The Balance Sheet and Financial Disclosures

Flashcards covering key vocabulary related to the balance sheet, financial disclosures, financial statement analysis, and relevant ratios based on the provided lecture notes.

Balance Sheet

Reports a company’s financial position at a point in time; provides an organized list of assets, liabilities, and equity grouped according to common characteristics.

Liquidity

The ability of a company to convert its assets to cash.

Long-term solvency

Whether a company will be able 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 (of a company)

Assets minus liabilities as shown in the balance sheet; usually will not directly measure the company’s market value due to historical costs and unrecorded valuable resources.

Accounting equation

Assets = Liabilities + Shareholders’ Equity.

Current assets

Assets expected to be converted to cash (or consumed) within the coming year or within the normal operating cycle of the business if that’s longer than one year.

Cash and cash equivalents

Typical components of current assets including cash, commercial paper, money market funds, and US treasury bills with maturity dates no longer than three months from 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, whichever is longer.

Accounts receivable

Result from the sale of goods or services on account; often referred to as trade receivables.

Notes receivable

Nontrade receivables supported by a formal agreement or note that specifies payment terms.

Inventory

Typical components of current assets, including raw materials, work in process, and finished goods.

Prepaid expenses

Arises when a company incurs an asset cost in one period that won’t be expensed until a future period, such as supplies, prepaid rent, and prepaid insurance.

Long-term assets

Assets expected to be converted to cash or consumed in more than one year (or operating cycle, if longer).

Investments (long-term)

Assets not used directly in business operations, such as debt/equity securities of other corporations, land held for speculation, and long-term receivables.

Property, Plant, and Equipment (PP&E)

Tangible, long-lived assets used in business operations, reported at original cost less accumulated depreciation (e.g., land, buildings, equipment).

Operating Lease Assets

A rental agreement giving a company the right to use an asset, requiring periodic cash payments, with the asset returned at the end of the lease; reported separately from PP&E.

Intangible Assets

Generally represent exclusive rights and valuable resources in generating future revenues, reported net of accumulated amortization (e.g., patents, copyrights, trademarks, goodwill).

Other Long-Term Assets

A catch-all classification for long-term assets not reported separately, often including long-term prepaid expenses (deferred charges) and long-term restricted cash.

Liabilities

Represent obligations to other entities.

Current Liabilities

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

Accounts Payable

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

Notes Payable (short-term)

Written promises to pay cash at a future date, usually requiring explicit interest, due within one year or operating cycle.

Deferred Revenues

Represent cash received from a customer for goods or services to be provided in a future period.

Accrued Liabilities

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

Current Maturities of Long-Term Debt

Portions of long-term notes, loans, mortgages, leases, and bonds payable that become due within the next year or are payable in installments.

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, if longer) after the balance sheet date.

Shareholders' Equity

Total assets minus total liabilities, arising primarily from paid-in capital and retained earnings; also referred to as net assets or book value.

Statement of financial position

The alternative title for the balance sheet, often used under International Financial Reporting Standards (IFRS).

Annual report

A yearly report companies with public securities are required to provide shareholders, including financial statements and additional disclosures.

Disclosure Notes

Notes that explain data in financial statements or provide additional information not directly related to a specific item.

Summary of Significant Accounting Policies

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

Subsequent Events

Events occurring after a company’s fiscal year-end but before the financial statements are issued, requiring disclosure.

Related-party transactions

Transactions between the company and owners, management, their families, or affiliated parties.

Errors and fraud

Misstatements in financial statements that are unintentional (errors) or intentional (fraud).

Management’s Discussion and Analysis (MD&A)

Provides management’s perspective on significant events, trends, and uncertainties related to a company's operations, liquidity, capital resources, and critical accounting estimates.

Sarbanes-Oxley Act of 2002

Legislation requiring corporate executives to personally certify financial statements and asserting management's responsibility for annual report information and internal control procedures.

Proxy statement

A statement provided to shareholders annually that invites them to the annual meeting to elect board members and vote on issues, including compensation and stock option information for directors and top executives.

Environmental, Social, and Governance (ESG) Disclosures

Disclosures detailing a company's practices and policies related to the sustainability of business operations, covering environmental impact, social issues, and governance policies.

Auditors’ Report

A report resulting from auditors examining financial statements and internal control, attesting to the fairness of the financial statements and stating an opinion.

Unqualified opinion (Auditors' report)

Issued when the auditor finds that financial statements are presented in conformity with generally accepted accounting principles (GAAP) after undertaking professional care.

Unqualified with an explanatory paragraph opinion

Issued when financial statements conform with GAAP but important information (e.g., lack of consistency, going concern) needs emphasis.

Qualified opinion

Issued when an audit reveals exceptions such as nonconformity with GAAP, inadequate disclosures, or a limitation of the audit scope.

Adverse opinion

Issued when financial statements are materially misstated and do not fairly present the company's financial position or results of operations in conformity with GAAP.

Disclaimer of opinion

Issued when an auditor cannot express an opinion on the financial statements due to significant limitations or restrictions on the audit examination.

Default risk

The risk that a company won’t be able to pay its obligations when they come due.

Operational risk

Relates to how a company can withstand events that might impair its ability to earn profits.

Comparative financial statements

Financial statements presented for the preceding year and often the previous two years to facilitate analysis.

Horizontal analysis

Financial statement analysis where each item is presented as a percentage of a base year amount.

Vertical analysis

Financial statement analysis where each item is presented as a percentage of a total.

Ratio analysis

Financial statement analysis where financial statement items are converted to ratios.

Liquidity ratios

Ratios providing information about a company’s ability to pay its short-term obligations by converting assets to cash.

Current ratio

A measure of liquidity computed by dividing current assets by current liabilities.

Working Capital

A measure of a company’s ability to satisfy its short-term obligations, calculated as Current Assets − Current Liabilities.

Acid-test ratio (Quick ratio)

A more stringent liquidity measure using 'quick assets' (unrestricted cash, short-term investments, accounts receivable) divided by current liabilities.

Solvency ratios

Ratios providing 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 comparing resources provided by creditors with resources provided by owners, indicating reliance on creditors and protection in case of insolvency.

Times interest earned ratio

A solvency ratio indicating a company's ability to cover its interest charges, calculated as (Net income + Interest expense + Income taxes) / Interest expense.

Favorable financial leverage

When a company uses borrowed funds to provide greater returns to its shareholders, potentially leading to a higher return on shareholders’ equity.

Reportable Operating Segment

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

Geographic area disclosure

US GAAP requirement to report revenues from external customers and long-lived assets broken down by domestic and foreign countries.

Major customers disclosure

Required if 10% or more of an entity's revenue is from a single customer, disclosing total revenue from each and the related operating segment(s).