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HR Accounting and Finance > Module 2 Balance Sheet > Flashcards

Module 2 Balance Sheet Flashcards

1
Q

What are the 3 groups of accounts on the balance sheet?

A

Assets
Liabilities
Equity

Total assets must equal total liabilities and equity

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2
Q

Define Assets and types of assets

A

What the organization owns
- it’s possessions, it’s assets

Types of assets

  • current
  • non current
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3
Q

What is a current asset?

A

Cash or items expected to be turned to cash within 1 year

Accounts receivable, inventory, and prepaid expenses)

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4
Q

What is a non-current asset?

A

Production assets with a useful life over 1 year - called long term or fixed assets

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5
Q

List 6 current assets

A 
Cash
Market securities
Accounts receivable 
Notes receivable within 1 yr
Prepaid expenses
Inventory
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6
Q

Define the current asset - Cash

A

Cash and bank balances

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7
Q

Define the current asset - marketable securities

A

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

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8
Q

Define current asset - accounts receivable

A

Monies owed to the company

Less allowance for doubtful accounts

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9
Q

Define current asset - Notes Recievable

A

Unconditional promise to pay a definite sum of money on demand at a future date

To be paid within one year

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10
Q

Define current asset - prepaid expenses

A

Expenses related to a period of time after the date of the balance sheet, which have already been paid

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11
Q

Define current asset - inventory

A

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…)

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12
Q

What are the main “issues” with inventory?

A

Minimize inventory but have enough inventory for customers

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13
Q

What are the 6 primary “cost” associated with inventory?

A 
Spoilage
Obsolescence
Money is tied up
Insurance costs
Risk of theft
Warehouse costs
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14
Q

What is just in time (JIT) inventory?

A

To reduce inventory cost the company waits until an order is received to produce the product

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15
Q

What are the 3 methods of valuing inventory allowed by GAAP?

A

Weighted average

FIFO (first in first out)

LIFO (last in first out)

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16
Q

Does the method of valuing inventory have to be the same for both sets of books? (Shareholders and Tax purposes)

A

Yes

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17
Q

Define inventory valuation using weighted average

A

Average cost of goods available for sale during the period

Calculation (total cost divided by number of units)

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18
Q

Define inventory valuation using FIFO

A

Items produced first are sold first

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19
Q

Define inventory valuation using LIFO

A

Last items produced are sold first

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20
Q

Define Goods Available for Sale (GAS)

A

Beginning inventory plus additions to inventory

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21
Q

Define Ending Inventory (EI)

A

Goods available for sale (GAS) minus units sold

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22
Q

Define cost of goods sold (COGS)

A

Goods available for sale (GAS) minus Ending Inventory (EI)

GAS - EI

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23
Q

Which inventory valuation method is used during times of increasing cost?

A

FIFO

Most profit and consequently highest taxes

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24
Q

Which inventory valuation method is used to reduce taxes in the current period?

A

LIFO

Assumes older inventory items are lower value

25
Q

What are the 2 groups of non-current assets?

A

Tangible and intangible assets

26
Q

Define Tangible non-current assets

A

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

27
Q

Define Intangible non-current assets

A

Assets with a value to the company that have no physical presence

(Example - goodwill, patents, franchises)

28
Q

List 7 Tangible non-current assets

A 
Land
Buildings
Furniture
Machinery
Leasehold Improvements
Long Term Investments
Over funded pension plan
29
Q

What is the Intangible non current asset Goodwill?

A

A company buys another company for an amount that exceeds fair market value

30
Q

How are goodwill intangible assets treated in accounting (both IRC and GAAP)

A

IRC (tax books) - 15 year straight line amortization

GAAP Shareholder Books - booked as an impairment

31
Q

Intangible non-current asset - How are patents (both purchased and developed) booked?

A

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.

32
Q

Intangible non-current assets Franchises - what is reported on the balance sheet?

A

Fees paid upfront are an asset

Amortized over the useful life of the franchise

33
Q

Define Liabilities

A

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)

34
Q

List 6 current liabilities

A

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)

35
Q

List 7 non-current liabilities

A

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)

36
Q

Define contingent liability:

Potential vs Real liability

A

Potential - lawsuit filed

Real - lawsuit won

37
Q

What is shareholder equity?

A

Money provided to the company by the owners through issuance of equity securities through earnings retained by the company

38
Q

What is included in the shareholder “book value”?

A

Preferred shares
Common shares
Treasury shares
Retained earnings

39
Q

Define preferred shares

A

Shares that have a fixed dollar dividend that must be paid after creditors but before common shareholders (in case of liquidation of company)

40
Q

Define common shares

A

Shares with voting rights and dividends

41
Q

Define treasury shares

A

Company’s purchase of its own shares shows as a reduction in shareholder equity

42
Q

Define retained earnings

A

Companies after tax earnings that have not been paid out in dividends

Kept for use in the business

43
Q

What is the relationship between total assets, total liabilities, and shareholder equity?

A

Always Balance:

Total Assets = total liabilities + shareholder equity

Company with more liabilities than assets would have negative equity to balance the balance sheet.

44
Q

Can you nail the exercise on page 51

A

Yes - No

45
Q

What is the purpose of Liquidity measures?

What are the measures?

A

Asses company’s ability to need current obligations relate to the balance sheet

Measurements:

  • working capital
  • Current Ratio
  • Quick Ratio
46
Q

Define working capital

A

Current Assets minus Current Liabilities

From the balance sheet

47
Q

Define Liquidity Current Ratio

A

Ratio of current assets to current liabilities

48
Q

Define Liquidity Quick Ratio

A

Ratio of short term liquid assets to current liabilities

49
Q

What are short term assets

A

Assets minus inventory and prepaid taxes

50
Q

How to determine debt to equity ratio

A

Divide total liabilities by total shareholder equity

Liabilities/equity

51
Q

What is the long term debt ratio used for?

A

Used by banks to assess credit worthiness.

Lower ratio = more equity less debt and is desireable

52
Q

How to calculate “long term” debt ratio?

A

Long term debt is Non-current liabilities

Long term debt
/
Long term debt + shareholder equity

53
Q

What is an example of a non current asset?

A cash
B machinery
C inventory
D marketable securities

A

B machinery

54
Q

In times of rising cost which would produce the most profit?

A weighted average
B FIFO
C LIFO
D Just In Time

A

B FIFO

55
Q

Which asset is neither depreciated or amortized?

A land
B buildings
C office equipment
D patents

A

A Land

56
Q

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

A

C one year

57
Q

Which of the following describes a companies purchase of its own shares?

A common shares
B treasury shares
C retained shares
D preferred shares

A

B treasury shares

58
Q

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

A

D total assets (balance sheet)

Assets = Liabilities
Equity

59
Q

What is the formula for calculating working capital?

A

Current assets - current liabilities

HR Accounting and Finance (7 decks)

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