Reading 25 Understanding Balance Sheets

Question 1

Balance sheet (statement of financial position or statement of financial condition)

Answer 1

disclose what an entity owns (or controls), what it owes, and what the owners’ claims are at a specific point in time. Assets (A), liabilities (L) and equity (E) are the basic elements.

Question 2

Liquidity

Answer 2

A company’s ability to pay for its short term operating needs relates to the concept of liquidity, it refers to the availability of cash to meet those short-term needs.

Question 3

Current assets

Answer 3

assets held primarily for the purpose of trading or expected to be sold, used up, or otherwise realized in cash within one year or one operating cycle of the business, whichever is greater, after the reporting period are classified as current assets.

Question 4

Current assets

Answer 4

1. Cash and cash equivalents: are financial assets, which are measured and reported at either amortised cost or fair value. (examples: Treasury bills, commercial paper, and money market funds)
2. Marketable securities: Treasury bills, notes, bonds, and equity securities.
3. Accounts receivable, also known as trade receivables: are reported at net realizable value, which is based on estimated bad debt expense.
4. Inventories: under IFRS, inventories are reported at the lower of cost or net realizable value. Net realizable value is equal to the selling price less any completion costs and disposal (selling) costs. Under U.S. GAAP, inventories are reported at the lower of cost or market. Market is usually equal to replacement cost.
5. Other current assets: prepaid expenses and deferred tax assets.

Question 5

Current liabilities

Answer 5

1. Accounts payable
2. Notes payable and current portion of long-term debt
3. Accrued liabilities
4. Unearned revenue

Question 6

Non-current assets

Answer 6

1. Property, plant, and equipment: under IFRS, PP&E can be reported using the cost model (PP&E other than land is reported at amortized cost - historical cost minus accumulated depreciation, amortization, depletion, and impairment losses, land is not depreciated because it has an indefinite life. Historical cost includes the purchase price plus any cost necessary to get the asset ready for use, such as delivery and installation costs)or the revaluation model. Under U.S. GAAP, only the cost model is allowed.
2. Investment property
3. Intangible assets.
4. Goodwill (accounting goodwill should not be confused with economic goodwill, economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of past acquisitions)
5. Financial assets

Question 7

Non-current liabilities

Answer 7

1. Long-term financial liabilities: bank loans, notes payable, bonds payable, and derivatives. if the financial liabilities are not issued at face amount, the liabilities are usually reported on the balance sheet at amortized cost, which is equal to the issue price minus any principal payments, plus any amortized discount or minus any amortized premium.
2. Deferred tax liabilities

Question 8

Both IFRS and US GAAP require that the balance sheet distinguish between current and non-current assets and between current and non-current liabilities and present these as separate classifications

Answer 8

A exception to this requirement, under IFRS, is that the current and non-current classifications are not required if a liquidity-based presentation provides reliable and more relevant information.

Question 9

Working capital

Answer 9

Current assets - current liabilities