LM 3: Analyzing Balance Sheet

Question 1

What’s the equation for a balance sheet?

Answer 1

Assets = liabilities + owners equity

Question 2

What is another name for the balance sheet?

Answer 2

statement of financial position

Question 3

What are the three types of balance sheets?

Answer 3

1. Unclassified balance sheet
2. Classified balance sheet
3. Liquidity based balance sheet

Question 4

What is an unclassified balance sheet?

Answer 4

Balance sheet reports assets and liabilities but does not separate the items into classes.

Question 5

What is a classified balance sheet?

Answer 5

Balance sheet with separately classified current and non-current assets & liabilities

Question 6

What is a liquidity based balance sheet?

Answer 6

Most liquid items listed first then least liquid items last

Question 7

What are current assets?

Answer 7

Assets expected to be liquidated or used up within one year or one operating cycle of business, whichever is greater

Question 8

What are non-current assets?

Answer 8

Assets not expected to be liquidated or used up within one year or one operating cycle of business, whichever is greater

Question 9

What are current liabilities?

Answer 9

Liabilities expected to be settled or paid within one year or one operating cycle of business, whichever is greater

Question 10

What are non-current liabilities?

Answer 10

Liabilities not expected to be settled or paid within one year or one operating cycle of business, whichever is greater

Question 11

What are the 5 types of current assets? CMAIO

Answer 11

1. Cash and cash equivalents
2. Marketable securities
3. Accounts receivable
4. Inventories
5. Other current assets

Question 12

What are the 6 types of non-current assets? PIIGFD

Answer 12

1. Property, plant, & equipment
2. Investment property
3. Intangible assets
4. Goodwill
5. Financial assets
6. Deferred tax assets

Question 13

What are the 2 types of non-current liabilities?

Answer 13

1. Long-term financial liabilities (debt, leases, etc)
2. Deferred tax liabilities

Question 14

What are 4 types of current liabilities? AFAD

Answer 14

1. Accounts payable
2. Financial liabilities
3. Accrued expenses (expenses business accrued but haven’t paid yet)
4. Deferred income (deferred revenue)

Question 15

What are intangible assets?

Answer 15

Intangible non-current assets are things business holds that do not have physical form, such as trademarks, patents, etc.

Question 16

Which model does IFRS and US GAAP allow for intangible assets?

Answer 16

IFRS: Cost model and Revaluation model

US GAAP: Cost model only

Question 17

When can you use the revaluation model under IFRS for intangible assets?

Answer 17

intangible assets that can be traded in an active market.

Question 18

When does impairment occur under the revaluation model?

Answer 18

when the assets carrying amount exceeds its recoverable amount

Question 19

What is the carrying cost?

Answer 19

original cost of an asset as reflected in a company’s books or balance sheet, minus the accumulated depreciation of the asset

Question 20

For indefinite intangible assets, what must you do at least annually?

Answer 20

test asset for impairment

Question 21

What are 2 ways intangible assets created internally are identified?

Answer 21

1. Research phase
2. Development phase

Question 22

For intangible assets in the research phase and in the developmental phase, should costs be expensed or capitalized?

Answer 22

Research phase costs need to be expensed

Developmental phase costs need to be capitalized if they meet certain criteria (technical feasibility and commercial viability)

Question 23

What is goodwill on a balance sheet?

Answer 23

Excess purchase price of the company, specifically for things like brand recognition, customer base, and etc.

Question 24

What is accounting goodwill?

Answer 24

When company acquired another company for more than book value of its tangible assets

Question 25

What is economic good will?

Answer 25

Is based on economic performance of the entity and the advantage it has over other companies

Question 26

How must you account for goodwill that has impairment losses?

Answer 26

subtract impairment losses from a company's net income by the amount of the reduction in the asset's book value.

Question 27

What are the 2 ways financial assets can be measured?

Answer 27

1. Fair value 2. Amortized cost

Question 28

What is fair value?

Answer 28

Price that would be received if the asset was sold in an orderly market transaction

Question 29

What is amortized cost formula?

Answer 29

Initial price - principal payments + - amortization - impairment

Question 30

What are 3 financial assets that are carried at cost or amortized cost and how are unrealized gains or losses recorded? DLE

Answer 30

1. debt securities held to maturity (US GAAP) 2. loans to other companies or notes receivable 3. equity instrument when fair value isn’t reliable unrealized gains or losses recorded only when realized or sold.

Question 31

What are 3 types of financial assets that are recorded fair value through profit or loss (FVPL) and which standard? IES

Answer 31

1. instruments intended to sell/trading securities (US GAAP) 2. equity securities (US GAAP) 3. security that has not been designated as FVOCI (IFRS)

Question 32

What are 3 types of financial assets that qualify to be recorded fair value through other comprehensive income (FVOCI) and which standard? API

Answer 32

1. available for sale (US GAAP) 2. passive source of interest and principal (IFRS) 3. if a company makes decision to treat them as FVOCI (IFRS)

Question 33

Where are assets recorded through fair value through profit or loss (FVPL) recorded?

Answer 33

income statement

Question 34

Where are assets recorded through fair value through other comprehensive income (FVOCI) recorded?

Answer 34

other comprehensive income (balance sheet)

Question 35

What is a deferred tax asset?

Answer 35

Item on a company’s balance sheet that reduces its taxable income in the future

Question 36

What is the common size analysis of a balance sheet?

Answer 36

each account is percentage of total assets

Question 37

What is the difference between liquidity and solvency?

Answer 37

liquidity: company's ability to meet its short-term financial obligations solvency: company's ability to meet its long-term financial obligations

Question 38

What are the 3 liquidity ratios? CQC

Answer 38

1. Current ratio 2. Quick ratio 3. Cash ratio

Question 39

What is current ratio formula?

Answer 39

Current assets/ current liabilities

Question 40

What is the quick ratio formula?

Answer 40

(Cash + marketable securities + receivables) / current liabilities

Question 41

What is the cash ratio formula?

Answer 41

Cash + marketable securities /current liabilities

Question 42

What are the 4 solvency ratios? LDTF

Answer 42

1. Long term debt to equity 2. Debt to equity 3. Total debt 4. Financial leverage

Question 43

What is long-term debt to equity ratio formula?

Answer 43

Total long term debt / total equity

Question 44

What is the debt to equity ratio formula?

Answer 44

Total debt/ total equity

Question 45

What is the total debt ratio formula?

Answer 45

Total debt / Total assets

Question 46

What is the financial leverage ratio formula?

Answer 46

Total assets / total equity

Question 47

What are marketable securities?

Answer 47

Financial assets that can be easily bought and sold on a public market, such as stocks, bonds, and mutual funds

Question 48

What are trade receivables or accounts receivable?

Answer 48

The amount owed to a business by its customers following sale of goods or services on credit

Question 49

What is treasury shares?

Answer 49

When company buys back its shares that were previously issued

Question 50

What is preferred share?

Answer 50

Shares of a company’s stock that give the owners high claim to company assets and dividends than common stock owners

Question 51

What’s the difference between capitalized and expensed ?

Answer 51

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

Question 52

What is a contra asset account vs contra liability account?

Answer 52

an account that reduces the asset balance an account that reduces the liability balance