FAR SEC 2 Flashcards
Are the financial statement formats required by GAAP?
No. Specific names and formats for these statements are not specified under GAAP. Instead, the formats of these statements have evolved to fulfill the requirements of GAAP
The left side of the accounting equation shows:
Assets (the entity’s resource structure)
The right side of the accounting equation shows:
Liabilities + Equity (the entity’s financing structure)
What are three items that primary users can assess about an entity based on the Balance Sheet?
Liquidity, Flexibility, Risk
Assets =
Liabilities + Equity
Assets are generally reported in order of:
Liquidity. Liquidity decreases moving from top to bottom on the assets section.
Current Assets
An asset is classified as current on the statement of financial position if it is expected to be realized within the entity’s operating cycle or 1 year, whichever is longer.
Operating Cycle
The operating cycle is the average time between the acquisition of resources and the final receipt of cash from their sale as the culmination of revenue generating activities. If the cycle is less than a year, 1 year is the period used for segregating current from noncurrent assets.
Operating Cycle = Inventory Period + Accounts Receivable Period
An asset is classified as current on the statement of financial position if
if it is expected to be liquidated or used up within the entity’s operating cycle or 1 year, whichever is longer.
Current assets include (6 elements)
1) Cash and cash equivalents;
2) Certain individual trading, available-for-sale, and held-to-maturity debt securities;
3) Certain individual investments in equity securities.
4) Receivables;
5) Inventories;
6) Prepaid expenses
Noncurrent Assets (basic definition, not examples)
Noncurrent assets are those not qualifying as current. Noncurrent assets are expected to be held for a longer period than 1 year or the length of the operating cycle.
What is the definition of Investments and Funds? Give the definition and four examples of types of Investments and Funds.
DEFINITION: NONOPERATING & NONCURRENT. Investments and funds include nonoperating items intended to be held beyond the longer of 1 year or the operating cycle. The following assets are typically included:
1) INVESTMENTS FOR CORPORATE EVENTS. Investments in equity securities made to control or influence another entity
2) NONCURRENT DEBT/EQUITY SECURITIES. Other noncurrent equity securities held as investments.
- Certain individual available-for-sale and held-to-maturity debt securities may be noncurrent.
3) NONOPERATING SPECIAL PUPROSE FUNDS. Funds restricted as to withdrawal or use for other than current operations, for example, to
- Retire long-term debt,
- Satisfy PENSION obligations, or
- Pay for the acquisition or construction of noncurrent assets
4) NONOPERATING CAPITAL ASSETS. Capital assets not used in current operations, such as
- Idle facilities or
- Land held for a future plant site
Noncurrent Assets (5 major categories)
Major categories of noncurrent assets include:
1) Investment and Funds,
2) Property, Plant, & Equipment (PPE),
3) Intangible Assets,
4) Other Noncurrent Assets,
5) Deferred Charges
Current Liabilities
Current liabilities generally are expected to be settled or liquidated in the ordinary course of business during the longer of 1 year or the operating cycle.
Current liabilities are “obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities.”
Current Liabilities include (5 elements):
1) Trade payables for items entering into the operating cycle, e.g., for materials and supplies used in producing goods or services for sale.
2) Other payables arising from operations, such as accrued wages, salaries, rentals, royalties, and taxes.
3) Unearned revenues (contract liabilities) arising from collections in advance of delivering goods or performing services, e.g., ticket sales revenue.
4) Other current liabilities include
Short-term notes given to acquire capital assets
Payments on the current portion of serial bonds or other noncurrent debt-
5) Noncurrent obligations callable by the creditor because of the debtor’s violation of the debt agreement at the balance sheet date are classified as current.
Working Capital =
Working Capital = Current Assets - Current Liabilities
Current liabilities do not include (2 elements):
Current liabilities do not include:
1) Current obligations if an entity (a) intends to refinance them on a noncurrent basis and (b) demonstrates an ability to do so.
- The ability to refinance may be demonstrated by
(i) Entering into a financing agreement meeting all conditions before the balance sheet is issued.
(ii) Issuing a noncurrent obligation or equity securities after the end of the reporting period but before issuance of the balance sheet.
- The amount excluded from current liabilities must not exceed the proceeds from the new obligation or equity securities issued.
2) Debts to be paid from funds accumulated in noncurrent asset accounts. Thus, a liability for bonds payable in the next period will not be classified as current if payment is to be from a noncurrent fund.
Noncurrent Liabilities (8 elements)
1) DEFINITION: Noncurrent liabilities are those not qualifying as current. The noncurrent portions of the following items are reported in this section of the balance sheet:
2) Noncurrent notes and bonds
3) Lease liability
4) Most postretirement benefit obligations
5) Obligations under product or service warranty agreements
6) Advances for noncurrent commitments to provide goods or services
7) Deferred revenue (payments collected for goods or services not yet earned)
8) Deferred tax liabilities arising from interperiod tax allocation are classified as noncurrent.
Noncurrent Liabilities (7 elements)
DEFINITION: Noncurrent liabilities are those not qualifying as current. The noncurrent portions of the following items are reported in this section of the balance sheet:
1) Noncurrent notes and bonds
2) LEASES. Long-term operating expense payment agreements, e.g., lease liability
3) PENSIONS. Most postretirement benefit obligations
4) WARRANTIES. Obligations under product or service warranty agreements
5) ADVANCES. Advances for noncurrent commitments to provide goods or services
6) Deferred revenue
7) ALL Deferred tax liabilities arising from interperiod tax allocation are classified as noncurrent.
Equity
Equity is the residual after total liabilities are subtracted from total assets.
Equity (4 major categories)
Equity consists of the following:
1) Capital contributed by owners (par value of common and preferred stock issued and additional paid-in capital)
2) Retained earnings (income reinvested)
3) Accumulated other comprehensive income (all comprehensive income items not included in net income)
4) The noncontrolling interest in a consolidated entity (covered in Study Unit 14)
Treasury Stock
Treasury stock is the entity’s own common stock that it has repurchased. Treasury stock is presented as a reduction of total equity (discussed in Study Unit 13).
Treasury Stock is a reduction of ___________.
Treasury stock is presented as a reduction of total equity.
Temporary vs. Permanent Accounts
The accounts presented on the balance sheet are real or permanent accounts. They report an entity’s resources and financing elements that exist from period to period. The accounts presented on the income statement are nominal or temporary accounts. They are reported for a period of time, closed at the end of the period, and reopened at the beginning of the next period with zero balances.