FSA: Understanding the Balance Sheets Flashcards
Elements of the balance sheet =
Assets
Liabilities
Equity
A financial statement item should be recognized if future economic benefit is probable and the item’s value/cost can be measured reliably.
Use of BS/liquidity/solvency/value =
The balance shows how liquid, solvent and able to make distributions to shareholders a firm is.
Liquidity = ability to meet short term obligations
Solvency = ability to meet long term obligations
NOTE: value on the BS is not consistent - some items are valued at historical cost, some at fair value, some at amortized value.
Some value adding items are not on the balance sheet - firm’s employees, reputation etc.
Classified balance sheet and liquidity based format =
IFRS and GAAP reguire a classified balance sheet, which separates current/non current assets and liabilities.
IFRS allows liquidity based format if more relevant/reliable - items are ordered by liquidity
(Non) Current Assets =
cash and other assets that will likely be converted to cash within the greater of one year or one operating cycle (time to produce, sell, collect cash).
CA are usually ordered by liquidity, with cash being the most liquid.
CA gives info about the operating activities of the firm.
NON CURRENT ASSETS: provide info about the firm’s investing activites
(Non) Current liabilities =
obligations that will be satisfied within the greater of one year or one operating cycle
- settlement is expected in the normal operating cycle
- settlement is expected within one year
- Held primarily for trading purposes
- There is not an unconditional right to defer settlement for more than one year
NONCURRENT LIABILITIES: provide info about long term financing activities
Working capital =
current assets - current liabilities
Not enough working capital may indicate liquidity problems, to much may indicate an inefficient use of assets
CA: Cash and cash equivalents =
cash equiv includes T bills, commercial paper, money market funds - close enought to maturity that interest risk is insignificant.
Considered financial assets.
financial assets are usually reported on the BS at amortized cost or fair value - should be about the same for C&CE
CA: Marketable securities =
Financial assets traded in public market
Value can be readily determined
Incl T bills, notes, bonds, equities.
Details of these investments are disclosed in the footnotes.
CA: Accounts receivable =
Gross receivables - allowance for doubtful accounts (a contra account) = AR (at net realizable value)
Bad debt expense increases the allowance for doubtful accounts.
AR: financial assets showing how much the firm is owed for goods/services sold on credit
When AR are written off (uncollectable) gross receivables and the allowance for doubtful accounts are reduced.
Underestimating bad debt expense will inflate AR (and look make reported earnings bigger).
Firms are required to disclose significant concentrations of credit risk (customer, geographic etc)
CA: Inventories =
Incl standard costing & retail method (for measuring inventory costs), cost flow assumptions
**P89 - DETAILS FOR REPORTING INVENTORY VALUE UNDER IFRS/GAAP
Goods held for sale or the manufacture of other goods
- Includes* costs such as purchase, conversion, transport, processing costs.
- Excludes* abnormal waste of material, labor, labor overhead, storage costs (unless part of production), administrative overhead and selling costs.
Standard costing: inventory cost is based on a predetermined amount of material/labor/overhead for production of a good (used by manufacturers)
Retail Method: retail prices of inventory - gross profit = inventory cost
Cost flow: IFRS allos FIFO +avg cost, GAAP allows FIFO +LIFO + avg cost
CA: Other current assets =
Including prepaid expenses and deferred tax assets
immterial ammounts combined into one account.
Prepaid Expenses: operating costs paid in advance. Cash goes down, PE goes up. As the the cost is incurred, expense is recognized on the IS and PE decreases.
**Deferred Tax assets: **taxes payable exceeds the amount of income tax expense recognized in the income statement.
CL: Accounts Payable =
AKA trade payables
amounts the firm owes to suppliers for goods and services purchased on credit
Payables relative to purchases can signal credit problems with suppliers
CL: Notes payable and current portion of long term debt =
obligations - promissory notes owwed to lenders.
If maturity is greater than one year these can be reported as noncurrent liabilities
The current portion of long term debt is the principle portion of debt due within the greater of one year or operating cycle
CL: accrued liabilities =
expenses that have been recognized in the IS bur are not yet contractually due.
Occurs as a result of accrual accounting - ie a year end interest payment will be recognized in expenses (on IS) and an increase in accrued liabilities throughout the year - even though the liability is not due until the end of the year
includes: interest payable, wages payable, accrued warranty expense, and sometimes income tax payable (taxes recognized on the IS but not yet paid)
CL: unearned revenue =
AKA unearned income, deferred rev, deferred income
cash collected in advance of providing goods and services.
When payment is received, assets (cash) and liabilities (unearned rev) both go up.
On delivery the firm recognizes revenue on the IS and reduces the liability (unearned revenue)
When analyzing liquidity, keep in mind that unearned rev doesnt require a future outflow of cash as accounts payable does.
URev may be an indication of future growth, as revenue will ultimately be recognized on the income statement.
NCA: Financial Assets: CHEAT CARD:
BS: Liquidity Ratios =
quick ratio aka acid test ratio
difference between current and quick ratio is INVENTORY.
cash ratio excludes INVENTORY and RECEIVABLES
BS: Solvency Ratios =
measures ability to satisfy long term obligations.
nb, LTD to E, TD to E and D ratio all consider interest bearing obligations (debt) whereas the financial leverage measure includes both interest and non interest bearing.
