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40 Cards in this Set
- Front
- Back
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Understanding the balance sheet:
Assets |
- provide future economic benefits controlled by a firm from previous transactions
- created by operating activities, investing, and financing |
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Understanding the balance sheet:
Common Balance Sheet Asset Accounts |
cash and equivalents
accounts receivable (trade receivables) inventory prepaid expenses investments PP&E Intangible assets deferred tax assets pension assets |
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Understanding the balance sheet:
Liabilities |
-obligations owed by an entitiy from previous transactions that are expected to result in an outflow in the future
- created by financing, operating activities |
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Understanding the balance sheet:
Common Balance Sheet Liabilitity Accounts |
accounts payable (trade payables)
accrued expenses unearned revenue notes payable bonds payable capital (financial) lease obligations pension liabilities deferred tax liabilities |
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Understanding the balance sheet:
Stockholders equity |
- the residual interest in assets that remains after subtracting a firms liabilites, also referred to shareholders equity, owners equity, or net assets
- created by financing and operating activities |
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Understanding the balance sheet:
Common Balance Sheet Equity Accounts |
capital stock
additional paid-in-capital (capital in excess of par) Treasury stock Retained earnings Accumulated other comprehensive income |
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The uses of the balance sheet in financial analysis
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important to investors and lenders alike, the analyst must understand the limitations, not all assets and liablilities are reported on the balance sheet, and those that are not necessarily reported at fair value
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Understanding the balance sheet:
formats of the balance sheet presentation |
1. balance sheet equation; an account format in which assets are presented on the left side and the liabilities and equitys are presented on the right side
2. report format - the assets, liabilities, and equity are presented in one column 3. classified balance sheet - groups together similar items, current assets grouped together, and current liabilites grouped together, similarly, noncurrent assets are grouped together as are noncurrent liabilities |
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Understanding the balance sheet:
Accrual process |
Under accrual accounting, revenue recognition and expense recognition do not necessarily coincide with cash receipts and cash payments
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Understanding the balance sheet:
Under Accrual accounting |
1. cash recieved in advanced of recognizing revenue results in an increase in assets (cash) and an increase in liagilities (unearned revenue), one the revenue is earned, liabilities (unearned revenue) decrease and equity (retained earnings) increases
2. recognizing revenue before cash is recieved results in an incresae in assets (acounts receivable) and an increase in equity (retained earnings), once the cash is collected and asset (cash) increases and another asset (accounts receivable) decreases by the same amount 3. cash paid in advance of recognizing an expense results in a decrease in one asset (cash) and an increase in another asset (prepaid expenses) by the same amount, once the expense is recognixed, assets (prepaid expenses) decrease ad equity (retained earnings) decreases by an equal amount 4. recognizing an expense before cash is paid results in an increase in liabilities (accrued expenses) and a decrease in equity (retained earnings), once the expense is paid, assets (cash) decrease annd liabilities (accrued expenses) decrease by an equal amount |
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Understanding the balance sheet:
current liabilities |
obligations that will be satisfied within one year or one operating cycle, whichever is greater
1. settlement is expected in the normal operating cycle 2. settlement is expected within one year 3. there is not an unconditional right to defer settlement for more than one year |
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Understanding the balance sheet:
current assets |
minus current liabilites equals working capitals, not enough working capital may indicate liquidity problems, too much working capital may be an indication of inefficiency
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Understanding the balance sheet:
noncurrent assets |
do not meet the definition of current because they will be converted into cash within one year or operating cycle, provide info about a companies investing activities
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Understanding the balance sheet:
noncurrent liabilities |
do not meet the criteria of current liabilities, provide info about the firms long-term financing activities
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Understanding the balance sheet:
Current/noncurrent format under IFRS |
requires the format unless liquidity baseed presentation is more relevant, as in the banking industry
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Understanding the balance sheet:
minority interest |
is the pro-rata share of the subsidiarys net assets (equity) not owned by the paretn company
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Understanding the balance sheet:
minority interest under IFRS and GAAP |
IFRS - reported in the equity section of the consolidated balance sheet
GAAP - reported in the liabilities section, the equity section, or the mezzanine section of the balance sheet, the mezzanine section is located between liabilities annd equity |
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Balance Sheet measurement bases:
historical cost |
of an asset or liability is its cost or fair value at acquisition, including any costs of acquisition and/ or preparation
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Balance Sheet measurement bases:
fair value |
is the amount at which ann asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arms length transaction, when hte asset or liability trades regularly, its fair value is usually readily determinable from its market price
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Balance Sheet measurement bases:
F/S footnotes |
- accounting policies, including formulas used
- total carrying value of inventory, amount per category - amount of inventories carried at fair value less costs to sell - amount of any write-downs and reversals of any write down - circumstances or events that led to the reversal of a write down - inventories pledged as security for liabilities - amount of inventories recognized as an expense |
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Balance Sheet measurement bases:
Current assets |
assets expected to be realized or intended for sale in an operating cycle
1. assets held primarily for trading 2. expected to be realized in 12 months after the balance sheet date 3. cash or cash equivalents 4. marketable securities 5. trade receivables 6. inventories 7. other current assest, short term items not easily classified |
