Chapter 3 - The Balance Sheet and Financial Disclosures Flashcards
LO3–1 Describe the purpose of the balance sheet and understand its usefulness and limitations. (p. 114)
LO3–1 The balance sheet is a position statement that presents an organized array of assets, liabilities, and shareholders’ equity at a particular point in time.
The statement does not portray the market value of the entity. However, the information in the statement can be useful in assessing market value, as well as in providing important information about liquidity and long-term solvency.
LO3–2 Identify and describe the various balance sheet asset classifications. (p. 116)
LO3–2 Current assets include cash and other assets that are reasonably expected to be converted to cash or consumed during one year or within the normal operating cycle of the business if the operating cycle is longer than one year.
All other assets are classified as various types of noncurrent assets. In addition to cash and cash equivalents, current assets include short-term investments, accounts receivable, inventories, and prepaid expenses. Other asset classifications include investments; property, plant, and equipment; intangible assets; and other assets. (p. 116
LO3–3 Identify and describe the two balance sheet liability classifications. (p. 120)
LO3–3 Current liabilities are those obligations that are expected to be satisfied through the use of current assets or the creation of other current liabilities. All other liabilities are classified as long term.
Current liabilities include notes and accounts payable, deferred revenues, accrued liabilities, and the current maturities of long-term debt.
Long-term liabilities include long-term notes, loans, mortgages, bonds, pension and lease obligations, as well as deferred income taxes. (p. 120)
LO3–4 Explain the purpose of financial statement disclosures. (p. 124)
LO3–4 Financial statement disclosures are used to convey additional information about the account balances in the basic financial statements as well as to provide supplemental information.
This information is disclosed, often parenthetically in the basic financial statements, or in disclosure notes that often include supporting schedules. (p. 124)
LO3–5 Explain the purpose of the management discussion and analysis disclosure. (p. 127)
● LO3–5 Annual reports of public companies will include management’s discussion and analysis of key aspects of the company’s business.
The purpose of this disclosure is to provide external parties with management’s insight into certain transactions, events, and circumstances that affect the enterprise, including their financial impact. (p. 127)
LO3–6 Explain the purpose of an audit and describe the content of the audit report. (p. 129)
● LO3–6 The purpose of an audit is to provide a professional, independent opinion as to whether or not the financial statements are prepared in conformity with generally accepted accounting principles.
The standard audit report of a public company contains four paragraphs; the first two deal with the scope of the audit and the third paragraph states the auditors’ opinion regarding the financial statements.
The fourth paragraph provides the auditors’ opinion on the effectiveness of the company’s internal control. (p. 129)
LO3–7 Describe the techniques used by financial analysts to transform financial information into forms more useful for analysis. (p. 132)
● LO3–7 Financial analysts use various techniques to transform financial information into forms more useful for analysis.
Horizontal analysis and vertical analysis provide a useful way of analyzing year-to-year changes.
Ratio analysis allows analysts to control for size differences over time and among firms while investigating important relationships among financial variables. (p. 132)
LO3–8 Identify and calculate the common liquidity and financing ratios used to assess risk. (p. 134)
LO3-8 The balance sheet provides information that can be useful in assessing risk.
A key element of risk analysis is investigating a company’s ability to pay its obligations when they come due.
Liquidity ratios and financing ratios provide information about a company’s ability to pay its obligations. (p. 134)
LO3–9 Discuss the primary differences between U.S. GAAP and IFRS with respect to the balance sheet, financial disclosures, and segment reporting. (pp. 122 and 141)
● LO3–9 There are more similarities than differences in balance sheets and financial disclosures prepared according to U.S. GAAP and those prepared applying IFRS.
Balance sheet presentation is one important difference. Under U.S. GAAP, we present current assets and liabilities before noncurrent assets and liabilities.
IFRS doesn’t prescribe the format of the balance sheet, but balance sheets prepared using IFRS often report noncurrent items first. Reportable segment disclosures also are similar. However, IFRS requires an additional disclosure, the amount of segment liabilities (Appendix 3). (pp. 122 and 141) ●
