Textbook on Balance Sheet Flashcards
(90 cards)
1
Q
What do financial statement users look to the balance sheet for?
A
To determine an entity’s ability to generate future cash flows and to evaluate its exposure to risk.
2
Q
What makes a balance sheet strong?
A
Having limited obligations so that a company can make timely debt payments.
3
Q
What is a healthy balance sheet?
A
A balance sheet that has adequate cash and other assets for managing day-to-day operations, for making timely debt payments, for stimulating future growth, and for funding any unexpected needs.
4
Q
The four basic financial statements interrelate, or ________________ to provide comprehensive information on a company’s operating performance and financial position.
A
articulate
5
Q
A key source of essential information regarding a company’s accounting policies that further explain the amounts reported in financial reports are the ____________.
A
notes
6
Q
The financial statements are usually part of a company’s annual report to shareholders, which also includes additional _________________________ that supplement and enhance the financial statements.
A
disclosures
7
Q
The statement of financial position, also called the balance sheet, lists an entity’s assets, liabilities, and equity as of a specific point in ___________.
A
time.
8
Q
The balance sheet consists of ________________ accounts which are not closed at year-end and have cumulative balances that the company carries forward period to period over the life of the firm.
A
permanent
9
Q
An entity’s ability to respond to unexpected needs and opportunities by taking actions that alter the amounts and timing of cash flows is known as financial ___________________________.
A
flexibility
10
Q
What is the relationship between an entity’s financial flexibility and risk? The greater an entity’s financial flexibility, the ________ its risk.
A
lower
11
Q
What are the limitations of the balance sheet?
A
- Use of Historical Costs: Many of the accounts on the balance sheet are reported at historical cost as opposed to market values or liquidation values. For example, assume an entity purchased land 10 years ago for $1,000 that now has a market value of $10,000. The firm reports the asset on the balance sheet under U.S. GAAP at the historical cost of $1,000. In this way, relying on historical costs limits the relevance of information in the balance sheet.
- Use of Estimates: Many of the accounts reported on the balance sheet are based on estimates as opposed to determinable amounts. For example, the net realizable value of accounts receivable is based on the estimated amount of cash that the entity expects to collect.
- Some Assets and Liabilities are Not Reported: A number of assets and liabilities are not reported on the balance sheet. For example, assets such as human capital and a company’s reputation for quality products will not be reported on the balance sheet.
12
Q
What are three common cash flow measures that are based on balance sheet information?
A
liquidity, solvency, and financial flexibility
13
Q
Which three areas does the balance sheet provide critical information to financial statement users?
A
- Summarizes the economic resources and obligations that impact the entity’s ability to generate future cash flows.
- Is useful in assessing an entity’s rate of return on its investments when examined in conjunction with the income statement.
- Aids in assessing the risk associated with an entity by providing inputs for cash flow measures of liquidity, solvency and financial flexibility.
14
Q
A measure of an asset’s nearness to cash—that is, how quickly the firm can convert assets into cash and pay liabilities with minimal risk of loss is known as ___________________.
A
liquidity.
15
Q
The cash flow measure that allows investors to determine whether an entity will have the resources needed to pay its currently maturing obligations, pay dividends, and/or buy back its own equity shares is __________________.
A
liquidity.
16
Q
Thus, the more liquid an entity, the ____________ the risk associated with that entity.
A
lower
17
Q
The cash flow measure of a firm’s long-term ability to pay its obligations as they mature is known as _____________.
A
solvency.
18
Q
A firm with a high level of debt relative to its equity may have difficulty meeting the fixed payments associated with its debt and therefore is in a position of low _____________________ .
A
solvency.
19
Q
Various financial ratios that are used to measure both ___________________ and ____________________.
A
- liquidity
- solvency
20
Q
What are the three primary classifications on the balance sheet?
A
assets, liabilities, and stockholders’ equity
21
Q
The balance sheet utilizes sub-classifications within each of these broad groups that enhance the usefulness of the balance sheet by grouping the accounts according to characteristics such as nature, function, or size. One of the primary distinctions is current versus ______________.
A
noncurrent or long-term
22
Q
Resources that the firm expects to convert to cash, use, or consume in a period of more than one year or one operating cycle, whichever is longer are called ____________________ assets.
A
noncurrent
23
Q
Obligations that are due after one year or one operating cycle, whichever is longer are ____________ liabilities.
A
noncurrent
24
Q
What are the balance sheet classifications for assets?
A
Assets are generally subdivided on the balance sheet as current assets; long-term investments; property, plant, and equipment; intangible assets; and other assets.
