Chapter Five: Balance Sheet and Statement of Cash Flows

Question 1

Net Realizable Value

Answer 1

Amount expect to receive on asset (estimated amounts for accounts and notes receivable)

Question 2

Classified Balance Sheet

Answer 2

Reports the accounting equation (assets = liabilities + equity) with the assets on the top or left side of the sheet and liabilities on the bottom or right side of the sheet

Question 3

Sections of Classified Balance Sheet

Answer 3

Current Assets, Noncurrent Assets, Current Liabilities, Long-term Liabilities, and Stockholder’s Equity

Question 4

Current Assets

Answer 4

listed first in order of liquidity

Question 5

Types of Current Assets

Answer 5

Cash, Investments, Accounts and Notes Receivable, Inventory, and Prepaid Expenses

Question 6

Cash

Answer 6

reported at fair value (face value), amounts on hand + amounts on demand accounts + money market funds

Question 7

Investments

Answer 7

Purchasing of stock or bond, trading and available for sale reported at fair value and held-to-maturity reported as amortized

Question 8

Accounts (sales) and Notes (interest and document associated) Receivable

Answer 8

estimated amount collectible, amounts owed to you, reported at net realizable value, report accrued interest

Question 9

Inventory

Answer 9

reported as lower-of-cost-or-market, anything that can be sold in normal operations

Question 10

Prepaid Expenses

Answer 10

unexpired (amount not used), pay for now and expect to receive benefits in the future

Question 11

Types of Noncurrent Assets

Answer 11

Long-term Investments, Property, Plant, and Equipment, and Intangible Assets

Question 12

Long-term investments

Answer 12

any investments held over one year, reported as fair value or cost for held to maturity securities

Question 13

What is the difference between long and short term investments?

Answer 13

Intent to hold onto security

Question 14

Property, Plant, and Equipment

Answer 14

long-term assets used in normal operations of business, reported at cost less accumulated depreciation (book value)

Question 15

Intangible Assets

Answer 15

nonphysical substance and nonfinancial instrument, reported at book value, amortized (how long asset worth to us), goodwill not amortized

Question 16

Current Liabilities

Answer 16

obligations due within 1 year, reported at face value

Question 17

Long-term Liabilities

Answer 17

reported at present value, takes into account that there is value in future and moves to current liability as moves closer to maturity

Question 18

Types of Stockholder’s Equity

Answer 18

Contributed Capital and Retained Earnings

Question 19

Contributed Capital

Answer 19

what stockholder’s have invested in your company, reported at par value + anything else they paid in (paid in capital in excess of par value)

Question 20

Retained Earnings

Answer 20

Money left over from operations after paying dividends or payments to owners, reported at accumulated value

Question 21

Supplementary Information

Answer 21

disclosed in notes of financial statements

Question 22

What is reported in supplementary information?

Answer 22

Accounting Policies, Contractual Situations, Fair Values, and Contingencies

Question 23

Accounting Policies

Answer 23

how you record when there are different options (ex. FIFO vs. LIFO)

Question 24

Contractual Situations

Answer 24

Used with debt covenants

Question 25

Fair Values

Answer 25

things on balance sheet at cost must have reported fair value

Question 26

Contingencies

Answer 26

potential future benefit (gain) or obligation (loss)

Question 27

Gain contingencies

Answer 27

never recognized (principle of conservancy)

Question 28

Loss contingencies

Answer 28

classified as probable, reasonably possible or remote

Question 29

When do you accrue loss contingencies that are probable?

Answer 29

If amount can be reasonably estimated

Question 30

When do you disclose loss contingencies that are probable?

Answer 30

If amount cannot be reasonably estimated

Question 31

How do you report reasonably possible loss contingencies?

Answer 31

Disclose them

Question 32

Why is the balance sheet useful?

Answer 32

Rates of Return, Evaluating Capital Structure, Liquidity, Solvency, and Financial Flexibility

Question 33

Rates of Return

Answer 33

return on assets and return on equity

Question 34

Evaluating Capital Structure

Answer 34

how much money comes from debt or shareholders

Question 35

Liquidity

Answer 35

how quickly can convert assets into cash

Question 36

Solvency

Answer 36

ability to readily pay off current liabilities

Question 37

Criticisms of Balance Sheet

Answer 37

adds up figures that are not logically combined/related, relies heavily on estimates, and omits items of value (ex. value of personnel, R & D)

Question 38

Three Sections of Cash Flow Statement

Answer 38

Financing Activities, Investing Activities, and Operating Activities

Question 39

Financing Activities (dividends)

Answer 39

Organizations receive resources from creditors and owners, any transaction between organization and creditors or owners (exception: interest)

Question 40

Investing Activities

Answer 40

acquisition or disposition of resources to be used to produce profits, any cash transaction used to acquire or dispose LT asset

Question 41

Operating Activities

Answer 41

use of resources for purpose of producing profits, any transaction used in determination of net income (interest)

Question 42

In what two ways are cash flows prepared?

Answer 42

Direct method and Indirect Method

Question 43

Direct Method

Answer 43

analyze each account that causes cash flow in operating activities

Question 44

Indirect Method

Answer 44

back out of net income in order to end up at operating activities (remove non-cash)

Question 45

Where do the differences in the direct and indirect method occur?

Answer 45

operating sections

Question 46

Input/Output Formula (direct method)

Answer 46

every account has one, beginning balance (balance sheet) + things added - things deducted = ending balance

Question 47

What are the tasks in an input/output formula?

Answer 47

to "know" things added and deducted and will usually know 3 and solve for 4th

Question 48

What do you look for in analysis of input/output formula?

Answer 48

Seek items that simultaneously affect cash

Question 49

Indirect Method

Answer 49

adjustments made, Net Income + Depreciation - Increases in Current Assets (other than cash) + Decreases in Current Assets + Increase in Current Liabilities - Decreases in Current Liabilities - Gains + Losses = Cash Flow From Operating Activities