Chapter-5 Balance Sheet and Statement of Cash Flows

Question 1

Solvency

Answer 1

Refers to the ability of a company to pay its debts as they mature

Question 2

Liquidity

Answer 2

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.

Question 3

What are the three major limitations to a balance sheet?

Answer 3

1. hostorical cost
2. Judgments and estimates
3. A balance sheet omits many items thar are of financial value

Question 4

What is financial flexibility?

Answer 4

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.

Question 5

What are three ways the balance sheet is classified

Answer 5

1. Assets that differ in their type of expected funtion in the companys central operations or other activities
2. Assets and liabilities with different implications for the companies financial dlexibility
3. Assets and liabilities with different general liquidity characteristics.

Question 6

What are current assets

Answer 6

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

Question 7

What are short-term investments?

Answer 7

Assets that are held for a year or less

Question 8

What does held to maturity mean?

Answer 8

Debt securities that a company has the positive intent and ability to hold to maturity

Question 9

What is trading

Answer 9

debt securities bought and held primarily for sale in the near term to generate income on short term differences

Question 10

What is available for sale?

Answer 10

Debt securitites not classified as held to maturity or trading securities

Question 11

What are the four types of long term invesments?

Answer 11

1. Investments in securities such as bonds, common stock, or long term notes
2. Invesments in tangible fixed assets not currently used in operations such as land held for speculation
3. Investments set aside in special funds, such as a sinking fund, or plant expansion fund.
4. Investments in nonconsolidated subsidiaries or affiliated companies.

Question 12

What are current liabilities?

Answer 12

Obligation that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.

Question 13

What are the three types of long term liabilities?

Answer 13

1. Obligations arising from specific financing situations, such as the issuance of bonds, long term lease obligations, and long term note payable
2. Obligations arising from the ordinary operations of the company, such as pension obligations and deffered income tax liabilities.
3. 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

Question 14

What is capital stock?

Answer 14

The par or stated value of shares issued

Question 15

What are the additional paid in capital?

Answer 15

The excess of amounts paid in over the par or stated value

Question 16

What are retained earnings?

Answer 16

The corporations undistributed earnings

Question 17

What is the primary purpose of the cash flows statement?

Answer 17

Provide relevant information about cash receipts and payments of an enterprise during a period.

Question 18

What is treasury stock?

Answer 18

Generally, the cost of share repurchased

Question 19

What are accumulated other comprehensive income?

Answer 19

The aggregate amount of other comprehensive income items

Question 20

What is noncontrolling interest (minority interest)?

Answer 20

A portion of the equity of subsidiaries not wholly owned by the reporting company.

Question 21

How does the statement of cash flows achieve its purpose?

Answer 21

1. The cash effects of operations during a period
2. Investing transactions
3. Financing transactions
4. The net increase or decrease in cash during a period.

Question 22

What simple questions does the statement of cash flows answer?

Answer 22

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?

Question 23

Where do companies obtain the information to prepare the statement of cash flows.

Answer 23

1. Comparatives balance sheets
2. The current income sheet
3. Selected transaction data

Question 24

What are the 4 steps in preparing the statement of cash flows?

Answer 24

1. Determine the net cash provided by operating activities
2. Determine the net cash provided by investing and financing activities
3. Determine the change in cash during the period
4. Reconcile the change in cash with the beginning and the ending cash balances

Question 25

What questions do creditors look to answer when looking at a company’s cash flow statements?

Answer 25

1. How successful is the company in generating net cash provided by operating activities?
2. What are the major trends in net flash flow provided by operating activities over time?
3. What are the major reasons for the positive or negative net cash provided by operating activities?

Question 26

What is current cash debt coverage a measure of and how is it solved?

Answer 26

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

Question 27

What is cash debt coverage a measure of? How do you solve for it?

Answer 27

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

Question 28

What is free cash flow a measure of?

Answer 28

It measures the amount of cash flow

Net Cash Provided By Operating Activities - Capital Expenditures - Cash Dividends = Free Cash Flow

Question 29

What are the Summary of Significant Accounting Policies?

Answer 29

It is a discourse to external users of alternative treatments in accounting transactions that may differ from other companies it is for comparability.

Question 30

What is the accounting policy note?

Answer 30

A note that discusses the

• nature of operations
• use of estimates
• certain significant estimates

Question 31

Under the balance sheet what three notes disclosures are included?

Answer 31

1. Contractual situations
2. Contingencies
3. Information of fair values

Question 32

What are the four major types of ratios?

Answer 32

• Liquidity Ratios
• Activity Ratios
• Profitability Ratios
• Coverage Ratios

Question 33

Liquidity Ratios

Answer 33

Measures the company’s short term ability to pay its maturing obligations

Question 34

Activity Ratios

Answer 34

Measures of how effectively the company uses its assets

Question 35

Profitibility Ratios

Answer 35

Measures of the degree of success or failure of a given company or division for a given period of time

Question 36

Coverage Ratios

Answer 36

Measures of the degree of protection for long term creditors and investors