Module 2 Balance Sheet Flashcards
What are the 3 groups of accounts on the balance sheet?
Assets
Liabilities
Equity
Total assets must equal total liabilities and equity
Define Assets and types of assets
What the organization owns
- it’s possessions, it’s assets
Types of assets
- current
- non current
What is a current asset?
Cash or items expected to be turned to cash within 1 year
Accounts receivable, inventory, and prepaid expenses)
What is a non-current asset?
Production assets with a useful life over 1 year - called long term or fixed assets
List 6 current assets
Cash Market securities Accounts receivable Notes receivable within 1 yr Prepaid expenses Inventory
Define the current asset - Cash
Cash and bank balances
Define the current asset - marketable securities
Investments valued at lower of (original cost or current market)
And
Have a maturity date of more than 90 days but will be used by the company when cash is needed
Define current asset - accounts receivable
Monies owed to the company
Less allowance for doubtful accounts
Define current asset - Notes Recievable
Unconditional promise to pay a definite sum of money on demand at a future date
To be paid within one year
Define current asset - prepaid expenses
Expenses related to a period of time after the date of the balance sheet, which have already been paid
Define current asset - inventory
Products including direct labor
- raw material
- work in progress
- finished goods
Indirect materials
- supplies used in the manufacturing process that do not become part of the product (shop rags…)
What are the main “issues” with inventory?
Minimize inventory but have enough inventory for customers
What are the 6 primary “cost” associated with inventory?
Spoilage Obsolescence Money is tied up Insurance costs Risk of theft Warehouse costs
What is just in time (JIT) inventory?
To reduce inventory cost the company waits until an order is received to produce the product
What are the 3 methods of valuing inventory allowed by GAAP?
Weighted average
FIFO (first in first out)
LIFO (last in first out)
Does the method of valuing inventory have to be the same for both sets of books? (Shareholders and Tax purposes)
Yes
Define inventory valuation using weighted average
Average cost of goods available for sale during the period
Calculation (total cost divided by number of units)
Define inventory valuation using FIFO
Items produced first are sold first
Define inventory valuation using LIFO
Last items produced are sold first
Define Goods Available for Sale (GAS)
Beginning inventory plus additions to inventory
Define Ending Inventory (EI)
Goods available for sale (GAS) minus units sold
Define cost of goods sold (COGS)
Goods available for sale (GAS) minus Ending Inventory (EI)
GAS - EI
Which inventory valuation method is used during times of increasing cost?
FIFO
Most profit and consequently highest taxes
Which inventory valuation method is used to reduce taxes in the current period?
LIFO
Assumes older inventory items are lower value
What are the 2 groups of non-current assets?
Tangible and intangible assets
Define Tangible non-current assets
Asset used in production that does not become part of the product and has a useful life greater than 1 yr.
Examples - property, plant, equipment
Define Intangible non-current assets
Assets with a value to the company that have no physical presence
(Example - goodwill, patents, franchises)
List 7 Tangible non-current assets
Land Buildings Furniture Machinery Leasehold Improvements Long Term Investments Over funded pension plan
What is the Intangible non current asset Goodwill?
A company buys another company for an amount that exceeds fair market value
How are goodwill intangible assets treated in accounting (both IRC and GAAP)
IRC (tax books) - 15 year straight line amortization
GAAP Shareholder Books - booked as an impairment
Intangible non-current asset - How are patents (both purchased and developed) booked?
Purchased - booked at the fair market value at date of acquisition and amortized over the rest of useful life
Internally developed - not shown on balance sheet, not listed as an asset.
Intangible non-current assets Franchises - what is reported on the balance sheet?
Fees paid upfront are an asset
Amortized over the useful life of the franchise
Define Liabilities
Obligation to pay an amount at a future date for current or past benefits received
Liabilities are what an org owes to others (current and non-current)
List 6 current liabilities
Accounts Payable - money owed to suppliers
Notes Payable - obligations via promissory notes
Accrued payables or obligations
Severance pay
Taxes
Current maturities of long term obligations (car loans mortgages)
List 7 non-current liabilities
Notes payable - greater than one year
Mortgages payable - long term debt secured by property
Bonds - money borrowed by company from public domain
Deferred taxes - tax obligation to be paid at a future date (greater than a year)
Financial or capital lease - finance operating equipment
Severance pay (more than a year)
Post employment benefits (retiree benefits)
Define contingent liability:
Potential vs Real liability
Potential - lawsuit filed
Real - lawsuit won
What is shareholder equity?
Money provided to the company by the owners through issuance of equity securities through earnings retained by the company
What is included in the shareholder “book value”?
Preferred shares
Common shares
Treasury shares
Retained earnings
Define preferred shares
Shares that have a fixed dollar dividend that must be paid after creditors but before common shareholders (in case of liquidation of company)
Define common shares
Shares with voting rights and dividends
Define treasury shares
Company’s purchase of its own shares shows as a reduction in shareholder equity
Define retained earnings
Companies after tax earnings that have not been paid out in dividends
Kept for use in the business
What is the relationship between total assets, total liabilities, and shareholder equity?
Always Balance:
Total Assets = total liabilities + shareholder equity
Company with more liabilities than assets would have negative equity to balance the balance sheet.
Can you nail the exercise on page 51
Yes - No
What is the purpose of Liquidity measures?
What are the measures?
Asses company’s ability to need current obligations relate to the balance sheet
Measurements:
- working capital
- Current Ratio
- Quick Ratio
Define working capital
Current Assets minus Current Liabilities
From the balance sheet
Define Liquidity Current Ratio
Ratio of current assets to current liabilities
Define Liquidity Quick Ratio
Ratio of short term liquid assets to current liabilities
What are short term assets
Assets minus inventory and prepaid taxes
How to determine debt to equity ratio
Divide total liabilities by total shareholder equity
Liabilities/equity
What is the long term debt ratio used for?
Used by banks to assess credit worthiness.
Lower ratio = more equity less debt and is desireable
How to calculate “long term” debt ratio?
Long term debt is Non-current liabilities
Long term debt
/
Long term debt + shareholder equity
What is an example of a non current asset?
A cash
B machinery
C inventory
D marketable securities
B machinery
In times of rising cost which would produce the most profit?
A weighted average
B FIFO
C LIFO
D Just In Time
B FIFO
Which asset is neither depreciated or amortized?
A land
B buildings
C office equipment
D patents
A Land
Within what time period are taxes payable if they are listed as current liabilities?
A one month
B six months
C one year
D two years
C one year
Which of the following describes a companies purchase of its own shares?
A common shares
B treasury shares
C retained shares
D preferred shares
B treasury shares
Total Liabilities plus Shareholders Equity is equal to which of the following?
A total income
B total costs
C profit or loss
D total assets
D total assets (balance sheet)
Assets = Liabilities
Equity
What is the formula for calculating working capital?
Current assets - current liabilities
