Chapter 4 Quiz - Balance Sheet Classifications

Current Assets

-Assets that are cash, will be converted into cash, sold, or consumed within the next year or next operating cycle whichever is longer

-They are listed on the balance sheet in order of their liquidity

What are the different types of current assets

-Cash & Cash Equivalents

-Short-Term Investments

-Accounts Receivables

-Other Current Receivables

-Inventories

-Short-term Prepayments

Cash Equivalents

-short-term, highly liquid investments that are able to be turned into known amounts of cash.

-They are debt-type investments, generally with original maturities of three months or less.

What do you do if cash is restricted for a non-current use

it should not be shown in the current asset section, it should be shown in the "Other Assets" section as "Restricted Cash"

What do you do if cash is restricted for a current use

it may be shown as a current asset, but must be reported in "Current Assets" as "Restricted Cash"

Short-term investments

-Short-term

-"Marketable," non-operating investments, such as the stocks or bonds of another entity that are owned

-> these are short-term investments that do NOT qualify to be reported as "cash equivalents"

Accounts Receivable

-They result from the sale of a service or the sale of merchandise inventory

-They are reported at net of an "Allowance for Uncollectibles"

Other Current Receivables

-"Notes Receivable": might be trade or non-trade

-"Other Receivables"

-> Depending on the situation, these receivables might a

Inventories

stocks of goods and raw materials held to facilitate business operations

-> each type of company may have multiple inventory accounts

What are the different types of inventory accounts

-Supplies Inventory

-Merchandise Inventory

-Raw Materials Inventory

-Work-In-Process Inventory

-Finished Goods Inventory

Short-term Prepayments

["Prepaid Expenses"]: Although these should only include those prepayments covering one year or one operating cycle in the future, [whichever is longer], many companies--because of materiality--show all prepayments in this account

What is the criteria for a long-term investment?

-Long-lived

-Not used in operations [non-operating]

-Of an investment-type nature

What are the categories of investment

Equity Securities and Debt Securities

Equity Securities

-"Short-term Investment" - current

-"Investment in stocks" - long-term

-Equity method investments ["Investment in Subsidiary"] - long-term

Debt Securities [3 categories]

1. Trading - current ["short-term investments"]

2. Available-for-Sale - current or long-term

3. Held-to-Maturity - long-term ["Investment in Bonds"]

What would go under other of long-term investments

1. Land held for future plant site

2. Construction-in-progress [which companies report incorrect as PP&E]

3. Machinery held for resale

4. Investment in patient

5. Bond sinking fund

6. Pension fund assets

7. Investment in cash surrender value of life insurance policy

8. Any asset owned for speculative purposes should be recorded in an account such as "Investment in Patent" or "Land Held as an Investment"

PP&E criteria

1. Tangible in nature

2. Long-lived

3. Used in operations

-> many of these assets, but not all are depreciable

What are examples of PP&E

-Land

-Building

-Machinery

-> If the assets are depreciable, they have a contra-asset account, such as accumulated depreciation: machinery, that MUST be shown on the balance sheet immediately below the machinery account that it is contra to

-> the PP&E section typically looks like:

PP&E

less: accumulated depreciation

PP&E, net

Book Values

The original cost of the asset less the depreciation taken to date

EX: Machinery (50,000) - accumulated depreciation: machinery (15,000) = book value of machinery $35,000

What is the criteria for intangible assets

-Intangible in nature

-Long-lived

-Used in operations

-> The intangibles that have a limited life must be amortized

What are examples of intangible assets

-Patent

-Trademark

-Copyrights

-Customer lists

-Goodwill

-Non-compete agreements

What do you do if intangible assets are amortized

-A contra-asset account is not used (such as accumulated amortization: patent)

-Instead, the intangible asset account itself is reduced by the amortization

FOR EXAMPLE: a patent acquire for $60,000 and which has $15,000 of amortization recorded to date, is reported on the balance sheet as

Patent $45,000

Other assets

assets that don't fit into any of the other four sub-classifications [thus, there are few, if any, assets that fit here]

What are examples of other assets

-Related-party receivables ["receivable from EXECUTIVE OFFICER"]

-"Restricted Cash" [restricted by a long-term agreement]

What are the sub-classifications of liabilities

-Current liabilities

-Long-term liabilities

Current liabilities true vs working definition

-True definition: A liability that will be settled or paid with current assets or replaced with another current liability

-Working definition: If the liability comes due within one year or one operating cycle after the balance sheet date, whichever is longer, and no other information is provided, then the liability is current

Long-term liabilities

Those liabilities that are not current

What are the sub-classifications of stockholders' equity

-Legal capital [capital stock]

-Additional paid-in capital

-Retained Earnings

-Unrealized Items

-Other stockholders' equity accounts

Legal Capital [Capital Stock]

Anything in this sub-classification is measured at number of shares times par value [or number of shares times stated value] unless the state in which the corporation operates does not require a par or stated value

-> any account that is measured at number of shares times par value [or number of shares times stated value] is shown in this Stockholders' Equity sub classification

What are some examples of legal capital [capital stock]

-Common stock

-Preferred stock

-Stock dividend to be distributed

-Treasure stock (a NEGATIVE legal capital account)

Additional paid-in capital

This type of account is used to balance certain types of entries involving stockholders' equity, such as the issuance of 10 shares of $3 par common stock for $10 per share

What is the entry for additional paid-in capital

Cash [10 shares x $10] $100

Common Stock [10 shares x $3] $30

P-I-C on Common Stock [10 shares x ($10-$3)] $70

What are examples of additional paid-in capital

-"P-I-C on Common Stock"

-"P-I-C on Preferred Stock"

-"Premium on Common Stock" [this is the same as "PIC on Common Stock"]

-"Discount on Common Stock"

-"P-I-C from Stock Dividend"

-"P-I-C from Treasury Stock Transactions"

What are unappropriated Retained Earnings

This means that these "Retained Earnings" are available for dividends

What are appropriated or "reserve" RE accounts

These amounts of "retained earnings" are NOT available for dividends

Where can the words appropriated and reserve be used on the balance sheet

In one place and that is in the "Retained Earnings" section to indicate retained earnings that have been appropriated for some purpose

What are some examples of account titles for appropriated retained earnings accounts

-"Reserve for Plant Expansion"

-"Reserve for Contingencies"

-"Retained Earnings Appropriated for Inventory Price Declines"

Unrealized items

These are "paper" adjustments to total stockholders' equity that are not reported - or have not yet been reported - on the income statement

What is an example of unrealized items

Accumulated other comprehensive income

What are the 2 stockholders' equity accounts that are reported in SE that are NOT reported in any of the 4 sub-classifications

1. Treasury Stock [if using the cost method]

2. Non-Controlling Interest

Treasury stock

-If it is accounted for using the cost method

-This account has a debit balance so it is reported as a negative in the "Stockholders' Equity" section

-It is reported as a deduction from a subtotal of stockholders' equity so you can get NET Stockholders' Equity

Non-controlling interest

-Also called minority interest or equity attributable to non-controlling interest

-This account results from the reporting entity preparing consolidated financial statements and one of the subsidiaries is not 100% owned by the reporting entity

-There is, therefore, another owner of part of this consolidated subsidiary and its ownership in this subsidiary [its equity in the subsidiary] is reported by the reporting entity as a part of stockholders equity as "Non-controlling Interest".