Ch. 4 - Understanding Balance Sheets

Flashcards on Understanding Balance Sheets

Balance Sheet

Also known as the statement of financial position or statement of financial condition, disclosing what an entity owns (or controls), what it owes, and what the owners’ claims are at a specific point in time.

Assets (A)

Resources controlled by the company as a result of past events and from which future economic benefits are expected to flow to the entity.

Liabilities (L)

Obligations of a company arising from past events, the settlement of which is expected to result in a future outflow of economic benefits from the entity.

Equity (E)

Represents the owners’ residual interest in the company’s assets after deducting its liabilities.

Liquidity

For a company overall, it's ability to pay for short-term obligations; for a particular asset or liability, its ‘nearness to cash’

Current Assets

Assets expected to be sold, used up, or otherwise realized in cash within one year or one operating cycle of the business, whichever is greater, after the reporting period.

Non-Current Assets

Assets not classified as current, also known as long-term or long-lived assets.

Current Liabilities

Liabilities expected to be settled within one year or within one operating cycle of the business.

Non-Current Liabilities

All liabilities not classified as current.

Working Capital

The excess of current assets over current liabilities.

Cash Equivalents

Highly liquid, short-term investments that are so close to maturity that the risk of significant change in value from changes in interest rates is minimal.

Trade Receivables

Amounts owed to a company by its customers for products and services already delivered; also referred to as accounts receivable and typically reported at net realizable value.

Property, Plant, and Equipment (PP&E)

Tangible assets that are used in company operations over more than one fiscal period.

Intangible Assets

Identifiable non-monetary assets without physical substance (e.g., patents, licenses, trademarks).

Goodwill

Arises when a company acquires another company for a price in excess of fair market value of net identifiable assets acquired.

Trade Payables

Amounts that a company owes its vendors for purchases of goods and services—in other words, the unpaid amounts of the company’s purchases on credit as of the balance sheet date; also known as accounts payable.

Notes Payable

Financial liabilities owed by a company to creditors, including trade creditors and banks, through a formal loan agreement.

Accrued Expenses

Expenses that have been recognized on a company’s income statement but that have not yet been paid as of the balance sheet date; also called ‘accrued expenses payable,’ ‘accrued liabilities,’ and other ‘non-financial liabilities’.

Deferred Income

Arises when a company receives payment in advance of delivery of the goods and services associated with the payment; also called ‘deferred revenue’ and ‘unearned revenue’.

Deferred Tax Liabilities

Amount of income taxes payable in future periods with respect of taxable temporary differences.

Treasury Shares

Also known as treasury stock, this is the portion of shares that a company keeps in their own treasury.

Solvency

A company’s ability to meet its financial obligations over the longer term.

Current Ratio

Calculated as current assets divided by current liabilities; indicates a company’s ability to meet current liabilities.

Quick Ratio

Calculated as (Cash + Marketable securities + Receivables) / Current liabilities; indicates a company’s ability to meet current liabilities.

Cash Ratio

Calculated as (Cash + Marketable securities) / Current liabilities; indicates a company’s ability to meet current liabilities.

Long-term debt to equity

Total long-term debt ¸ Total equity; indicates financial risk and financial leverage and a company’s ability to meet its financial obligations over time.

Debt to equity

Total debt ¸ Total equity; indicates financial risk and financial leverage and a company’s ability to meet its financial obligations over time.

Debt to assets

Total debt ¸ Total assets; indicates financial risk and financial leverage and a company’s ability to meet its financial obligations over time.

Debt to capital

Total debt ¸ (Total debt + Total equity); indicates financial risk and financial leverage and a company’s ability to meet its financial obligations over time.

Financial leverage

Total assets ¸ Total equity; indicates financial risk and financial leverage and a company’s ability to meet its financial obligations over time.