Chapter 5: Balance Sheet and Statement of Cash Flows Flashcards
What are the advantages of the balance sheet?
- Helps judge market value
- Helps predict future cash flows
- Helps determine lliquidity, solvency, and financial flexibility due to classfications
What are the limitations of the balance sheet?
- Does not state market value
- Does not state liquidation value
- Items report at historical cost
- Many off-balance sheet resources
- Relies on estimates
What are the elements of the balance sheet?
- Assets - future benefit from past event, controlled by entity
- Liability - future sacrifice from past event, obligation to transfer asset or provide service
- Equity - residual claim to asset after liabilities are deducted
What are current assets?
What are the items?
Converted to cash within a year or the operating cycle, whichever is longer.
- Cash and cash equivalents
- Short-term investments
- Accounts receivable (trade receivables)
- Inventories
- Prepaid expenses
What are current liabilities?
What are the exceptions?
Paid within a year or the operating cycle, whichever is longer.
The only exception is if management intends to and has the ability to refinance.
What is the operating cycle?
- Use cash to acquire raw materials
- Convert raw materials to finished product
- Deliver product to customer
- Collect cash from customer
To be classified as a cash equivalent, what is the maturity of an investment?
Maturity of 3 months or less.
What is a short-term investment?
Ability and intent to sell investment in the next 12 months or the operation cycle whichever is longer.
What are non-current assets?
- Long term investments
- Property, plant, and equipment
- Intangibles
- Other Assets
What are long term investments?
- Investment in securities
- Investment in fixed assets not used in operations
- Investment in special funds
- Investment in nonconsolidated subsidiaries/affiliated companies
What is property, plant, and equipment?
How are they presented in the financial statements?
Tangible, long-lived assets used in the operations of the business.
They are presented:
- Detailed notes
- Historical cost less depreciation (depletion)
- Land is separate and has no depreciation
What are intangibles?
How are they presented on the balance sheet?
The ownership of an exclusive right to product, process, or name.
They are presented:
- Net of accumulated amortization
- Sometimes included with PPE or other non-current assets
- Some of the value is expensed
What are current liabilities?
- Accounts payable
- Notes payable
- Unearned revenues
- Accrued liabilities
- Current maturity of long term debt
What are the long-term liabilities?
What are the requirements?
Long term notes, bonds, pension and leas obligations.
- Do not require use of current assets or creation of current liabilities
- Detailed disclosure needed in notes
What are the stockholders’ equity items?
- Capital stock - par or stated value of the share issued
- Additional paid-in capital - excess of amounts paid in over the par or stated value
- Retained earnings - corporation’s undistributed earnings
- Accumulated other comprehensive income - aggregate amount of the other comprehensive income items
- Treasury stock - cost of shares repurchased
- Nonconrolling interest
How are assets, liabilities, and equity listed, respectively?
- Order of liquidity
- Order of maturity
- Most ot least permanent
What are operating activities on the statement of cash flows?
Inflows and outflows of cash resulting from activities reported on the income statement.
- Cash revenue from dividends and interest
- Non-cash not reported, but disclosed
What are investing activities on the statement of cash flows?
Inflows and outflows of cash resulting from activities reported on the balance sheet as assets.
Remember:
Principal payment received from notes receivable is investing.
What are financing activities on the statement of cash flows?
Inflows and outflows of cash resulting from activities reported on the liabilities and stockholders’ equity.
Remember:
Principal payment made on notes payable is financing.
What are types of disclosure notes?
- Summary of significant accounting policies
- Contegenicies - material events with uncertain outcomes
- Contractual situations
- Fair values - additional disclosure for Level 3 measurements
What are the requirements of an informal restriction of cash?
- Reported in Investments and Funds/Other Assets if material
- Disclosure note if material
What are the requirements of contractual restriction on cash?
- Reported as debt instruments
- If liability is non-current - Non-current investments and funds/other assets
- If liability is current - Current investments and funds/other asset
- Disclosure note required if material
What is a compensating balance?
What is the result of this type of balance?
Cash restriction in relation to a loan and is the minimum balance required.
Results in higher effective interest rate, which is the difference between the stated loan and the compensating balance.
What is the effective interest rate?
Interest expense
/
Actual loan
Where is the compensating balance reported if informal agrrangement?
What is required?
Cash and cash equivalent
Note Disclosure required
Where is the compensating balance reported if legally binding restriction?
What is required
Current Investment/Funds or Other Assets + Note
Noncurrent Investment/Funds or Other Assets + Note
How are bank drafts handled?
- Reported as current liabilities
- Only offset cah if overdraft is in the same bank as another cash account
