Chapter 5 Flashcards
Liquidity
Liquidity is generally related to the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid.
Solvency
Solvency refers to the ability of an enterprise to pay its debts as they mature.
Financial Flexibility
Financial flexibility is the ability of an enterprise to take effective action to alter the amounts and timing of cash flow so that it can respond to unexpected needs and opportunities.
Limitations of the Balance Sheet
(a) Failure to reflect current fair value information.
(b) The extensive use of judgment and estimates.
(c) Failure to include items of financial value that cannot be recorded objectively.
Major classifications used in the Balance Sheet
Assets- Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Liabilities- Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Equity- Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.
Current Assets (Balance Sheet)
Current assets are cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer.
Current assets are presented in the balance sheet in the order of their liquidity and normally include cash and cash equivalents, short-term investments, receivables, inventories, and prepaid expenses.
Long-term Investments (Balance Sheet)
Long-term investments are rather permanent in nature as they are not normally disposed of for a long period of time. They are shown in the balance sheet below current assets in a separate section called Investments.
Types of Long-term Investments (Balance Sheet)
Investments in securities, such as common stock, bonds, or long-term notes.
Investments in tangible fixed assets not currently used in operations.
Investments set aside in special funds (sinking, pension, plant expansion, etc.) and the cash surrender value of life insurance.
Investments in non-consolidated subsidiaries or affiliated companies.
Property, Plant & Equipment (Balance Sheet)
Property, plant and equipment are properties of a durable nature that are used in the regular operations of the enterprise.
Examples include land, land improvements, buildings, machinery, furniture, tools, and wasting resources.
With the exception of land, these assets are either depreciable or depletable.
Intangible Assets (Balance Sheet)
Intangible assets lack physical substance. However, their benefit lies in the rights they convey to the holder.
Examples include patents, copyrights, franchises, goodwill, trademarks, trade names, and secret processes.
Limited-life intangible assets are amortized over their useful lives.
Indefinite-life intangibles (such as goodwill) are not amortized but, instead, are assessed at least annually for impairment.
Other Assets (Balance Sheet)
Many companies include an “Other Assets” classification in the balance sheet after Intangible Assets. This section includes a wide variety of items that do not appear to fall clearly into one of the other classifications.
Some of the more common items included in this section are: deferred charges, noncurrent receivables, prepaid pension costs, deferred income taxes, and advances to subsidiaries.
Current Liabilities (Balance Sheet)
Current liabilities are the obligations that are reasonably expected to be liquidated either through the use of current assets or the creation of other current liabilities.
Items normally shown in the current liabilities section of the balance sheet include notes and accounts payable, advances received from customers, current maturities of long-term debt, taxes payable, and accrued liabilities.
Long-term Liabilities (Balance Sheet)
Long-term liabilities are obligations whose settlement dates extend beyond the normal operating cycle or one year, whichever is longer.
Examples include bonds payable, notes payable, lease obligations, and pension obligations.
Owner’s Equity (Balance Sheet)
The owners’ equity (stockholders’ equity) section of the balance sheet includes information related to:
- capital stock
- additional paid-in capital
- retained earnings
- accumulated other comprehensive income
- treasury stock
- noncontrolling interest (minority interest)
Long-term Liabilities Categories (Balance Sheet)
Obligations arising from specific financing situations, such as the issuance of bonds, long-term lease obligations, and long-term notes payable.
Obligations arising from the ordinary operations of the company, such as pension obligations and deferred income tax liabilities.
Obligations that depend on the occurrence or non-occurrence of one or more future events to confirm the amount payable, the payee, or the date payable, such as product warranties and other contingencies.