25
What are balance sheet classifications for liabilities?
Liabilities are generally classified on the balance sheet as either current or noncurrent.
26
What are the four major components of stockholders' equity?
Stockholders’ equity, also referred to as shareholders’ equity and owners’ equity, is generally separated into four major categories: contributed capital, retained earnings, accumulated other comprehensive income, and noncontrolling interest.
27
What are the balance sheet classifications for assets, liabilities and stockholders' equity?
28
Resources that the firm expects to convert to cash, to use, or to consume within one year or one operating cycle, whichever is longer are called ______________ assets.
current
29
The period of time from the acquisition of goods to the point at which the entity receives cash from the sale of the goods is called the ___________________ cycle.
operating
30
Current assets primarily include:
* Cash and cash equivalents.
* Short-term investments.
* Accounts receivable.
* Inventory.
* Prepaid expenses.
31
Cash includes:
cash (coins, currency, and money orders)
32
What are *cash equivalents*?
Short-term, highly liquid investments acquired with three months or less to maturity.
33
Cash equivalents include:
* Commercial paper (i.e., short-term loans receivable from high-quality corporations sold by commercial banks).
* Money market funds.
* U.S. Treasury bills. For example, a three-year Treasury instrument acquired with two months to maturity is a cash equivalent.
34
What are short-term investments?
Investments that are not classified as cash equivalents which are investments in debt or equity securities of other corporations or governmental entities that the entity has the ability and intent to sell within the next year or operating cycle, whichever is longer.
Example: An entity classifying 100 shares of Microsoft that it intends to sell within the next year.
35
Amounts owed to the entity resulting from the sale of goods or services to customers on credit and require no formal written agreement are __________.
accounts receivable
36
Tangible property that is either (a) held for sale in the ordinary course of business, (b) used as raw materials in the manufacturing process to produce finished goods to be sold in the ordinary course of business, or (c) held as supplies to be currently consumed when providing goods or services are known as _____________.
For a retail or wholesale business, _______________ includes all goods held for resale. In the case of a manufacturing company, ______________ is made up of three components: raw materials, work-in-process, and finished goods. ______________ is classified as a current asset.
inventory
37
Assets that arise when expenses are paid before they are incurred and are typically considered current assets because the benefits associated with these prepayments are usually consumed within a year or operating cycle if longer are known as __________ expenses.
prepaid
38
What are some examples of prepaid expenses?
prepaid rent and prepaid insurance
39
Noncurrent assets that are not used directly in the operations of the business or where management does not intend to convert them into cash within the next year (or operating cycle, if longer) are known as ______________ investments.
long-term
40
Investments in debt and equity securities and investments in land and other property that are not used in operations are examples of _____________ investments.
long-term
41
Assets that are tangible, long-lived, and used in the production and sale of the company’s goods and services and includes items such as buildings, land, machinery and equipment, office furniture and equipment, and natural resources are known as _________________________.
property, plant, and equipment
42
All property, plant, and equipment is reported on the balance sheet net of accumulated depreciation or depletion except for ______________, which is not depreciated.
land
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Assets that lack physical substance but have economic value due to the rights they confer upon the holder are known as ______________ assets.
intangible
44
Trademarks, trade names, broadcast licenses, patents, copyrights, and franchises are known as ___________ assets.
intangible
45
How is it determined whether an intangible asset is amortized or not?
Intangible assets that have a definite or finite useful life are amortized whereas those that have an indefinite life are not amortized
46
Obligations that the firm expects to liquidate through the use of current assets or the creation of other ___________ liabilities. and will typically be paid within one year or operating cycle, whichever is longer are known as ______________ liabilities.
current
47
Current liabilities commonly include:
* Accounts payable.
* Short-term notes payable.
* **Current maturities of long-term debt.**
* **Accrued liabilities.**
* **Unearned revenues.**
48
Obligations due to suppliers of goods or services incurred in the normal course of business operations where there is no formal, written agreement required and no interest is charged because they are are due within 30 to 60 days is known as __________ payable.
Accounts payable (also called trade payables)
49
Formal, written promises to pay cash at a fixed maturity date in the future with either a fixed rate of interest or no interest and the maturity date is within the next year or operating cycle, if longer is known as short-term _________ payable.
short-term notes payable
50
The portion of any long-term debt that is payable within the next year or operating cycle, if longer is known as ___________ maturities of long-term debt.
current maturities of long-term debt
However, this amount must be paid from current assets or result in the creation of other current liabilities in order to be classified as current. For example, if the maturity of the debt is extended or if the debt is replaced by equity or other long-term debt, the debt is classified as long term.
