ch 4- balance sheet

what does the balance sheet do

1. reports assets, liabilities, and equity at specific date

2. provides information about resources, obligation to creditors, and equity in net resources

3. helps in predicting amounts of timing, and uncertainty of future cash flows

4. reported what is owned and what is owed at one in time

heading for balance sheet

Month, Day, Year

usefulness of the balance sheet

computing rates of return

evaluating capital structure

assess risk and future cash flows

analyze the company's: liquidity, solvency, and financial flexibility

liquidity

the ease with which an asset can be converted into cash

solvency

ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

financial flexibility

the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs

What is a limitation of the balance sheet regarding asset valuation?

Most assets and expenses are recorded at historical cost.

What is a limitation of the balance sheet related to judgment?

The use of judgment and estimates can affect the accuracy of the balance sheet.

What happens to items of financial value that cannot be recorded objectively on the balance sheet?

They are omitted from the balance sheet.

assets

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

liabilities

probable future sacrifices of economic benefits

equity

residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.

classifications of assets

current assets

long-term investments

property, plant, and equipment

right-of-use assets

intangible assets

other assets

classifications of liabilities and owners' equity

current liabilities

long-term liabilities

owners' (stockholders'_ equity

current assets

cash and other assets expected to be exchanged for cash or consumed within a year

order of liquidity of current assets

cash/cash equivalents

short-term investments

receivables

inventories

prepaid expenses

cash

any monies available on demand

cash equivalents

short-term highly liquid investments that mature within three months or less

how is restricted cash treated on the balance sheet

current asset

investment

must be disclosed

short-term investments

must be marketable and management must intend to convert within one year/operating cycle

equity securities

short-term investments

recorded at fair value

trading equity securities

valued at fair value

current asset

debt securities

short-term investments

held-to-maturity debt securities

company has positive intent and ability to hold to maturity

current or noncurrent

how are held-to-maturity debt securities valued

amortized cost

trading debt securities

bought and held primarily for sale in the near term to generate income on short-term price differences

current

how are trading debt securities valued

fair value

available-for-sale debt securities

not classified as held-to-maturity or trading debt securities

current or noncurrent

how are available-for-sale debt securities valued

fair value

receivables

claims held against customers and others for money, goods, or services

how should inventories be disclosed on balance sheet

basis of valuation

cost flow assumption

prepaid expenses

payment of cash that is recorded as an asset

how are prepaid expenses recorded

at cost

examples of prepaid expenses

insurance

supplies

advertising

rent

taxes

does the current assets section have to have "total current assets" line

yes

1 multiple choice option

long-term investments

ling term commitment of funds in order to earn a profit, but not from main operations

types of long-term investments

securities

tangible fixed assets

special funds

non-consolidated subsidiaries

securities

debt investments classified as available-for-sale or held-to-maturity

types of securities

bonds

long-term notes

how are available for sale debt investments valued

fair value

how are held-to-maturity debt investments valued

amortized cost

how are equity investments valued

fair value

types of

tangible fixed assets

fixed assets not currently being used in operations

types of tangible fixed assets

land held for future plant site

retired machine no longer in use

special funds

long-term restricted cash

types of special funds

sinking funds

pension funds

cash surrender value of life insurance

property, plant, and equipment

tangible long-lived assets used in the regular operations of the business

how are pp&e recorded

book value (cost-depreciation)

general order of recording pp&e

land

building

equipment

software

tools

leasehold improvements

intangibles

lack of physical substance and are not financial instruments

grants owner right to do something no one else can do

general order of intangibles

goodwill

patents

trademarks

franchises

copyrights

examples noncurrent assets

long-term prepaid expenses

prepaid pension cost

noncurrent receivables

assets in special funds

deferred income taxes

property held for sale

restricted cash or securities

current liabilities

debts that will be paid or will come due within the next year and will use current assets

does the current liabilities section have to have "total liabilities assets" line

yes

1 multiple choice option

What are payables resulting from the acquisition of goods and services?

Accounts payable, wages payable, taxes payable

What are collections received in advance?

Unearned rent revenue or unearned subscription revenue

What are other types of current liabilities?

The portion of long-term bonds to be paid in the current period or short-term obligations arising from the purchase of equipment

working capital

current assets - current liabilities

current ratio

current assets/current liabilities

ideal current ratio

2:1

long-term liabilities

obligations that a company expects to pay after one year

examples of long-term liabilities

mortgage payable

bonds payable,

long-term notes payable

how do companies classify long-term liabilities that mature within the current operating cycle if payment of the obligation requires the use of current assets

current liabilities

What are obligations arising from specific financing situations?

Issuance of bonds, long-term lease obligations, and long-term notes payable.

What are obligations arising from pension obligations?

Deferred income tax liabilities.

What are obligations that depend on the occurrence of future events?

Service or product warranties and other contingencies.

items in the stockholders' equity section

capital stock

additional paid-in capital

retained earnings

accumulated other comprehensive income

treasury stock

capital stock

par or stated value of shares issued

additional paid-in capital

the excess of amounts paid in over the par or stated value

retained earnings

the corporation's undistributed earnings

accumulated other comprehensive income

the aggregate amount of the other comprehensive income items

treasury stock

the amount of ordinary shares repurchased