Intermediate Accounting 1 Chapter 5

Front 1

Explain the limitations of the balance sheet

Back 1

The balance sheet provides info about the nature and amounts of investments in a company's resources, obligations to creditors, and owners' equity. It contributes to fianncial reporting by providing a basis for 1. computing rates of return. 2. computing rates of return. 3. assessing the liquidity, solvency, and financial flexibility of the enterprise. Three limitations of the balance sheet are 1. The balance sheet doesn't reflect fair value because accountants use a historical cost basis in valuing and reporting most assets and liabilities. 2. Companies must use judgments and estimates to determine certain amounts, such as the collectibility of receivables and the useful life of long term tangible and intangible assets. 3. The balance sheet omits many items that are of financial value to the business but cannot be recorede objectively such as human resources, customer base, and reputation.

Front 2

Identify the major classifications of the balance sheet.

Back 2

The general elements of the balance sheet are assets, liabilities and equity. The major classifications of assets are current assets; long term investments, property, plant, and equip.; intangible assets; and other assets. The major classifications of liabilties are current and long term liabailitis. The balance sheet generally classifies owner's equity as capital stock, additional paid in capital, and retained earnings.

Front 3

Determine which balance sheet info requires supplemental disclosure

Back 3

4 types of info normally are supplemental to account titles and amounts presented in the balance sheer. 1. contingencies material events that have an uncertain outcome. 2. Accuonting policies: Explanations of the valuation methods used or the basic assumptions made concerning inventory valuation, depreciation methods, investments in subsidiaries. 3. Contractual situations: Explanations of certain restrictions or covenents attached to specific assets or, more likely to liabilities. 4. Fair value: Disclosures related to fair values, particularly related to financial instruments.

Front 4

Describe the major disclosure techniques for the balance sheet

Back 4

Companies use 4 methods to disclose pertinent info in the balance sheet. 1. parenthetical explanationsL Provides additional info or description following the item. 2. Notes uses notes if it cannot conveniently show additional explanatons or descriptions as parenthetical explanations. 3. cross referenced and contra items: companies cross reference a direct relationship between an asset and a liability on the balance sheet. 4. supporting schedules often a company uses a separate schedule to present more detailed info than just the single summary item shown in the balance sheet.

Front 5

Account form

Back 5

Lists assets by sections on the left side, and liabilities and equity on the right side. Disadvantage need wide space.

Front 6

ther liabilities whose liquidation

Back 6

Increases either an asset, liability or equity account. An example is premium on bond payable which, when added to the bond, describes the total bond liability of the company.

Front 7

Available for sale securities

Back 7

Debt and equity securities not classified as held to maturity or trading securietes. Current or non current depending on additional info.

Front 8

Contingencies

Back 8

A contingency is an existing situation involving uncertainty as to possible gain or loss that will ultimately be recorded when one or more future events occur or fail to occur. They deal with material events with uncertain futures.

Front 9

Current asset

Back 9

cash and other assets a company expects to convert into cash, sell, or consume within one year or the operating cycle whichever is longer.

Front 10

Current liabilities

Back 10

Obligations a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilties. Exp. Payables resulting from the acquisition of goods and services: Accounts payable, wages payable and so on. Collections received in advance for delivery of goods or performance of services. Current portion paid of long term liabilities

Front 11

Financial flexibility

Back 11

measures the ability of an enterprise to take effeective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities.

Front 12

Financial Instruments

Back 12

cahs, an ownership interest, or a contractual right to receive or obligation to deliver cash or another financial instrument.

Front 13

held to maturity securities

Back 13

debt securities that a company has the positive intent and ability to hold to maturity. Current and non current depending on circumstances should be shown with amortized cost.

Front 14

Intangible assets

Back 14

lack physical substance and are not financial instruments. They include patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists.

Front 15

Solvency

Back 15

refers th the ability of a company to pay its debts as they mature

Front 16

Trading securities

Back 16

debt and equity securites bought and held primarily for sale in the near term to generate income on short term price differences.