51
Expenses incurred by an entity that remain unpaid at the end of the accounting period such as utilities payable, wages and salaries payable, interest payable, and taxes payable and will be paid within the next year or operating cycle, if longer are known as ________ liabilities.
accrued liabilities
However, if the entity will not pay an accrued liability within the next year, it classifies it as a long-term liability.
52
Liabilities resulting from advance collections of cash from a customer for goods or services to be provided in the future under existing sales or service contracts and where the firm will remove the liability from the balance sheet when it provides the goods or services to the customer are known as ____________ revenues.
unearned revenues (sometimes referred to as deferred revenues)
However, if the firm will not provide the goods or services associated with the unearned revenues to the customer within the next year (or operating cycle, if longer), it classifies the unearned revenue as a long-term liability.
53
Obligations an entity does not expect to satisfy within one year or operating cycle, whichever is longer and are not liquidated through the use of current assets or the creation of other current liabilities are known as _________________ liabilities.
noncurrent liabilities
54
Long-term notes payable, the long-term portion of capital lease obligations, bonds payable, and pension obligations are examples of ______________ liabilities.
noncurrent liabilities
55
Stockholders’ equity, also referred to as shareholders’ equity and owners’ equity, is generally separated into four major categories. What are these categories?
* contributed capital
* retained earnings
* accumulated other comprehensive income
* noncontrolling interest
56
The face or stated value on the share certificate is its _______ value, which is an arbitrary value that the organizers of the corporation place on the stock.
par value
57
The amounts invested by shareholders which includes the stock sold by the entity at face or par value and amounts received above par value, known as additional paid-in capital or paid-in capital in excess of par are known as _____________________ capital.
Contributed capital (also called paid-in capital)
58
The change in an entity’s equity during the period resulting from transactions with nonowners. In other words, it includes all changes in equity during a period except those changes that result from investments and distributions to owners.
Comprehensive income
59
The sum of net income and other comprehensive income. (Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from net income but included in comprehensive income.)
Comprehensive income
60
The cumulative earnings (losses) of the company that have not been distributed as dividends to shareholders are known as _______________.
retained earnings.
61
The cumulative amount of other comprehensive income (or loss) over the life of the entity are known as ________________.
accumulated other comprehensive income (or loss)
62
When one company controls another company (e.g., a subsidiary) but owns less than 100% of its voting shares, and the other controlling company adds all of the subsidiary’s assets and liabilities to its own balance sheet is known as a ____________________ interest, the amount of the company’s net assets owned by outside shareholders.
To illustrate, assume a parent company owns 90% of the voting shares of a subsidiary that reports $100 in assets and $40 in liabilities. The shareholders’ equity (net assets) of the subsidiary is equal to $60 with $6 (10% * $60) of the net assets owned by the noncontrolling interest.
noncontrolling
63
After grouping assets as current and noncurrent, companies make further classifications. Specifically, within current and noncurrent assets, companies list each asset in decreasing order of _____________.
liquidity.
64
Companies list liabilities in increasing order of ___________. That is, current liabilities are listed before long-term liabilities. Also, within each group, the individual liability accounts are listed in order of _______________.
maturity
65
What are the two forms of balance sheet format?
1. The account format lists assets on the left side and liabilities and stockholders’ equity on the right side of the statement.
2. The report format lists liabilities and stockholders’ equity directly below assets on the same page.
66
The intrinsically interrelated relationships among financial statement elements where net income is included in stockholders' equity on the balance sheet, and where net income and the balance sheet are used to prepare the statement of cash flows is is known as financial statement ________________.
articulation
67
Show a diagram of financial statement articulation:
68
Show an example of financial statement articulation:
69
Give a summary of the four primary financial statements and financial statement articulation.
70
The four main financial statements are:
Statements of Net Income and Comprehensive Income
Statement of Stockholders’ Equity
Statement of Financial Position
Statement of Cash Flows
71
Financial statement __________ makes clear the interaction among assets, liabilities, and equity elements with revenues and expenses.
