Reading 22: Understanding Balance Sheets Flashcards
Explain treasury shares.
These are shares that have been bought back by the company. Share repurchases result in a reduction in owners’ equity and in the number of shares outstanding. These shares do not receive dividends and do not have voting rights. While treasury shares may be reissued at a later date, no gain or loss is recognized when they are reissued.
List the 5 components that represent equity attributable to owners of the parent company.
Capital contributed by owners Preferred shares Treasury shares Retained earnings Accumulated other comprehensive income
List and explain the formats in which a balance sheet may be presented.
Report format: assets, liabilities, and equity are presented in a single column.
Account format: assets are presented on left side of the balance sheet; liabilities and equity are presented on the right side.
Classified balance sheet: different types of assets and liabilities are grouped into subcategories; this gives an effective overview of the company’s financial position. Typically, items are grouped into current and non-current categories.
Liquidity-based presentation: allowed by IFRS; all assets and liabilities broadly presented in order of liquidity. Typically used by banks.
Under IFRS, what information should be included in the statement of changes in equity?
Total comprehensive income for the period;
The effects of any accounting changes that have been retrospectively applied to previous periods;
Capital transactions with owners and distributions to owners; and
Reconciliation of the carrying amounts of each component of equity at the beginning and end of the year.
Give the reasons why analysts should be careful not to view equity reported on the balance sheet as either the market or intrinsic value of a company’s net assets.
Under current accounting standards, the measurement basis of different assets and liabilities may vary considerably.
The value of items reported on the balance sheet reflects their value at the end of the reporting period, which may not necessarily be “current.”
In addition, the balance sheet does not include other qualitative factors that have an important impact on the company’s future cash-generating ability and therefore its overall value.
Define assets, liabilities, and equity.
Assets are resources under a company’s control as a result of past transactions that are expected to generate future economic benefits for the company.
Liabilities are a company’s obligations from previous transactions that are expected to result in outflows of economic benefits in the future.
Equity represents the residual claim of shareholders on a company’s assets after deducting all liabilities. Other terms commonly used for shareholders’ equity include stockholders’ equity, net assets, and owners’ equity.
