The Balance Sheet

Question 1

the balance sheet

Answer 1

statement of financial position: snapshot at a specific point in time, of the resources controlled by an entity (assets), the claims against those resources (liabilities), and the owners’ residual interest in the entity (owners’ equity

Question 2

four requirements of an asset

Answer 2

1. Acquired at measurable cost 2. Obtained or controlled by the entity 3. Expected to produce future economic benefits 4. Arises from a past transaction or event

Question 3

tangible assets

Answer 3

have physical substance like a building or computer

Question 4

non tangible assets

Answer 4

do not have physical substance like licenses and prepaid expenses

Question 5

current assets

Answer 5

Current assets include cash and those assets that are expected to be converted into cash or consumed within 12 months of the balance sheet date

Question 6

non current assets

Answer 6

non-current assets are assets that are expected to provide economic benefits for periods longer than a year.

Question 7

accumulated depreciation

Answer 7

Some tangible, non-current assets with limited lives, such as the warehouse building, have an associated contra-asset account, called accumulated depreciation, that reduces the recorded value of the asset

Question 8

liability

Answer 8

obligations of the entity to other parties.

Question 9

three requirements of a liability

Answer 9

1. ?It involves a probable future sacrifice of economic resources by the entity 2. ?The economic resource transfer is to another entity 3. ?The future sacrifice is a present obligation, arising from a past transaction or event

Question 10

current liabilities

Answer 10

expected to become due within 12 months of the balance sheet

Question 11

non-current liabilities

Answer 11

expected to become due more than 12 months past the balance sheet date.

Question 12

Owners’ Equity

Answer 12

residual interest of the entity’s owners in the company’s assets (net assets, stockholders equity, shareholder’s equity, or just equity) the amount remaining after liabilities are deducted from assets.

Question 13

the accounting equation

Answer 13

The left side of the accounting equation–total assets–represents all of an entity’s resources that have probable future economic benefits that the entity has obtained or controls as a result of past transactions or events. The right side of the equation–total liabilities plus owners’ equity–represents the sources for those resources. Therefore, the two sides must be equal at all times.

Question 14

dual aspect

Answer 14

formalizes the idea that there are two sides to every accounting transaction - double entry book-keeping. after both sides of each accounting transaction are recorded on the entity’s books, the basic accounting equation should remain balanced.

Question 15

historical cost

Answer 15

(a.k.a cost concept) provide guidance as to the amount at which a tranaction should be reported initially in the entitiy’s account. It requires that transactions be recorded in terms of their actual price or cost at the time the transaction occurred.

Question 16

relevance vs. reliabiltiy

Answer 16

market value vs. historical cost

Question 17

financial ratio analysis

Answer 17

ratios based on the amounts in the financial statements.

Question 18

current ratio

Answer 18

ratio of current assets to current liabilities is a measure of an entity’s ability to meet its maturing short-term obligations. In the current ratio, the numerator, current assets, represents the resources of the entity that are either cash or expected to soon be converted into cash The denominator, current liabilities, represents the current claims of creditors that must be extinguished in the near-term.

Question 19

debt to equity ratio

Answer 19

total debt / total equity : total debt (capital that accrues interest and has to be repaid to lenders) to equity capital (capital that does not demand interest and does not have to be repaid).