Understanding Balance Statment

Question 1

The Accounting Equation

Answer 1

Assets = Liabilities + Owners Equity

Assets are financed by Debt (L) and/or Equity

Question 2

Assets

Answer 2

What a company owns.

Question 3

Liabilities

Answer 3

What a company owes

Question 4

Equity

Answer 4

Assets - Liabilities (equity = Book Value)
equity ≠ market value
equity ≠ intrinsic value

Question 5

Component of Asset and Liability

Answer 5

A future economic benefit flowing to or from the entity must be probable and the item has a cost or value that can be measured reliably

Question 6

Balance Sheet

Answer 6

At a point in time. Mixes casts and values of items (historical cost, adjusted historical cost, and fair value. Useful for assessing the entity’s liquidity and solvency

Question 7

Liquidity

Answer 7

ability to meet short-term liabilities

Question 8

Solvency

Answer 8

ability to meet Long term debt. An entity is considered solvent if Equity > 0, Insolvent if Equity < 0

Question 9

A Current/Non-Current Classification BS

Classified BS

Answer 9

both IFSR & GAAP requirement

Question 10

Current Assets/Liabilities

Answer 10

One operating cycle (1 yr unless longer is justified).

Question 11

Non-Current

Answer 11

More then 1 year. Long-term >1yr

Question 12

Working Capital

Answer 12

Current Assets - Current Liabilities.
Measure of a company’s liquidity, operational efficiency and its short-term financial health. If a company has substantial positive working capital, then it should have the potential to invest and grow.

Question 13

Liquidity Based BS

Answer 13

All A/L are presented in order of liquidity.

Can be used under IFRS if it is more relevant informative

Question 14

Current Asset Examples

Answer 14

Cash/Cash Equivalents - reported at amortized cost or fair value
Marketable Securities - <1yr
Trade Receivables - Reported at net realizable value (amt owed less contra debts)
Inventories

Question 15

Contra Account

Answer 15

Subtracts from a specified account.

Question 16

Trade Receivables % uncollectible affected by

Answer 16

• Changes in credit terms
• Quality of Customers
• Changes in risk mgmt policies
• Changes in estimates
• Concentration of credit risk –> reported in Notes

Question 17

Inventories Measurements

Answer 17

IFRS - lower of cost or net realizable value(selling price)

GAAP - same as IFRS with LIFO or retail inventory method.

Question 18

Current Liabilities

Answer 18

<12 months
Trade Payable - owed to vendor for the purchase of g/s
Bank Loans
Notes Payable
Current Portion of LTD
Accrued Expenses
Deferred Income/Unearned Revenue

Question 19

Par Value

Answer 19

face value of a bond.

Question 20

Equity

Answer 20

Capital Contributed by owners
Preferred Shares
Treasury Shars
Retained Earnings
Accumulated Other Comprehensive Income
Non-Controlling Interest