Lecture 02 Balance Sheet Flashcards
What is a Balance Sheet?
The balance sheet measures an entity’s financial position, i.e., the resources the entity controls and the claims that various parties have on these resources.
The elements of a balance sheet are:
* assets;
* liabilities; and
* (owners’) equity (sometimes also called net assets or surplus).
What is the definition of Assets?
Assets are resources that are controlled by the entity and that are expected to yield future economic benefit as a result of a past transaction. The benefit must be probable and reasonably estimable.
What is the definition of Liabilities?
Liabilities are present obligations of the entity that arise from past events and whose settlement is expected to result in an outflow of resources from the entity. The outflow must be probable and reasonably estimable.
Are contingent liabilities classified as proper liabilities?
Contingent liabilities related to, for example, pending lawsuits or possible future environmental cleanup obligations might only be disclosed in a footnote if they cannot be quantified reliably.
How are future benefits of research and development activities recognized?
- Under IFRS, development costs can be capitalized as an asset only once technical and commercial feasibility have been established.
- Under US GAAP, all research and development costs are expensed as incurred.
How complete are Balance Sheets?
- Not all economic resources are listed on the balance sheet as assets. (And neither are all obligations listed as liabilities.)
- All balance sheets are incomplete.
How do we deal with (De-)Recognition for the balance sheet?
Test whether the item meets the definition of an asset or a liability.
How do we deal with measurement (valuation) for the balance sheet?
The initial default valuation is the acquisition cost (purchase price). If no updates are made to the balance, the item is said to be carried at historical cost.
What are the two classifications of assets and liabilities by timing?
- Current assets are assets that are expected to be converted into cash or otherwise disposed of within one year or one operating cycle, whichever is longer.
- Current liabilities are liabilities that are expected to be settled within one year or one operating cycle, whichever is longer.
Items not classified as current are classified as non-current
In what order are assets and liabilities generally listed?
- Assets are generally listed in order of liquidity
- Liabilities are generally listed in order of maturity
- The sortin can be in ascending or descending order
What is net working capital?
The difference between current assets and current liabilities is referred to as net working capital
net working capital = current assets - current liabilities
What are some typical current asset accounts?
Typical current asset accounts are:
* cash and cash equivalents: currency, bank deposits, and investments with a maturity of 90 days or less at the time of purchase;
* accounts receivable: amounts due to the company from customers and others, usually arising from the sale of products and services on credit;
* marketable securities: short-term investments that can be sold quickly to raise cash;
* inventory: goods purchased or produced for sale to customers;
* prepaid expenses: costs paid in advance for services such as rent, insurance, advertising, etc.
What are some typical non-current asset accounts?
Typical non-current (long-term) assets include:
(long-term) investments:
* investments not intended for sale in the near future, particularly larger, strategic equity investments;
* property, plant and equipment and lease (right-of-use, ROU) assets : tangible, long-lived assets, such as land, buildings, machinery, vehicles, and equipment, to be used in operations and not held for resale; if obtained under lease, they may be shown on a separate line;
* intangible assets: assets without physical substance, including patents, trademarks, franchise rights, brand names, product licenses, goodwill, etc., except for financial assets;
* deferred tax assets: conceptually, a kind of prepaid income tax expense (to be discussed more rigorously later in the course).
What are some typical current liability accounts?
Typical current liability accounts are:
* accounts payable: amounts owed to suppliers for goods and services purchased on credit;
* accrued liabilities (expenses): obligations for expenses incurred but not yet paid or invoiced; e.g., accrued wages payable (wages earned by employees but not yet paid) or accrued interest payable;
* unearned (or deferred) revenue: obligations created when the company accepts payment in advance for goods or services it will deliver in the future; also called advances from customers or customer deposits;
* short-term debt/notes payable: short-term debt payable to banks or other creditors;
* current maturities of long-term debt: principal portion of long-term debt that is due to be paid within one year.
What are some typical non-current liability accounts?
Typical non-current (long-term) liabilities include:
* long-term debt: amounts borrowed from creditors and scheduled to be repaid more than one year into the future, e.g., bonds, mortgages and loans; also includes lease obligations; any portion of the debt that is due within one year is reclassified as a current liability called current maturities of long-term debt;
* pensions and other post-retirement benefit obligations: post-retirement benefits owed to current and former employees;
* deferred tax liabilities: conceptually, a kind of accrued income tax expense (to be discussed more rigorously later in the course).
