Part 3 The Balance Sheet Reveals the Most

Question 1

What is the Balance Sheet?

Answer 1

It is no more, and no less, than a statement of what a business owns and what it owes at a particular point in time.

Question 2

Equity

Answer 2

The difference between what a company owns and what it owes

Question 3

Assets

Answer 3

What a company owns

Question 4

Liabilities

Answer 4

What a company owes

Question 5

Owners’/Shareholders’ equity

Answer 5

What the company is worth

Question 6

Current Assets

Answer 6

Anything that can be turned into cash in less than a year (usually comes first on the balance sheet)

Question 7

Cash and Cash Equivalents

Answer 7

Money in the bank

Question 8

Long-Term Assets

Answer 8

Physical Assets that have a useful life of more than a year

Question 9

Accounts receivable

Answer 9

This is the amount customers owe the company (like a loan from the company to its customers)

Question 10

Allowance for bad debt

Answer 10

an amount subtracted from accounts receivable based on the expectation that the cusomer won’t pay their bills

Question 11

“Smoothing” Earnings

Answer 11

Sometimes adding bad-debt reserve to reduce overall earnings. This is sometimes done purposefully to reduce a visible spike in earnings that might shock or scare away investors. Bad debt reserve is an estimate so there is room for subjectivity.

Question 12

Is there a subjective part of accounts receivable?

Answer 12

Yes increasing or decreasing “bad-debt reserve”.