Balance Sheet Overview

A comprehensive set of flashcards covering key concepts from the lecture notes on the balance sheet, financial statements, assets, liabilities, equity, and accounting principles.

What is a Balance Sheet?

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

What is the primary purpose of cash internal controls?

To safeguard cash assets and ensure accurate financial reporting.

What is included in the Valuation of Accounts/Notes Receivable?

Estimation of the amounts owed to the business including considerations for bad debts.

What is depreciation?

An expense that reflects the allocation of the cost of tangible long-lived assets over their useful lives.

What are intangible assets?

Assets without physical substance that provide long-term value, such as patents and goodwill.

What does 'Accounts Payable' refer to?

A liability account indicating amounts a company owes to suppliers for goods or services received.

What are preferred stocks?

A class of stock with special privileges, often providing fixed dividends before common stockholders receive any payment.

What are long-term liabilities?

Obligations that are due beyond one year from the balance sheet date, like bonds payable.

What is owner's equity?

The residual interest in the assets of an entity after deducting liabilities.

How is liquidity defined?

The ability of a company to meet its short-term financial obligations.

What does solvency measure?

A company's ability to meet its long-term financial obligations.

What is inventory turnover?

A measure of how many times inventory is sold or used over a specific period.

What are the two methods for tracking inventory?

Periodic inventory method and perpetual inventory method.

What is a contra-asset account?

An account that offsets the value of another related asset account.

What is the significance of retained earnings?

Retained earnings represent the cumulative amount of net income not distributed to shareholders as dividends.

What is the formula for calculating gain or loss on disposal of an asset?

Amount received - Book value of the asset disposed = Gain or Loss.

In context to notes receivable, what does 'discounting a note' mean?

Selling a note to a bank where the bank subtracts a discount to provide proceeds.

What does liquidity ratio analysis indicate?

A company's ability to pay its financial obligations, influencing its operational sustainability.

What is FIFO in inventory management?

First In, First Out; an accounting method where the oldest inventory is sold first.

What does GAAP stand for?

Generally Accepted Accounting Principles, which are the standard framework of guidelines for financial accounting.

What is included in a company's owner's equity section?

Common stock, preferred stock, additional paid-in capital, and retained earnings.

What does the term amortization refer to?

The process of gradually writing off the initial cost of an intangible asset over a period.

What are the primary components of a note receivable?

Face amount and the interest associated with that amount.

Why is depreciation recorded for fixed assets?

To allocate the cost of an asset over its expected life, reflecting usage and wear.

What does it mean for an asset to be capitalized?

Recording an asset on the balance sheet instead of treating it as an expense, reflecting its long-term benefit.

What is the calculation for the solvency ratio?

Net Income + Depreciation divided by Total Liabilities.

What does the term 'bad debts' refer to?

Accounts receivable that are not expected to be collected.

What is the meaning of 'activity ratios'?

Ratios that measure how efficiently a business is utilizing its assets to generate sales.

When can an intangible asset be written down?

When it becomes impaired, or loses value, it may be necessary to reduce its book value.

What rights do common stockholders have?

Rights to vote, share in dividends, and a percentage of the corporation upon liquidation.

What is the equation for net income related to retained earnings?

Net income after dividends is added to retained earnings.

What is an example of a current asset?

Cash and accounts receivable that are expected to be converted to cash within one year.

What are the three methods of asset depreciation?

Straight-line, declining balance, and units of production.

What characterizes a plant asset?

A long-term asset used in the operations of a business, such as machinery or buildings.

What does the term 'tangible assets' refer to?

Physical assets such as real estate, inventory, and equipment.

What is the primary concern of internal controls?

To prevent fraud and safeguard assets.

What does book value refer to in the context of an asset?

The value of an asset as recorded in the company's books, minus depreciation.

What is the balance sheet equation?

Assets = Liabilities + Owner's Equity.

How does accounting for notes receivable work?

Notes are recognized as assets on the balance sheet when they are recorded.

Define the term 'current asset'.

An asset that is expected to be converted into cash or used up within one year.

What is an example of an intangible asset?

A trademark or patent.

What is meant by 'par value' of stock?

The nominal value assigned to a share of stock for accounting purposes.

