The Balance Sheet and Financial Disclosures

Flashcards covering key vocabulary terms related to the balance sheet, financial disclosures, and analysis techniques based on the lecture notes.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.

Assets

Economic resources owned by the company that are expected to provide future economic benefits.

Liabilities

Obligations of the company to transfer economic resources to other entities in the future.

Shareholders' Equity

The owners' residual claim on the assets of the company after deducting liabilities, representing paid-in capital and retained earnings.

Liquidity

The ability of a company to convert its assets to cash to pay its current obligations.

Long-term Solvency

The ability of a company to pay all its liabilities, including its long-term liabilities.

Financial Flexibility

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

Book Value

A company's assets minus liabilities as shown in the balance sheet, which often does not equal market value due to historical cost measurement and unrecorded resources.

Accounting Equation

Assets = Liabilities + Shareholders' Equity, showing the fundamental relationship among these elements.

Current Assets

Assets expected to be converted to cash or consumed within one year or the normal operating cycle of the business, whichever is longer.

Operating Cycle

The period of time it takes to convert cash to inventory, sell the inventory, and collect cash from the customers.

Cash Equivalents

Highly liquid investments with a maturity date no longer than three months from the date of purchase.

Short-Term Investments

Investments in stock and debt securities of other corporations that the company has the ability and intent to sell within the next 12 months or operating cycle.

Accounts Receivable

Amounts owed to the company from customers for goods or services sold on account, also known as trade receivables.

Inventory

Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process (for manufacturers: raw materials, work in process, finished goods).

Prepaid Expenses

Costs incurred by a company in one period for an asset that will be expensed in a future period (e.g., supplies, prepaid rent, prepaid insurance).

Long-Term Assets

Assets expected to be converted to cash or consumed for more than one year or operating cycle.

Property, Plant, and Equipment (PPE)

Tangible, long-lived assets used in the operations of the business, reported at original cost less accumulated depreciation.

Intangible Assets

Assets that generally represent exclusive rights and are valuable in generating future revenues, reported net of accumulated amortization (e.g., patents, copyrights, goodwill).

Current Liabilities

Obligations that are expected to be satisfied through the use of current assets or the creation of other current liabilities within one year or the operating cycle, whichever is longer.

Accounts Payable

Obligations to suppliers of merchandise or services purchased on account, typically due in 30 to 60 days.

Notes Payable

Written promises to pay cash at some future date, usually requiring explicit interest payments.

Deferred Revenues

Cash received from a customer for goods or services to be provided in a future period, representing an unearned obligation (also known as unearned revenues).

Accrued Liabilities

Obligations created when expenses have been incurred but will not be paid until a subsequent reporting period (e.g., accrued salaries payable, accrued interest payable).

Current Maturities of Long-Term Debt

The portion of long-term debt (notes, loans, mortgages, bonds) that becomes payable within the next year or operating cycle.

Long-Term Liabilities

Obligations due to be settled or having a contractual right by the borrowing company to be settled in more than one year or operating cycle after the balance sheet date.

Annual Report

A document public companies are required to provide shareholders at the end of each fiscal year, including financial statements and additional disclosures.

Disclosure Notes

Explanations of data presented in financial statements, or information not directly related to any specific item in the statements (e.g., accounting policies, subsequent events, related-party transactions).

Summary of Significant Accounting Policies

A disclosure note that conveys valuable information about a company’s choices from among various alternative accounting methods.

Subsequent Events

Events that occur after a company’s fiscal year-end but before the financial statements are issued.

Related-Party Transactions

Transactions between a company and its owners, management, families of owners or management, or affiliated parties.

Management's Discussion and Analysis (MD&A)

A section in the annual report providing management's biased but informed perspectives on significant events, trends, and uncertainties pertaining to operations, liquidity, and capital resources.

Auditors' Report

A document issued by independent auditors that provides an opinion on the fairness of the financial statements and the effectiveness of internal control procedures.

Unqualified Opinion

A 'clean' auditor's opinion indicating that the financial statements are presented fairly in conformity with generally accepted accounting principles (GAAP).

Qualified Opinion

An auditor's opinion issued when financial statements are presented fairly, 'except for' a specified deviation from GAAP or a limitation of the audit scope.

Adverse Opinion

An auditor's opinion stating that the financial statements are not presented fairly in conformity with generally accepted accounting principles (GAAP).

Disclaimer of Opinion

An auditor's statement that they are unable to express an opinion on the financial statements due to significant scope limitations or other issues.

Default Risk

The risk that a company will not be able to pay its obligations when they come due.

Operational Risk

The risk related to how a company can withstand various events and circumstances that might impair its ability to earn profits.

Horizontal Analysis

A financial statement analysis technique where each item is presented as a percentage of a base year amount to show trends over time.

Vertical Analysis

A financial statement analysis technique where each item is presented as a percentage of a total (e.g., each asset as a percentage of total assets).

Ratio Analysis

A financial statement analysis technique that converts financial statement items into ratios to assess performance and risk.

Current Ratio

A liquidity ratio calculated by dividing current assets by current liabilities, indicating a company's ability to pay short-term obligations.

Acid-Test Ratio (Quick Ratio)

A more stringent liquidity ratio calculated by dividing 'quick assets' (cash, short-term investments, and accounts receivable) by current liabilities, excluding inventories and prepaid items.

Working Capital

A measure of a company's short-term liquidity, calculated as current assets minus current liabilities.

Solvency Ratios

Ratios that provide an indication of the riskiness of a company with regard to its ability to pay its long-term debts.

Debt to Equity Ratio

A solvency ratio calculated by dividing total liabilities by shareholders' equity, indicating the extent of reliance on creditors versus owners.

Times Interest Earned Ratio

A solvency ratio calculated as (Net income + Interest expense + Income taxes) divided by Interest expense, measuring a company's ability to cover its interest payments.

Favorable Financial Leverage

The business activity of using borrowed funds to provide greater returns to shareholders.

Reportable Operating Segment

A component of a public business entity that engages in distinct business activities, whose operating results are regularly reviewed by the chief operating decision maker, and for which discrete financial information is available.

Major Customer Disclosure

A required disclosure if 10% or more of an entity's revenue is derived from transactions with a single customer, including the total revenue amount and the identity of the operating segment(s) reporting the revenue.