L.4 - Balance Sheet

Question 1

Assets

Answer 1

Resources controlled by the firm

from which future economic benefits are expected to flow to the entity

Question 2

Liabilities

Answer 2

obligations of a firm arising from past events

settlement of which is respected result in an outflow of economic

Question 3

Equity

Answer 3

owner´s equity
can be view as a residual or balancing amount
Equity = assets net of liabilities
–> should not be viewed as a measure of either the market or intrinsic value of company´s equity for three reasons:
1. BS is a mixed model w.r. to measurement
- some A&L are measured based on historical cost whereas others are based on fair value or current value

2. current value reflects the value at end of reporting period
   - values can change after the balance sheet is prepared
3. The value of a company is a function of many factors, incl. future cash flows
   - important aspects, e.g. its reputation, patents, management skills - not included within BS

Question 4

Current & NonCurrent Assets

Answer 4

current
= expected to be liquidated within a year or operating cycle
= maintained fo operating purposes

Noncurrent
= represents infrastructure of the firm operates and not consumed in he current period

Question 5

Current Assets

Answer 5

cash
items to be converted into cash (trade receivables, marketable securities)
used up (office supplies, prepaid expenses)
sold up (inventories)

financial liabilities

Question 6

current liabilities

Answer 6

financial liabilties classified as current if they are due to be settled within one year
even if original term was for a period longer than one year

trade payables and some accruals for employee and other operating costs,
–> are part of the WC used in the entity´s normal operating cycle

Question 7

Working capital

Answer 7

=excess of current assets over current liabilities

level of WC provides analysts with information about ability of an entity to meet its liabilities as they fall due
- how quickly it can meet its ST obligation given its ST cash/asset account

Question 8

Non-Current Assets

Answer 8

Long Term assets with physical substance that are used in company´s operations
sometimes collectively referred to as non-current, long term or long-.lived assets

• PPE
• Investment Property to earn rental income or capital appreciation
• Intangible assets

Certain rights that are not presented by the possession of physical assets
two types:
a) identifiable intangibles - typically linked to specific rights of privilege having finite benefit periods
b) unidentifiable intangibles - linked to M&A having identifiable benefit periods

Question 9

Intangible Assets

Answer 9

=identifiable non-monetary assets without physical substance
E.g.: patents, licenses, trademarks

For each intangible, Co. has to assess whether useful life is
a) with finite:
useful life is amortised over its useful life with the amortisation method
–> UL estimate reviewed
–> asset tested for impairment

or b) infinite
not amortised
instead, at least annually, the reasonableness of assuming an indefinite UL for the asset is reviewed
asset is tested for impairment

Question 10

Intangible Assets

how to report them?

Answer 10

may have been created INTERNALLY or PURCHASE
determine the cost of internally created can be difficult and subjective
HENCE - they are expensed rather than reported on BS
they include
- internally generated brands, publishing titles, customer lists
- start-up costs
- training costs
- admin expenses/ other generated overhead costs
- advert/promotion
- relocation/reorganisation expenses
- redundancy and other termination costs

Question 11

Unidentfiable Intangible Assets

Answer 11

assets that are never recorded on BS because they have NO PHYSICAL SUBSTANCE OR NON-IDENT.
Examples:
- management skills
- name recognition
- good reputation

Question 12

Goodwill

Answer 12

when firm acquires another
if the PRICE > FAIR VALUE of asset&liabilities
the excess amount is recorded as Goodwill - recognised as an asset

Proponents
= PV of excess returns that a company s expected to earn
= analogous to determining the PF of future CF associated with other assets&projects

Oponents:
claim that often turn out to be based n UNREALSTIC expectations
thereby leading to future write-offs

Question 13

Goodwill

Special Cases

Answer 13

certain items not recognised in financial statements (e.g. reputation, distribution system, trained employees) have value

expenditure on R&D may not have met criteria for recognition but nonetheless have value

part of value of an acquisition may arse from strategic position or synergies

Question 14

Goodwill

Impairment Loss

Answer 14

• GW is capitalised and tested for impairment annually
• Impairment loss = charged against income in current period
• IL = reduces current earnings, total assets, ROA,
• IL = non cash item

Question 15

Components of Equity

Answer 15

=residual claim on company´s asset after deducting liabilities
= claim of owner against company

Components:
1.  COMMON STOCK
=Capital contributed by owners 
Issued Sh. sold to investors
Outstanding Shares = issued SH - Treasury SH

2. PREFERRED SHARES
   = classified as equity or fin. liabilities based upon their character. rather than legal form
3. TREASURY STOCK
   = shares in company repurchased by company itself
   = held as treasury shares, rather than being cancelled
4. RETAINED EARNINGS
   = cumulative amount of earnings recognised not been paid to owners of the co. as dividends
5. ACCUM. other Compr. Income
   = or other reserved
   = cumulative amount of OCI or loss
6. NON CONTROLLING INTEREST (minority Interest)
   = equity interest of minority SH in the subsidiary companies that have been consolidated by the parents
   (=controlling company)
   but not wholly owned by parent company