Chapter Five: Balance Sheet and Statement of Cash Flows Flashcards
Net Realizable Value
Amount expect to receive on asset (estimated amounts for accounts and notes receivable)
Classified Balance Sheet
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
Sections of Classified Balance Sheet
Current Assets, Noncurrent Assets, Current Liabilities, Long-term Liabilities, and Stockholder’s Equity
Current Assets
listed first in order of liquidity
Types of Current Assets
Cash, Investments, Accounts and Notes Receivable, Inventory, and Prepaid Expenses
Cash
reported at fair value (face value), amounts on hand + amounts on demand accounts + money market funds
Investments
Purchasing of stock or bond, trading and available for sale reported at fair value and held-to-maturity reported as amortized
Accounts (sales) and Notes (interest and document associated) Receivable
estimated amount collectible, amounts owed to you, reported at net realizable value, report accrued interest
Inventory
reported as lower-of-cost-or-market, anything that can be sold in normal operations
Prepaid Expenses
unexpired (amount not used), pay for now and expect to receive benefits in the future
Types of Noncurrent Assets
Long-term Investments, Property, Plant, and Equipment, and Intangible Assets
Long-term investments
any investments held over one year, reported as fair value or cost for held to maturity securities
What is the difference between long and short term investments?
Intent to hold onto security
Property, Plant, and Equipment
long-term assets used in normal operations of business, reported at cost less accumulated depreciation (book value)
Intangible Assets
nonphysical substance and nonfinancial instrument, reported at book value, amortized (how long asset worth to us), goodwill not amortized
Current Liabilities
obligations due within 1 year, reported at face value
Long-term Liabilities
reported at present value, takes into account that there is value in future and moves to current liability as moves closer to maturity
Types of Stockholder’s Equity
Contributed Capital and Retained Earnings
Contributed Capital
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)
Retained Earnings
Money left over from operations after paying dividends or payments to owners, reported at accumulated value
Supplementary Information
disclosed in notes of financial statements
What is reported in supplementary information?
Accounting Policies, Contractual Situations, Fair Values, and Contingencies
Accounting Policies
how you record when there are different options (ex. FIFO vs. LIFO)
Contractual Situations
Used with debt covenants
Fair Values
things on balance sheet at cost must have reported fair value
Contingencies
potential future benefit (gain) or obligation (loss)
Gain contingencies
never recognized (principle of conservancy)
Loss contingencies
classified as probable, reasonably possible or remote
When do you accrue loss contingencies that are probable?
If amount can be reasonably estimated
When do you disclose loss contingencies that are probable?
If amount cannot be reasonably estimated
How do you report reasonably possible loss contingencies?
Disclose them
Why is the balance sheet useful?
Rates of Return, Evaluating Capital Structure, Liquidity, Solvency, and Financial Flexibility
Rates of Return
return on assets and return on equity
Evaluating Capital Structure
how much money comes from debt or shareholders
Liquidity
how quickly can convert assets into cash
Solvency
ability to readily pay off current liabilities
Criticisms of Balance Sheet
adds up figures that are not logically combined/related, relies heavily on estimates, and omits items of value (ex. value of personnel, R & D)
Three Sections of Cash Flow Statement
Financing Activities, Investing Activities, and Operating Activities
Financing Activities (dividends)
Organizations receive resources from creditors and owners, any transaction between organization and creditors or owners (exception: interest)
Investing Activities
acquisition or disposition of resources to be used to produce profits, any cash transaction used to acquire or dispose LT asset
Operating Activities
use of resources for purpose of producing profits, any transaction used in determination of net income (interest)
In what two ways are cash flows prepared?
Direct method and Indirect Method
Direct Method
analyze each account that causes cash flow in operating activities
Indirect Method
back out of net income in order to end up at operating activities (remove non-cash)
Where do the differences in the direct and indirect method occur?
operating sections
Input/Output Formula (direct method)
every account has one, beginning balance (balance sheet) + things added - things deducted = ending balance
What are the tasks in an input/output formula?
to “know” things added and deducted and will usually know 3 and solve for 4th
What do you look for in analysis of input/output formula?
Seek items that simultaneously affect cash
Indirect Method
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
