Reading 19 - Understanding Balance Sheets

Question 1

What are the characteristics of:

1. Liquidity (ST/LT)
2. Solvency (ST/LT)
3. Asset
4. Liability
5. Equity

Answer 1

Liquidity is the ability to meet ST Obligations.

Solvency is the ability to meet LT obligations.

Assets: resources, expected to provide future economic benefits.

Liabilities: Obligations, expected outflow of economic resources

Equity: Residential Interest/Net Assets

Question 2

What is a classified balance sheet?

Answer 2

Breakdown of balance sheet by Current and Non-Current

Question 3

What is a firm’s operating cycle?

Answer 3

Time taken for firm to:

1. Produce or purchase inventory
2. Sell products
3. Collect Cash

Also referred to as Cash conversion cycle, and a shorter operating cycle is a good indicator of liquidity and efficiency as the firm is able to generate cash quickly.

Question 4

What are the two different methods to measure inventory

Answer 4

Standard Costing - mainly used by manufacturing firms, assigns predetermined amounts of materials, labour, and overhead to goods produced.

Retail Method - takes retail price of inventory, subtract gross profit to reverse engineer cost

Question 5

What is the difference between identifiable and unidentifiable intangible assets? (separate?)

patents, trademarks, copyrights vs goodwill

Answer 5

Identifiable intangible: can be acquired separately and are results of rights or privileges to the owner.

Unidentifiable intangible: cannot be acquired separately and may have unlimited life (goodwill)