Balance Sheet Exam online advanced

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.

Listed equity securities are measured at fair value through profit and loss, unless the firm chooses at the time of purchase to measure them at fair value through other comprehensive income. Debt securities issued by the firm, and debt securities that the firm intends to hold until maturity, are both reported at amortized cost unless the firm chooses to report them at market value.

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 balance sheet lists the firm’s assets, liabilities, and equity. The capital structure is measured by the mix of debt and equity used to finance the business .

For financial assets classified as trading securities,unrealized gains and losses are reported on the incomestatement and flow to shareholders’ equity as part of retainedearnings.

Repurchased stock that is not cancelled is called treasury stock. Treasury stock does not have voting rights and does not receive cash dividends .

The market value of the firm's common equity (common stock) is not included on the balance sheet. IFRS allows some PP&E assets to be carried at fair value and some types of inventory to be carried at their market values .

The three elements of a balance sheet are assets, liabilities, and equity.

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

Office supplies are owned as a result of a past purchase transaction and give future benefit when used to provide goods and services.

Office supplies are assets used within one year and are current.

Intangible assets have no physical substance and P/P/E is used longer than one year.

The quick ratio  = (Cash+Marketable securities+Accounts receivable) ÷ (Current liabilities)

 =  ( 4,000 +17,000 + 225,000 ) ÷ 339,000 = 0.73

Financial assets classified as held to maturity aremeasured at amortised cost. Gains and losses are recognizedonly when realized.

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).

For financial assets classified as available for sale,unrealized gains and losses are not recorded on the incomestatement and instead are part of other comprehensive income.

Accumulated other comprehensive income is a component ofShareholders’ equity

Equipment is reported in the balance sheet at historical cost less accumulated depreciation .

The statement of changes in equity shows a firm's comprehensive income (net income and other comprehensive income) and transactions with shareholders, such as dividends paid and issuance or repurchases of stock. Repayment of bond principal is not a change in equity : assets (cash) decrease and liabilities (long-term debt) decrease.

The balance sheet reports what the company has, what they owe and what is owned on a given date.

It normally reports two years and the user can see the difference in the categories reported, but not the cause.

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 .

Accrued expenses, also known as accrued liabilities, havebeen recognized on a company’s income statement but have not been paidas of the balance sheet date. Unpaid interest costs are an example of anaccrued expense.

Deferred expenses refer to payments that have been madebut will not be reported as an expense until a future accounting period.

Accounts payable are amounts that a company owes itsvendors for purchases of goods and services that have already beendelivered. They represent the unpaid amount of the company’s purchase oncredit as of the balance sheet date.

Both the cost of inventory and property, plant, andequipment include delivery costs, or costs incurred in bringingthem to the location for use or resale.

Initially, goodwill is measured as the differencebetween the purchase price paid for an acquisition and the fairvalue of the acquired, not acquiring, company’s net assets(identifiable assets less liabilities).

Deferred income arises when a company receivespayment in advance of delivery of the goods and servicesassociated with the payment.

normal operating expenses that havebeen paid in advance are a type of prepaid expense and areincluded in other current assets, not deferred income.

an expense that has been recognized ona company’s income statement but has not yet been paid as ofthe balance sheet date is an accrued expense, not deferred
income.

An asset is a probable future economic benefit as a result of a past transaction. There is no such thing as a contingent asset because a company can not project future assets and record them. The other categories are commonly found on the balance sheet.

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.

Acquired copyrights and patents are intangible assets that can be separately identified.

Identifiable intangible assets are amortized over their useful lives .

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 .

Under IFRS, inventories are carried at historicalcost, unless net realizable value of the inventory is less.

UnderUS GAAP, inventories are carried at the lower of cost or market.

Balance sheet information is as of a specific pointin time, and items measured at current value reflect the valuethat was current at the end of the reporting period.

For allfinancial statement items, an item should be recognized in thefinancial statements only if it is probable that any futureeconomic benefit associated with the item will flow to or from theentity and if the item has a cost or value that can be measuredwith reliability.

Items measured at current value reflect the valuethat was current at the end of the reporting period. The values ofthose items can change after the balance sheet is prepared.

(start of the reporting period) is incorrect because items measured at current value reflectthe value that was current at the end of the reporting period (notat the start of the reporting period).

(midpoint of the reporting period) is incorrect because items measured at current value reflectthe value that was current at the end of the reporting period (notat the midpoint).

Goodwill is measured at historical cost and is not amortized. Goodwill must be tested for impairment at least annually and written down to fair value if it is impaired.

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.

Retained earnings, a component of equity, isdefined as the cumulative amount of earnings recognized on thecompany’s income statements that have not been distributed asdividends to the company’s owners.

Other comprehensive income is also a componentof equity, but it is defined as items of comprehensive income notreported on the income statement.

Dividends payable represent dividends that havebeen declared but not yet paid. Not all earnings not yet paid outwould be accrued as a liability: only those that have beendeclared as dividends.

Goodwill developed internally is expensed as incurred. The purchased patent is reported on the balance sheet.

The item “retained earnings” is a component ofshareholders’ equity.

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

A classified balance sheet is one that classifies assets andliabilities as current or non-current and provides a subtotal for current assetsand current liabilities.

A liquidity-based balance sheet broadly presentsassets and liabilities in order of liquidity.

Assets are resources controlled by a company as a result of past events.

Estimated income taxes for the current year are likely reported as a current liability. To recognize the warranty expense, it must be probable, not just possible. Recognizing impairment of PP&E does not create a liability.

Deferred tax liabilities result when, for a givenperiod, taxable income and the associated income tax payableare less than the reported financial statement income beforetaxes and the associated income tax expense.

(items of expense are included in financial statement income in earlier periods than those for which taxable income is reported) is incorrect because if items of expense are included infinancial statement income in earlier periods than those for whichtaxable income is reported, then the financial statement incomeand associated reported income tax expense will be less thantaxable income and actual income tax payable. A deferred taxliability occurs only in the opposite case, when taxable income
and income tax payable are smaller. Deferred tax liabilities resultfrom timing differences between financial statement income andtaxable income when taxable income is lower than financialstatement income, not higher.

(straight-line depreciation methods are used for tax purposes and accelerated methods are employed for financial statement purposes) is incorrect because straight-line depreciation methods resultin lower depreciation expense than accelerated methods. Thisapproach would produce higher taxable income than financialstatement income, with no resulting deferred tax liability.

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.

Liabilities are obligations resulting from past events that are expected to require a future outflow of resources. Assets are resources that are expected to provide future benefits. Equity is residual ownership interest in an entity's assets (i.e., assets minus liabilities).

The current ratio provides a comparison of assetsthat can be turned into cash relatively quickly and liabilities thatmust be paid within one year.

The other ratios are more suited tolonger-term concerns.

Goodwill is recorded only when a total company is purchased.

The amount recorded is the difference between the amount paid for the company and the fair market value of the net assets of the company.

Internally generated goodwill is not recorded because it can not be reliably valued.

Current liabilities are those liabilities, includingdebt, due within one year.

Preferred refers to a class of stock.

Convertible refers to a feature of bonds (or preferred stock)allowing the holder to convert the instrument into common stock.