articulation
72
Financial statement articulation for the Statements of Net Income and Comprehensive Income include:
Net income = Revenues - Expenses + Gains - Losses
Comprehensive Income = Net Income + Other Comprehensive Income (OCI)
73
Financial statement articulation for the the Statement of Stockholders’ Equity include:
Ending Retained Earnings = Beginning Retained Earnings + Net income - Dividends Declared +/- Other
Ending Accumulated OCI = Beginning Accumulated OCI +/- OCI
74
Financial statement articulation for the Statement of Financial Position include:
Assets = Liabilities + Stockholders’ Equity
75
Financial statement articulation for the Statement of Cash Flows include:
Net Change in Cash = Ending Cash - Beginning Cash
76
An integral part of the financial statements that are typically extensive provide descriptive information regarding a company’s accounting policies, supplemental disclosures of items not reported on the financial statements, and additional details for transactions reported on the four main financial statements.
the notes (or footnotes)
77
Notes are an integral part of the financial statements and provide additional information related to the line items presented. The notes both expand on financial information included in the financial statements and provide additional disclosures. Examples of notes that provide additional disclosures include:
* Summary of significant accounting policies: Details the methods that the entity has selected in reporting various accounts.
* Subsequent events: Describes significant events that occur after the date of the fiscal year-end but before the financial statements are issued or available to be issued.
* Going concern uncertainties: Management must evaluate whether there is substantial doubt as to whether the entity will continue to operate within one year after the financial statements
are issued. If substantial doubt does exist, disclosures are required.
* Related-party transactions: Details transactions that an entity engages in with owners, firm management, affiliated entities, or any other entity that can exert significant influence on the company
78
Details the methods that the entity has selected in reporting various accounts.
Summary of significant accounting policies
79
The definitions, policies, and methods used to account for areas such as cash equivalents; investments; property, plant, and equipment; revenue recognition; inventories; intangible assets and goodwill; financial instruments; product liability; credit risk; research and development; income taxes; and earnings per share that are disclosed by companies in the first footnote is known as the summary of ______________ accounting policies.
significant
80
Describes significant events that occur after
the date of the fiscal year-end but before the financial statements are issued or available to be issued.
Subsequent events
81
An event that occurs after the date of the fiscal year-end but before the financial statements are issued or available to be issued is known as a ________________ event.
subsequent
82
The sale of a business, the issuance of debt or equity securities, and the settlement of litigation are examples of _________________ events.
subsequent
83
When should a firms recognize material subsequent events in the financial statements for the preceding year and when should a firm disclose them in the notes to the financial statements?
The recognition versus disclosure decision depends upon whether the event relates to a condition that existed on the balance sheet date (the end of the fiscal year):
1. If the condition existed as of the balance sheet date, the firm should make an adjustment to the financial statements to account for the subsequent event.
2. If the condition did not exist as of the balance sheet date, the entity is required to disclose only the subsequent event as opposed to adjusting the financial statements.
84
Management must evaluate whether there is substantial doubt as to whether the entity will
continue to operate within one year after the financial statements are issued. If substantial doubt does exist, disclosures are required.
Going concern uncertainties
85
Details transactions that an entity engages in with owners, firm management, affiliated entities, or any other entity that can exert significant influence on the company.
Related-party transactions
86
Explain the going concern concept.
The going concern concept indicates that accountants record transactions and prepare financial statements if the entity will continue to operate for an indefinite period of time unless there is evidence to the contrary.
Management must evaluate whether there is substantial doubt as to whether the entity will continue to operate within one year after the financial statements are issued. If substantial doubt does exist, then management must consider any plans it has to mitigate the entity’s going concern issue. If it is probable that these plans will be implemented and will alleviate the conditions that raise doubt about the entity’s ability to continue operating, then the entity must disclose information about:
* The conditions or events that raised substantial doubt about the entity’s ability to continue operations.
* Management’s evaluation of the significance of those conditions.
* Management’s plans that alleviate substantial doubt about the entity’s continued operations. If conditions exist that raise substantial doubt about the entity’s ability to continue as a going concern and this doubt is not alleviated by management’s plans, then the entity must disclose that there is substantial doubt about the entity’s ability to continue as a going concern within one year from the date that the financial statements are issued (or available to be issued).
Additionally, the entity should disclose information about:
* The conditions that raise substantial doubt about the entity’s ability to continue operations.
* Management’s evaluation of the significance of those conditions.
* Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
87
Explain related-party transactions.
Related-party transactions are transactions that an entity engages in with owners, firm management, affiliated entities, or any other entity that can exert significant influence on the company.16 FASB requires disclosure of related-party transactions because it is possible that the transaction was not objective and not completed at market prices. For example, if a corporate officer borrows funds from her employer, she may do so below the market rate of interest. The disclosure of a related-party transaction must include:
1. The nature of the relationship.
2. A description of the transaction.
3. The amount of the transaction.
4. Any amounts due from or to related parties.
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