Interpeting Quality and Consistency of Balance Sheet and Income Statements Flashcards
Four Factors to Considrer Whenever you Assess Asset Quality
Restrictions on the use of the asset
Net Realizable value of the asset in normal course of business or liquidation of the company
Company’s ability to operate without the asset
Time Required to convert to cash.
Questions Regarding Cash
- Are there any restrictions on use
- Is the amount of cash adequete
- Is the amount typical for the company at all times.
Marketable Securities
- Are securities really marketable?
- Are securities reported in their full amount or net of related debt.
- How are securities classified
Securtities Classifications-Held to maturity securities
Held-to-maturity-reflected as amortized cost on the balance sheet with any realized gains and losses taken as income when sold.
Securities Classifications- Trading Securities
Company intends to sell in the short-term. Must reported at fair value Realized and unrealized gains and losses must be taken into current period income
Securities Classifications - Available for Sale Securities
Must be recorded at fair value, realized gains and losses must be taken into current period income, unrealized gains and losses must be includein Other Comprehensive Income.
Accounts Receivable Questions
- What is the number of accounts
- Is there a concentration
- What are terms?
- What are credit standards and procedures
- Are the receivables for completed or ongoing work
6 Is there any additional work required7. What does aging reveal
7.What is company’s bad debt experience
Question for Inventory
- What is composition of inventory
- what is required to maintain inventory
- Is there damanged inventory
- What is accounting method to assign the cost of inventory
- What is current market value
- Has the company respected GAAP’s low of cost or market rule
Companies are required to useAR: The Alllowance Method
Companies must estimated probable losses
Set up and allowance for bad debts reflects the estimated amount of futre uncollectable
Adjust the estimated amount of future uncollectable account with each perods contribution
Factors In Inventory Assessment
Stage of Completion Maintenance Accounting Method Current Market Value Lower of Market or Cost Rule
Deferred Tax Assest
Represent Tax Dedcution that a company expects to realize value from in the future
Common causes: Loss carryforward
Temporary difference between when an expense is recognized by GAAP and when the IRS allows it.
Intangible Assets
Provide future benefit to the company, but have no physical presence.
Not all intangible assets are amortized
Non-amortizable assets are subject to annual impairment tests.
Amortizing intangible assets are also subject to impairment tests.
Generally not good repayment sources
Three Types of Liabilities
Current
Non-Current
Deferred
Common Types of Notes Payable
Stockholders
Former Owners
Suppliers
Evaluating Accounts Payable
Determine who suppliers are.
Determine if goods purchased are in short supply
Determine Aging of Paybles
Determine if Sales Discounts are being taken
Obtain a credit report
Learn detail of affiliate payables.
Long-Term Obligations to Affiliated Parties
Are effectively considered short-term obligations.
Interpreting Fluctuations In Income Taxes Payable
Increases can indicate failure to pay taxes during the year, or poor tax planning.
Types of Contingencies
Take or pay - purchaser of goods agrees to purchase under a contract.
Litigation- Company has been sued.
Equity Accounts of a Sole Proprietorship
Balance Sheet Displays: Owners initial investment, undistributed earnings.
One individual goes into business
When owner dies, business dies
General Partnership
Balance Sheet Displays:
Any partners initial invest and earnings not withdrawn
One or more individuals go into business together
Disbands on death of a partner
Each partner is fully liable.
Limited Liability Partnerhship
States dictates what is displayed Businesses must register with the state LLP usually reserved for professionals Not liable for wrongful conduct Liable for debts of partnership that existed prior to registration, but not new debts
Limited Liability Company
Balance Sheet mandated by the state One or more individuals enter into an operating agreement File a certificate of organization Members manage business Members have no personal liability
Limited Partnership
Balance Sheet similar to General Partnership General Partnership manages business Limited partnerships contribute capital Not active in business Liable only to extent of investment
Joint Venture
Investors to into business for a specific project
When project is completed JV is dissolved
Taxed individually
Corporation
Balance Sheet Displays:
Capital Stock
Additional paid-capital
Retain Earnings Capital Stock
Bill and Hold Sales
Sales where the customer does not take delivery of product. Subtract from sales and AR.
What are the major expense catagories
COGS
Operating Expenses
Income Taxes
Business Practices that Enhance Quality of Earnings
Maintenance and Replacement of Equipment
Offering Good Benefits and Compensattion
Planning, Research and Development
Bad Debt Provisions and Quick Charge offis
Interest Expense Evaluation
Compare interest expense to an increase in overall profitability.
