Chapter 5: Balance Sheet and Statement of Cash Flows Flashcards
Current Ratio
Company’s ability to pay current liabilities from current assets
= Total current assets / total current liabilities
1.5 is strong, 1 is low/ risky
(Current = short term)
Liquidity Ratios
Measure the ability of the company to pay current liabilities with current assets
Current ratio: CA/ CL (2+ preferred)
Shows amount of current assets available for every $1.00 of current liabilities
Working Capital = CA- CL
shows assets left after paying all current liabilities
Liquidity
Ability to pay obligations expected due in the next year
“the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability is paid.”
Long-Term Liabilities
Obligations the company expects to pay after a year (or operating cycle)
- does not include currently maturing portions of long-term liabilities, those are current.
- obligations from financing
- obligations from extraordinary operations
- obligations contingent of future events
Requires much supplementary disclosures - inclusion of terms of agreements in notes
Current Liabilties
Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets or the creation of other current liabilities
(generally in one year/ one operating cycle)
includes portion of long term liabilities currently coming due
- notes payable
- accounts payable
- other current liabilities in order of magnitude
Long term assets
Holding over one year/ operating cycle
Order on balance sheet
2) Long-term investments
3) Property, plant and equipment
4) Intangible assets
5) Other assets
Current Assets
Assets the company expects to convert to cash or use up within one year or one operating cycle (whichever is longer)
Generally listed in order expected to change to cash
Cash (at fair value) Short term investments (at fair value) Accounts Receivable (at estimated amount collectable) Inventory (lower of cost or market) Prepaid expenses (cost
Operating Cycle
Average time from purchase of inventory to collection of cash from customers
Lower-of-cost-or-Market Rule
If value of ending inventory is lower than its cost:
- companies must “write down” (recognize loss on income statement) the inventory to market value (replacement cost, not selling price) in the period where a decline below cost occurs
Conservatism in action
Cash Ratio
Measures company’s ability to pay current liabilities from cash and cash equivalent
= (cash + cash equivalents)/ total current liabilities
Cash equivalent = can be converted to cash in three months or less
Cash Equivalent
Cash equivalents: short term highly liquid investments that mature within THREE MONTHS (90 days) or less
company must disclose any restrictions or commitments in availability
- current assets if current assets
- other assets if NOT current obligations
Current assets NRV on balance sheet
Net Realizable Value of current assets on balance sheet
Current Assets:
Accounts Receivable
Less: Allowance for bad debts
Receivables on the Balance Sheet
- identify each major type of receivable in the balance sheet or in the notes
- report short term receivables as current assets
- report both gross amount of A/R and allowance for doubtful accounts
- identify any receivables used as collatoeral
Valuing Accounts Receivable
- Always a current asset
- reported at the amount the company thinks they will be able to collect (Net realizable cash value = NRV)
- difficulty is that an unknown amount of receivables will become uncollectable
Types of Receivables
Amounts due to economic entity that are expected to be received in cash
Accounts Receivable: owed by customers for goods/ services sold
Notes Receivable: Claims for formal instruments of credit issued as proof of debt
Other receivables: “nontrade”, interest, loans to officers, advances in pay, income tax refundable
Intangible assets on financial statements
Usually shown as a separate category from PP&E
(Natural resources listed under PP&E)
Shown only at net book value (accumulated amortization not shown on balance sheet)
Intangible Assets
Characteristics
1) Lack physical existence
2) Not financial instruments
Categorized as having a limited life or an indefinite life
- rights, privileges, competitive advantages that do not possess physical substance
Trademarks, patents, goodwill, copyrights, franchises/ licenses
categorized as internally created vs purchased
Current Liabilities on Balance Sheet
Notes Payable
Accounts Payable
Then in order of magnitude (largest to smallest)
When long term debt matures
On the balance sheet shows under current liabilities as “long term debt due within one year”
Some notes may have portions report as current and portions reported as long term
Stock on balance sheet (common only)
Stockholders' Equity Paid-In Capital Common Stock Paid-In-Capital in excess of par value Total Paid-in-capital Retained Earnings Total Stockholder's Equity
Treasury Stock on Balance Sheet
Stockholder's Equity Paid-in- Capital Common Stock APIC Retained Earnings Total P-I-Capital & Retained Earnings Less Treasury stock (qty at cost) Total Stockholder's Equity
Treasury Stock= reduction in total stockholder’s equity
APIC
Paid in capital in excess of stated or par value of stock
aka: additional paid-in-capital, premium on stock
usually on balance sheet as one amount though there may be subtotals
Stock on balance sheets
Stockholder’s Equity
Paid in Capital
% preferred Stock, $ par value
X shares authorized, x issued and outstanding
Common Stock, $ value (par or stated)
X shares authorized, x issued and outstanding
Total capital stock
Additional paid in capital also separated into preferred and common stock
Par Value stock
Value per share assigned by charter
while it used to be the legal capital per share a company was required to retain to protect creditors this is no longer required in most states