Balance Sheet quiz

Dividends received from trading securities and available-for-sale securities are recognized in the income statement. The difference in trading and available-for-sale classifications relates to the treatment of any unrealized gains and losses.

The liquidity-based format of balance sheet presentation is most common in the banking industry.

Banks often present liquidity-based balance sheets, which list all assets and liabilities in order of liquidity, because for banks this format is typically more relevant and reliable than a classified balance sheet. Firms in most other industries typically present classified balance sheets .

Unrealized gains and losses from trading securities are recognized in the income statement while unrealized gains and losses from available-for-sale securities bypass the income statement and are reported as other comprehensive income, a component of stockholders' equity. Cash dividends are recognized in the income statement for both trading and available-for-sale securities. Thus, Alpha will recognize only the $2,000 dividend if the shares are considered available-for-sale and will recognize $22,000 ($2,000 dividend + $20,000 unrealized gain) if the shares are considered trading securities.

Operating cycle = days of inventory + days of receivables, and is the number of days that it takes to turn raw materials into cash from sales .

Unless impairment has been recognized, land is reported at historical cost and is not subject to depreciation. Increases in value are not reflected in balance sheet values under U.S. GAAP.

Total stockholders’ equity consists of common stock of $550,000, preferred stock of $175,000, retained earnings of $893,000, and accumulated other comprehensive income of $46,000, for a total of $1,664,000. The $30,000 unrealized gain from the investment in Beta is already included in accumulated other comprehensive income.

An asset is a future economic benefit obtained or controlled as a result of past transactions. Some assets are intangible (e.g., goodwill), and others may be donated .

The commercial paper should be classified as current because it will be converted to cash in less than a year. A liability that is held primarily for trading purposes, such as this short position, should also be classified as current .

Classified balance sheets have categories for current assets, non-current assets, current liabilities, and non-current liabilities.

Liquidity-based balance sheet presentation is an exception, under IFRS only, to the requirement (under both IFRS and U.S. GAAP) for assets and liabilities to be classified as current or non-current. Under IFRS, a firm may present a liquidity-based balance sheet if this format is more reliable and relevant than a classified balance sheet.

The ticket revenue should not be recognized until it is earned. Even though the tickets are nonrefundable, the seller is still obligated to hold the event.

Liabilities are equal to $3,790 million ($240 million unearned revenue + $1,570 long term debt + $1,150 accounts payable + $830 accrued expenses). Stockholders' equity is equal to $3,420 million ($30 common stock at par + $440 capital in excess of par – $2,000 treasury stock + $5,160 retained earnings – $210 accumulated other comprehensive loss).

Common-size balance sheets express each balance sheet item as a percentage of total assets. Contributed capital from issuing common shares may be included in common stock (at par value) or additional paid-in capital (for proceeds in excess of par value). Shareholders' equity is unlikely to consist only of common and preferred stock, as it also includes components such as retained earnings and accumulated other comprehensive income.

The current ratio, quick ratio, and cash ratio measure liquidity. Debt-to-equity, the total debt ratio, and the financial leverage ratio measure solvency.

The accrual process refers to accounting for transactions when revenue or expense recognition does not coincide with the exchange of cash. Accounts receivable, for example, represent sales of goods and services that have been recognized as revenue, but for which the firm has not yet been paid cash. Cash equivalents are highly liquid marketable securities, such as Treasury bills, in which a firm typically invests its short-term cash balances.

Balance sheet values may use a mixture of measurement bases (historical cost, fair value, etc.). As a result, balance sheet values of assets, liabilities, and equity may not reflect their intrinsic values. Balance sheets provide the information necessary to calculate the firm's solvency and liquidity ratios. Items are recognized on the balance sheet only if a flow of future economic benefits to or from the firm is probable.

Common size balance sheets express all balance sheet items as a percentage of assets. Common size income statements express all income statement items as a percentage of sales .

If equity = 40 % of assets, total liabilities = 60 % of assets, thus  60 / 40 = 1.5 .

On a common-size balance sheet, each line item is stated as a percentage of total assets : 2,000 / 10,000 = 20% .

Under IFRS, firms have an irrevocable choice at the time of purchase to report equity securities at fair value through other comprehensive income. If they do not make this election, equity securities are reported at fair value through profit and loss.

The par value of common stock is the stated or nominal value assigned to the stock. Par value has no relationship to market value. The amount the corporation receives from the issuance of common stock is equal to the par value plus the additional paid-in-capital (proceeds in excess of par).

Under IFRS, research costs must be expensed . but development costs under certain circumstances may be capitalized.

An analyst can use the balance sheet to assess a firm's solvency and liquidity.

Operating profitability can be assessed by examining the income statement.

Information on a firm's investing and financing activities appears in a firm's statement of cash flows.

Quick ratio = [100(cash) + 750(AR) + 300(marketable securities)] / [300(AP) + 130(shortterm debt)] = (1,150 / 430) = 2.67

Trading securities are reported in the balance sheet at fair value. At the end of the year, the fair value of the securities was $980,000 ($435,000 + $545,000). The unrealized gains and losses from trading securities are recognized in the income statement. Thus, Ponca would recognize an unrealized gain of $30,000 ($980,000 fair value – $950,000 cost).

IFRS permits either the cost model or the revaluation model for property, plant, and equipment.

Common-size balance sheets for the two firms are as follows :

Working capital (current assets minus current liabilities) is 32.4% – 6.5% = 25.9% of assets for Amplus and 26.1% – 5.7% = 20.4% of assets for Brevis. Fixed assets (property, plant, and equipment) are relatively larger for Brevis than for Amplus. Based on long-term borrowing and total liabilities, Brevis is significantly more leveraged than Amplus.

Purchase price of $7,500,000 [$15 per share × 500,000 shares] – fair value of net assets of $7,000,000 [$6,000,000 book value + $1,000,000 increase in property and equipment] = goodwill of $500,000.

A classified balance sheet groups assets and liabilities by subcategories. It distinguishes between current and noncurrent assets and current and noncurrent liabilities. The assets and related liabilities are reported separately, they are not netted.