Chapter-5 Balance Sheet and Statement of Cash Flows Flashcards
Solvency
Refers to the ability of a company to pay its debts as they mature
Liquidity
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.
What are the three major limitations to a balance sheet?
- hostorical cost
- Judgments and estimates
- A balance sheet omits many items thar are of financial value
What is financial flexibility?
The ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities.
What are three ways the balance sheet is classified
- Assets that differ in their type of expected funtion in the companys central operations or other activities
- Assets and liabilities with different implications for the companies financial dlexibility
- Assets and liabilities with different general liquidity characteristics.
What are current assets
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
What are short-term investments?
Assets that are held for a year or less
What does held to maturity mean?
Debt securities that a company has the positive intent and ability to hold to maturity
What is trading
debt securities bought and held primarily for sale in the near term to generate income on short term differences
What is available for sale?
Debt securitites not classified as held to maturity or trading securities
What are the four types of long term invesments?
- Investments in securities such as bonds, common stock, or long term notes
- Invesments in tangible fixed assets not currently used in operations such as land held for speculation
- Investments set aside in special funds, such as a sinking fund, or plant expansion fund.
- Investments in nonconsolidated subsidiaries or affiliated companies.
What are current liabilities?
Obligation that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.
What are the three types of long term liabilities?
- Obligations arising from specific financing situations, such as the issuance of bonds, long term lease obligations, and long term note payable
- Obligations arising from the ordinary operations of the company, such as pension obligations and deffered income tax liabilities.
- Obligations that depend on the occurence or non occurence of one or more future events to confirm the amount payable the payee or the date payable such as service or product warranties
What is capital stock?
The par or stated value of shares issued
What are the additional paid in capital?
The excess of amounts paid in over the par or stated value
What are retained earnings?
The corporations undistributed earnings
What is the primary purpose of the cash flows statement?
Provide relevant information about cash receipts and payments of an enterprise during a period.
What is treasury stock?
Generally, the cost of share repurchased
What are accumulated other comprehensive income?
The aggregate amount of other comprehensive income items
What is noncontrolling interest (minority interest)?
A portion of the equity of subsidiaries not wholly owned by the reporting company.
How does the statement of cash flows achieve its purpose?
- The cash effects of operations during a period
- Investing transactions
- Financing transactions
- The net increase or decrease in cash during a period.
What simple questions does the statement of cash flows answer?
Where did the cash come from?
What was the cash used for during the period?
What was the change in the cash balance during the period?
Where do companies obtain the information to prepare the statement of cash flows.
- Comparatives balance sheets
- The current income sheet
- Selected transaction data
What are the 4 steps in preparing the statement of cash flows?
- Determine the net cash provided by operating activities
- Determine the net cash provided by investing and financing activities
- Determine the change in cash during the period
- Reconcile the change in cash with the beginning and the ending cash balances
What questions do creditors look to answer when looking at a company’s cash flow statements?
- How successful is the company in generating net cash provided by operating activities?
- What are the major trends in net flash flow provided by operating activities over time?
- What are the major reasons for the positive or negative net cash provided by operating activities?
What is current cash debt coverage a measure of and how is it solved?
A measure of whether a company can pay off its current liabilities from its operations in a given year.
Net cash provided by operating activities/average Current Liabilities = Current Cash Coverage
What is cash debt coverage a measure of? How do you solve for it?
It measures a company’s ability to reapay its liabilities from net cash provided by operating activities without having to liquidate assets from its operations.
Net Cash Provided by Operating Activities/ Average Total Liabilities = Cash Debt Coverage
What is free cash flow a measure of?
It measures the amount of cash flow
Net Cash Provided By Operating Activities - Capital Expenditures - Cash Dividends = Free Cash Flow
What are the Summary of Significant Accounting Policies?
It is a discourse to external users of alternative treatments in accounting transactions that may differ from other companies it is for comparability.
What is the accounting policy note?
A note that discusses the
- nature of operations
- use of estimates
- certain significant estimates
Under the balance sheet what three notes disclosures are included?
- Contractual situations
- Contingencies
- Information of fair values
What are the four major types of ratios?
- Liquidity Ratios
- Activity Ratios
- Profitability Ratios
- Coverage Ratios
Liquidity Ratios
Measures the company’s short term ability to pay its maturing obligations
Activity Ratios
Measures of how effectively the company uses its assets
Profitibility Ratios
Measures of the degree of success or failure of a given company or division for a given period of time
Coverage Ratios
Measures of the degree of protection for long term creditors and investors
