B2 - Reading Business & Financial Information CH2

Balance Sheet & Statement of Equity

What’s the difference between current and non-current assets?

Current less than 12 months. Non-current more than 12 months

Why do analysts care about inventory?

Obsolescence and sell ability affect liquidity and valuation

What’s goodwill?

Purchase price less fair value of net identifiable assets (non-current intangible)

How often is goodwill tested?

At least annually for impairment

What are intangible assets?

Non-physical assets like trademarks, patents, copyrights

What are deferred income taxes?

Taxes arising from timing differences between accounting and tax rules

What is a deferred tax liability?

Tax payable in future because accounting profit is greater than taxable profit now

What is a deferred tax asset?

Tax recoverable in future because accounting profit is less than taxable profit now

What is contributed surplus (APIC)?

Capital received above par value (additional paid-in capital)

How are stock options recorded?

Expense on income statement. Increase contributed surplus in the statement of equity

What is other comprehensive income (OCI)?

Gains/losses bypassing net income such as unrealised gains. Recorded in the statement of equity

Common vs preferred shares — dividend priority?

Preferred paid before common

Common shares — voting?

Usually grant voting rights

Preferred shares — tax treatment?

Dividends are not tax-deductible for the company

What is a statement of changes in equity?

Shows movements in share capital, retained earnings and other comprehensive income

What is shareholders’ equity composed of?

Share capital + retained earnings + reserves

How do related-party loans affect equity analysis?

They can be near-equity; require scrutiny and possible subordination

Why remove intangibles for lenders?

Intangibles have poor collateral recovery value

How do sole proprietorships report equity?

Owner’s equity, no share capital, drawings from the business reduce equity

How do partnerships report equity?

Partner capital accounts showing each partner’s share

How does an LLC appear on balance sheet?

Members’ equity. treatment depends on tax election

What is treasury stock?

Company shares repurchased and held in treasury

What effect do share buybacks have?

Reduce equity, can increase leverage ratios

What does retained earnings ≠ cash mean?

Retained earnings is accounting equity, not actual cash on hand.

What disclosures should PPE notes include?

Components, cost, accumulated depreciation, disposal, useful lives

What info goes in debt notes?

Maturity, interest rate, covenants, amount outstanding

Why check share capital transactions in notes?

To understand dilution, buybacks, warrants, options

What is a capital reserve?

Equity component from non-profit transactions such as revaluations

Why assess liquidity of current assets?

Not all current assets convert to cash quickly

Quick tip for equity health?

Look at retained earnings trend, capital injections, and related-party loans