Understanding Balance Statment Flashcards
The Accounting Equation
Assets = Liabilities + Owners Equity
Assets are financed by Debt (L) and/or Equity
Assets
What a company owns.
Liabilities
What a company owes
Equity
Assets - Liabilities (equity = Book Value)
equity ≠ market value
equity ≠ intrinsic value
Component of Asset and Liability
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
Balance Sheet
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
Liquidity
ability to meet short-term liabilities
Solvency
ability to meet Long term debt. An entity is considered solvent if Equity > 0, Insolvent if Equity < 0
A Current/Non-Current Classification BS
Classified BS
both IFSR & GAAP requirement
Current Assets/Liabilities
One operating cycle (1 yr unless longer is justified).
Non-Current
More then 1 year. Long-term >1yr
Working Capital
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.
Liquidity Based BS
All A/L are presented in order of liquidity.
Can be used under IFRS if it is more relevant informative
Current Asset Examples
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
Contra Account
Subtracts from a specified account.
Trade Receivables % uncollectible affected by
- Changes in credit terms
- Quality of Customers
- Changes in risk mgmt policies
- Changes in estimates
- Concentration of credit risk –> reported in Notes
Inventories Measurements
IFRS - lower of cost or net realizable value(selling price)
GAAP - same as IFRS with LIFO or retail inventory method.
Current Liabilities
<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
Par Value
face value of a bond.
Equity
Capital Contributed by owners Preferred Shares Treasury Shars Retained Earnings Accumulated Other Comprehensive Income Non-Controlling Interest
