(R22) Understanding Balance Sheets

Question 1

Classified Balance Sheet

Answer 1

Balance sheet with separate sections for current and non current assets and liabilities

Question 2

Liquidity-based balance sheet

Answer 2

All assets and liabilities presented in order of liquidity

Question 3

Working capital =

Answer 3

Current assets - current liabilities

Question 4

How are cash/cash equivalents and marketable securities reported on the BS?

Answer 4

At amortized cost or fair value

Question 5

How are trade receivables reported on the BS?

Answer 5

At net realizable value (AR - AFDA)

Question 6

How are inventories reported on the BS under IFRS and GAAP

Answer 6

IFRS: lower of cost or net realizable value; where NRV = selling price - cost to complete GAAP: lower of cost or market; market equals the current replacement cost

Question 7

When is inventory written down? Can the write down be reversed under IFRS and GAAP?

Answer 7

Write down inventory when NRV or market < inventory carrying costs; write down goes to COGS Reversal is allowed under IFRS but not GAAP

Question 8

How is PP&E measured on the BS and how do you calculate net PP&E?

Answer 8

Cost model is used

Net PPE = historical cost - accumulated depreciation - impairment

Question 9

When is PP&E impaired?

Answer 9

Carrying amount of the asset is greater than the recoverable amount

Recoverable amount is the greater of 1) FV - costs to sell & 2) value in use

Question 10

Recoverable amount for PP&E

Answer 10

Greater of the follow two items:

1. FV - costs to sell
2. Value in use

Question 11

How is investment property measured?

Answer 11

Cost or fair value

Question 12

How are intangible assets measured on the BS for IFRS and GAAP?

Answer 12

IFRS: cost model or revaluation

GAAP: cost model;

Cost model: Cost - amortization - impairment

Question 13

Cost model for assets

Answer 13

PP&E: historical cost - accum depr. - impairment

Inangible assets: cost - amort. - impairment

Question 14

Can all intangible assets be amortized and impaired?

Answer 14

Only finite life intangibles are amortized and impaired; indefinite life intangibles are not amortized but tested for impairment annually

Question 15

What is goodwill?

Answer 15

Goodwill is the excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired in a business acquisition. Goodwill is not amortized but must be tested for impairment at least annually.

Question 16

Where are internally developed intangible assets recorded?

Answer 16

On the income statement as an expense

Question 17

For held-to-maturiy financial assets, how are they recorded on the balance sheet?

Answer 17

Recorded on BS at amortized cost (this is for debt only)

Question 18

For held-for-trading financial assets, how are they recorded on the balance sheet and where are unrealized gains/losses recorded?

Answer 18

Recorded on BS at fair value with unrealized gains/losses recorded on the income statement

Question 19

For available-for-sale financial assets, how are they recorded on the balance sheet and where are unrealized gains/losses recorded?

Answer 19

Recorded on BS at fair value with unrealized gains/losses recorded in OCI

Question 20

Common size balance sheet

Answer 20

Expresses each item of the balance sheet as a percentage of total assets.

Question 21

Liquidity ratios

Answer 21

Measure the firm’s ability to satisfy its short-term obligations as they come due (Current ratio, quick ratio, and cash ratio)

Question 22

Solvency Ratios

Answer 22

Measure the firm’s ability to satisfy its long-term obligations (LTD to equity, debt to equity, total debt, financial leverage)