E. Describe different types of assets and liabilities and the measurement bases of each Flashcards
Understanding Balance Sheets
Current Assets
Cash and other assets converted to cash in less than 1 year or the operating cycle
Operating cycle - Inventory>sales>cash
Presented in order of liquidity
Reveal info about the operating activities of the firm
Cash and cash equivalents
Short term
Highly liquid
Readily convertible to cash
Interest rate risk is insignificant (very near maturity)
Cash equivalents = Treasury bills, commercial paper, money market funds
Marketable Securities
Financial assets that are traded in a public market and whose value can be readily determined.
Treasury bills, notes, bonds, equity securities
Marketable security details in financial footnotes
Accounts Recievable
Represent financial assets that represent amounts owed to the firm by customers for goods or services sold on credit.
Reported at net realizable value (NRV is based on Bad Debt Expense)(Bad Debt Expense increases the allowance for doubtful accounts - contra asset)(A contra account is used to reduce the value of its controlling account)
Inventories
Good held for sale to customers or used in manufacture of goods to be sold.
Costs: Purchase cost, conversion costs, other costs
Costs excluded: abnormal waste of material, labor, overhead, storage costs (unless a part of the production process), administrative overhead, selling costs
Other current assets
Amounts that may not be material if shown separately (so they’re combined into ‘other current assets’)
Prepaid expense: Operating costs that have been paid in advance. -assets, +expense then recognized = +expense, -prepaid expense (asset)
Deferred tax assets
Deferred tax assets
Amount of taxes payable>amount of income tax expense
Recognized in the income statement
Current Liabilities
Obligations to be satisfied within one year or op cycle
Held primarily for trading purposes
There is not an unconditional right to defer settlement for more than one year
Accounts payable
Amounts owed to suppliers for purchases on credit
Payables/Purchases can signal credit problems with suppliers
Notes payable and current portion of long term debt
Obligations(promissory notes). If notes payable maturities>1year then = noncurrent liabilities
‘current portion’ of long term debt: The principal due in a year or op. cycle
Accrued liabilities
aka ‘accrued expenses’ - expenses that have been recognized in the income statement but are not yet contractually due.
Accrual method - rev. n expenses recognized as incurred.
interest payable, wages payable, accrued warranty expense
Unearned Revenue
Cash before goods or service, aka ‘unearned inc, deferred rev, deferred inc’
Record: +Cash, +Unearned Revenue
Rendered: +Revenue, -Unearned Revenue
Non-Current Assets
Info about firms investing activities
PPE, Investment Property, Intangible Assets (identifiable and unidentifiable), goodwill
Property, Plant, Equipment
Land, buildings, equiptment and machinery, furniture, natural resources
PPE under IFRS: Cost model, Revaluation model (amortized or fair values)
PPE under USGAAP: Cost Model
Investment Property
IFRS: Assets that general rental income or capital appreciation. Reported at amortized or fair value.
GAAP: No def.
Intangible Assets
Non-monetary, no physical substance
Identifiable: Patents, trademarks, copyrights
Unidentifiable: Goodwill
Goodwill
The excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired in a business acquisition.
- only created in a purchase aquisition
- If internal then expensed as incurred
- tested for impairment (loss doesnt effect CF)
- Not impaired? Can remain on BS indefinitely.
Financial Assets
Cash equivalents: Treasury bills, commercial paper, money market funds
Reported on BS as amortized cost or fair value
F.Assets as amortized: Held-to-maturity securities: Debt securities acquired with the intent to be held to maturity
F.Assets as fair value: Market-to-Market accounting - trading securities, available-for-sale securities, and derivatives
Long-term financial liabilities
Bank loans
notes payable
bonds payable
derivatives
If financial liability not reported at FV then report on BS at amortized cost
Amort cost = issue price-principal payments+any amortized discounts-amortized premium
Deferred tax liabilities
Tax differences (amort v. straight line) or tax deductions make amounts of tax income payable in future periods
Current Assets - Current Liabilities
Working Capital
Not enough working capital
Liquidity problems
Too much working capital
Indication of inefficient use of assets
What does it mean that receivables are ‘written-off’?
Written off = removed from BS because they’re uncollectible. Adjustment = -Gross Recievables,-allowance account
What could analyzing receivables relative to sales reveal?
Could reveal collection problems
How do manufacturing firms report inventories?
As separate
Inventories of raw materials
Work-in-process
finished goods
What are the two measurement bases to inventory costs
Standard costing: Assigning predetermined amounts of materials, labor, and overhead to goods produced
Retail Method: Measure inventory at retail prices and then subtract gross proit in order to determine cost.
Taxes payable
Current T’s recognized in IS but not yet paid
Consider this about unearned rev during analysis
When analyzing liquidity, Unearned Revenue does not require a future outflow of cash like accounts payable
Unearned reve may indicate future growth as the rev. will ultimately be recognized in the income statement.
Fair value model
Any changes in fair value are recognized in the income statement
Trading securities
‘held for trading securities’ - reported on BS at fair value and any unrealized gains and losses(aka holding period gains and losses) reported on IS
Available for sale securities
- Not expected to be held to maturity or traded in the near term
- also reported on BS at fair value like trading securities
- Unrealized holding period returns losses NOT reported on IS but on other comprehensive inc as part of SE