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Balance Sheet measurement bases:
Inventories under Current assets |
should be measured at the lower of cost or net realizable value (NVR), hte estimated selling price less the estimated costs of completeion and costs necessary to make the sale,
amounts that should be excluded include the following: - abnormal amounts wasted - storage costs - admin overheads - selling costs |
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Balance Sheet measurement bases:
Inventories under Current assets, techniques for measuring inventories |
standard cost - which should take into account the normal levels of materials, labor, and actual capacity, should be reviewed regularly
retail method - the sales value is reduced by the gross margin to calculate cost |
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Balance Sheet measurement bases:
Inventories under Current assets and prepaid expenses |
are normal operating expenses that have been paid in advance, as the costs are actually incurred an expense is recognized in the income statement and prepaid expenses (an asset) decrease
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Balance Sheet measurement bases:
Current liabilities |
obligations that will be satisfied within one year or operating cycle
accounts payable - amounts owed to suppliers for goods or services purchased on credit notes payable - obligations in the form of promissory notes owed to creditors, can also be included in noncurrent liabilities current portion of long-term debt - the principal portion of debt due within one year or operating cycle taxes payable - current taxes that have been recognized in the income statement but hav not yet been paid accrued liabilites (accrued expenses) - expenses that have been recognized in the income statement but are not yet contractually due unearned revenue - cash collected in advance of providing goods and services |
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Balance Sheet measurement bases:
Tangible assets |
long-term assets with physical substance, such as land, reported on the balance sheet at historical cost less accumulated depreciation, land of course is not depreciated,
tangible assets not used in the operations of the firm should be classified as investment assets |
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Balance Sheet measurement bases:
Intangible assets |
long-term assets that lack physical substance,
identifiable - based on rights and privileges over a finite period, amortized unidentifiable - cannot be bought separately, infinite life, not amortized, but tested at least for impairment Under GAAP - R&D expensed as incurred Under IFRS - a firm must identify the research stage and development stage, expense costs in the research phase, and capitalize costs during the development stage |
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Off-balance-sheet disclosures
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F/S footnotes should disclose
- accounting polices - estimation of uncertainty - debt agreement terms - leases and off-balance-sheet financing - business segments - contingent assets annd liabilities - pension plans |
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Appropriate classifications and related accounting treatments:
Marketable investment securities |
classified as:
- held-to-maturity securities, debt securities acquired with the intent that they will be held to maturity, reported on balance sheet at amortized cost, amortized cost is equal to the face (par) value less any unamortized discount or plus any unamortized premium trading securites - debt and equity securities acquired with the intent to profit over the near term, reported on the balance sheet at fair value, unrealized gains and losses, are reported in the income statement - available-for-sale, debt and equity securities that are not expected to be held to maturity, reported on the balannce sheet at fair value, any unrealized gains are losses are not recognized in the income statement, but are reported in other comprehensive income as a prot of stockholders equity |
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List the components of owners equity
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1. capital contributed by owners
2. minority interest 3. retained earnings 4. treasury stock 5. accumulated comprehensive income |
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Equity:
capital contributed by owners |
total amount paid in by the common and preferred shareholders
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Equity:
retained earnings |
undistributed earnings (net income) of the firm since inception, teh cumulative earnings that have not been paid out to shareholders as dividends
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Equity:
Treasury stock |
stock that has been recquried by th issuing firm but not yet retired, reduces stockholders equity, does not represent an investment in the firm, does not recieve dividends
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Equity:
Accumulated comprehensive income |
includes all changes in stockholders equity except for transactions recognized in the income statement (net income) annd transactions with shareholders, such as issuing stock, reacquiring stock, and paying dividends
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Equity:
Comprehensive income GAAP annd IFRS |
GAAP - the firm can report comprehensive income in the income statement (below net income) in a separate statement of comprehensive income, or in the statement of changes in stockholders equity
IFRS - firms are not required to report comprehensive income |
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Interpret the balance sheet and common size balance sheet
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a common size balance sheet expresses eahc balance sheet account as a percentage of tota assets, the format is known as vertical common-size analysis, allows for time series analysis and cross-sectional analysis
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Commonly used balance sheet ratios:
Liquidity ratios |
current ratios = current assets / current liabilities
less than one means negative working capital, quick ratio = cash + marketable securities + receivables / current liabilities more conservative measure of liquidity cash ratio = cash + marketable securities / current liabilities the higher the liquidity ratios, the more likely the firm will be able to pay its short term debts |
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Commonly used balance sheet ratios:
Solvency ratios |
long-term debt to equity = total long-term debt / total equity
debt to equity = total debt / total equity total debt = total debt / total assets financial leverage = total assets / total equity |
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Usefulness of ratio analyses
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1. insights into the financial relationships
2. information about the financial flexibility of the firm 3. a means of evaluating managements performance |
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Limitations of financial ratios
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1. not useful when viewed in isolation
2. comparison betweem companies more difficult because of different accounting methods 3. difficulty in locating comparable ratios when analyzing companies that operate in multiple industries 4. conclusions cannot be made when viewing one set of ratios 5. judgement is required, |