What does the term 'liquidation' mean in reference to stockholders?

The process of selling off a company's assets and distributing the proceeds to claimants.

What are bonds payable considered in accounting?

A long-term liability that represents a loan made to the issuer by the bondholders.

What is the effect of issuing dividends on retained earnings?

Dividends decrease retained earnings as they are distributed to shareholders.

What does EBITDA stand for?

Earnings Before Interest, Taxes, Depreciation, and Amortization.

What does the term 'net income' represent?

The profit of a company after all expenses and taxes have been deducted from revenue.

What is the purpose of calculating inventory cost?

To determine the total cost of products that have not yet been sold.

How are fixed assets depreciated?

Over their useful lives using methods like the straight-line or declining balance.

What factor can lead to an account being classified as 'doubtful'?

The risk of non-collection due to the customer’s financial difficulty.

Define 'current liabilities'.

Obligations that a company expects to settle within one year.

What is the valuation method used for estimating uncollectible accounts?

Percentage of accounts receivable method.

What does the term 'break-even point' refer to?

The level of sales at which total revenues equal total costs.

What impacts the accounting treatment of an asset?

The asset's classification as current or long-term influences its accounting treatment.

What categorizes a liability as 'short-term'?

A liability due to be settled within one year.

What is an example of a deferred warranty revenue?

Money received upfront for warranty services that will be provided in the future.

What are the objectives of the valuation of inventories?

To accurately reflect the costs of inventory in financial statements.

How is goodwill measured in accounting?

As the excess of the purchase price over the fair value of identifiable net assets acquired.

What principle confines the valuation of assets to historical cost?

The cost principle in accounting.

What determines the useful life of an asset for depreciation?

The period over which the asset is expected to be available for use.

What distinguishes fixed assets from current assets?

Fixed assets are long-term and used in operations, while current assets are short-term and can be liquidated.

What is included in the income statement?

Summary of revenues, costs, and expenses over a specific period.

What impacts a company’s financial position?

The balance of assets against liabilities and owner's equity.

How does poor liquidity affect a company?

It increases the risk of bankruptcies and operational difficulties.

What is the potential downside of using debt financing?

Increased financial risk and potential for insolvency if not managed effectively.

What is a capital asset?

An asset that is utilized to generate wealth or income over time.

Define the term 'cash flow'.

The net amount of cash being transferred into and out of a business.

What does it mean to capitalize an expense?

To record an expense as an asset instead of immediately recognizing it as a cost.

What are the key components of a standard cash flow statement?

Operating, investing, and financing activities.

What is the purpose of an audit?

To verify the accuracy and completeness of financial statements.

What is the role of internal audits?

To assess and improve the effectiveness of risk management and control processes.

What constitutes a financial audit?

An examination of a company's financial statements and related operations.

What does includes current assets?

Cash, inventory, and accounts receivable that can be quickly converted to cash.

What is the relationship between revenues and net income?

Net income is derived from total revenues minus total expenses.

What are long-term assets?

Assets with a useful life greater than one year.

What is the primary focus of financial accounting?

To provide relevant financial information about an organization to outside users.

What is meant by 'marketable securities'?

Short-term investments that are easily convertible to cash.

What does a classified balance sheet provide?

Detailed organization of assets and liabilities into current and non-current categories.

What is the role of the Securities and Exchange Commission (SEC)?

To protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

What is a stockholder's equity statement also known as?

Statement of changes in owner’s equity.

What is a financial ratio?

A calculation used to evaluate relationships between financial statement items.

What measures a company’s operational efficiency?

Activity ratios track how effectively a company utilizes its assets.

How do financial statements impact investment decisions?

They provide insights into a company’s profitability, liquidity, and risk.

What is warned for uncollectability?

The early identification of customer accounts that may default on payment.

What metrics are included in liquidity ratios?

Current ratio and quick ratio are key metrics.

What is the difference between cash flow and profit?

Cash flow focuses on the cash generated and used, while profit accounts for revenue and expenses.

Define 'external audit'.

An independent examination of financial information of any entity, whether profit oriented or not.

What constitutes comprehensive income?

All changes in equity during a period except those resulting from investments by owners and distributions to owners.