accepted accounting principles
  2. inadequate disclosures
  3. a limitation or restriction of the scope of the examination
30
Q

What is a qualified opinion?

A

This contains an exception to the standard unqualified opinion but not of sufficient seriousness to invalidate the financial statements as a whole.

31
Q

What is adverse opinion?

A

This is necessary when the exceptions (a) nonconformity with generally accepted accounting principles and (b) inadequate disclosures are so serious that a qualified opinion is not justified. Adverse opinions are rare because auditors usually are able to persuade management to rectify problems to avoid this undesirable report.

32
Q

What is a disclaimer?

A

An auditor will disclaim an opinion for item (c) “a limitation of the scope of the examination that insufficient information” has been gathered to express an opinion.

33
Q

The auditor should assess the firm’s ability to continue as ____________.

A

going concern

34
Q

What is a proxy statement?

A

contains disclosures on compensation to directors and executives

35
Q

What are comparative financial statements?

A

allow financial statement users to compare year-to-year financial position, results of operations, and cash flows

36
Q

What is the difference between horizontal and vertical analysis?

A

Horizontal: expressing the same item as a percentage in a year-to-year comparison
Vertical: expressing each item as a percentage, but within the same year

37
Q

Evaluating information in __________ form allows analysts to control for size differences over time and among firms.

A

ratio

38
Q

What is default risk?

A

a company’s ability to pay its obligations when come due

39
Q

What is operational risk?

A

how adept a company is at withstanding various events and circumstances that might impair its ability to earn profits

40
Q

What is working capital?

A

the difference between current assets and current liabilities, is a popular measure of a company’s ability to satisfy its short-term obligations

41
Q

How do we calculate the Current ratio?

A

Current assets/Current liabilities

42
Q

Working capital may not present an accurate or complete picture of a company’s _________.

A

liquidity

43
Q

What is the acid-test ratio (quick ratio)?

A

Quick assets (i.e. cash, short-term investments, A/R)/Current liabilities

It provides a more stringent indication of a company’s ability to pay its current obligations.

44
Q

Liquidity ratios should be assessed in the context of both __________ and __________ of managing assets.

A

profitability

efficiency

45
Q

What is the debt to equity ratio?

A

Total liabilities/Shareholder’s equity

It indicates the extent of reliance on creditors, rather than owners, in providing resources.

46
Q

What is favorable financial leverage?

A

means earning a return on borrowed funds that exceeds the cost of borrowing the funds

47
Q

What is the times interest earned ratio?

A

(Net income + Interest expense + Income taxes)/Interest expense

It indicates the margin of safety provided to creditors.

48
Q

What is the purpose of the balance sheet?

A

To report a company’s financial position on a particular date.

Intermediate Accounting I :!: (6 decks)

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