LM 3: Analyzing Balance Sheet Flashcards
What’s the equation for a balance sheet?
Assets = liabilities + owners equity
What is another name for the balance sheet?
statement of financial position
What are the three types of balance sheets?
- Unclassified balance sheet
- Classified balance sheet
- Liquidity based balance sheet
What is an unclassified balance sheet?
Balance sheet reports assets and liabilities but does not separate the items into classes.
What is a classified balance sheet?
Balance sheet with separately classified current and non-current assets & liabilities
What is a liquidity based balance sheet?
Most liquid items listed first then least liquid items last
What are current assets?
Assets expected to be liquidated or used up within one year or one operating cycle of business, whichever is greater
What are non-current assets?
Assets not expected to be liquidated or used up within one year or one operating cycle of business, whichever is greater
What are current liabilities?
Liabilities expected to be settled or paid within one year or one operating cycle of business, whichever is greater
What are non-current liabilities?
Liabilities not expected to be settled or paid within one year or one operating cycle of business, whichever is greater
What are the 5 types of current assets? CMAIO
- Cash and cash equivalents
- Marketable securities
- Accounts receivable
- Inventories
- Other current assets
What are the 6 types of non-current assets? PIIGFD
- Property, plant, & equipment
- Investment property
- Intangible assets
- Goodwill
- Financial assets
- Deferred tax assets
What are the 2 types of non-current liabilities?
- Long-term financial liabilities (debt, leases, etc)
- Deferred tax liabilities
What are 4 types of current liabilities? AFAD
- Accounts payable
- Financial liabilities
- Accrued expenses (expenses business accrued but haven’t paid yet)
- Deferred income (deferred revenue)
What are intangible assets?
Intangible non-current assets are things business holds that do not have physical form, such as trademarks, patents, etc.
Which model does IFRS and US GAAP allow for intangible assets?
IFRS: Cost model and Revaluation model
US GAAP: Cost model only
When can you use the revaluation model under IFRS for intangible assets?
intangible assets that can be traded in an active market.
When does impairment occur under the revaluation model?
when the assets carrying amount exceeds its recoverable amount
What is the carrying cost?
original cost of an asset as reflected in a company’s books or balance sheet, minus the accumulated depreciation of the asset
For indefinite intangible assets, what must you do at least annually?
test asset for impairment
What are 2 ways intangible assets created internally are identified?
- Research phase
- Development phase
For intangible assets in the research phase and in the developmental phase, should costs be expensed or capitalized?
Research phase costs need to be expensed
Developmental phase costs need to be capitalized if they meet certain criteria (technical feasibility and commercial viability)
What is goodwill on a balance sheet?
Excess purchase price of the company, specifically for things like brand recognition, customer base, and etc.
What is accounting goodwill?
When company acquired another company for more than book value of its tangible assets
What is economic good will?
Is based on economic performance of the entity and the advantage it has over other companies
How must you account for goodwill that has impairment losses?
subtract impairment losses from a company’s net income by the amount of the reduction in the asset’s book value.
What are the 2 ways financial assets can be measured?
- Fair value
- Amortized cost
What is fair value?
Price that would be received if the asset was sold in an orderly market transaction
What is amortized cost formula?
Initial price - principal payments + - amortization - impairment
What are 3 financial assets that are carried at cost or amortized cost and how are unrealized gains or losses recorded? DLE
- debt securities held to maturity (US GAAP)
- loans to other companies or notes receivable
- equity instrument when fair value isn’t reliable
unrealized gains or losses recorded only when realized or sold.
What are 3 types of financial assets that are recorded fair value through profit or loss (FVPL) and which standard? IES
- instruments intended to sell/trading securities (US GAAP)
- equity securities (US GAAP)
- security that has not been designated as FVOCI (IFRS)
What are 3 types of financial assets that qualify to be recorded fair value through other comprehensive income (FVOCI) and which standard? API
- available for sale (US GAAP)
- passive source of interest and principal (IFRS)
- if a company makes decision to treat them as FVOCI (IFRS)
Where are assets recorded through fair value through profit or loss (FVPL) recorded?
income statement
Where are assets recorded through fair value through other comprehensive income (FVOCI) recorded?
other comprehensive income (balance sheet)
What is a deferred tax asset?
Item on a company’s balance sheet that reduces its taxable income in the future
What is the common size analysis of a balance sheet?
each account is percentage of total assets
What is the difference between liquidity and solvency?
liquidity: company’s ability to meet its short-term financial obligations
solvency: company’s ability to meet its long-term financial obligations
What are the 3 liquidity ratios? CQC
- Current ratio
- Quick ratio
- Cash ratio
What is current ratio formula?
Current assets/ current liabilities
What is the quick ratio formula?
(Cash + marketable securities + receivables) / current liabilities
What is the cash ratio formula?
Cash + marketable securities /current liabilities
What are the 4 solvency ratios? LDTF
- Long term debt to equity
- Debt to equity
- Total debt
- Financial leverage
What is long-term debt to equity ratio formula?
Total long term debt / total equity
What is the debt to equity ratio formula?
Total debt/ total equity
What is the total debt ratio formula?
Total debt / Total assets
What is the financial leverage ratio formula?
Total assets / total equity
What are marketable securities?
Financial assets that can be easily bought and sold on a public market, such as stocks, bonds, and mutual funds
What are trade receivables or accounts receivable?
The amount owed to a business by its customers following sale of goods or services on credit
What is treasury shares?
When company buys back its shares that were previously issued
What is preferred share?
Shares of a company’s stock that give the owners high claim to company assets and dividends than common stock owners
What’s the difference between capitalized and expensed ?
Capitalized: fixed assets and intangible assets expected to provide long term benefits greater than one year must be capitalized and expensed over time.
Expensed: items expected to provide short-term benefits less than 1 year like inventory must be expensed in period incurred
What is a contra asset account vs contra liability account?
an account that reduces the asset balance
an account that reduces the liability balance
