Balance Sheet quiz level 2

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.

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

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

A company’s value is a function of many factors, including expected future cash flows and current market conditions. Important aspects of a company’s ability to generate future cash flows—for example, its reputation and management skills—are absent from the balance sheet.

While the statement is true of all financial statements, it is not a reason that intrinsic or market value may be different from equity reported
on the balance sheet. The balance sheet is intended to disclose all relevant information about what an entity owns (or controls), what it owes, and what the owners’ claims are at a specific point in time.

The balance sheet information is presented as of a specific point in time. The income statement and cash flow statement are financial statements that are evaluated spanning a period of time.

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

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

Accumulated other comprehensive income is a component of Shareholders’ equity

An asset is recognized on the balance sheet only if it is probable that it will provide future economic benefits. Assets can be tangible or intangible. In some cases, assets are acquired without cost, but will be reported to the extent that they will provide future economic benefit, and thus have value.

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.

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

Identifiable intangible assets are amortized over their useful lives .

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.

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.

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

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.

Inventories are required to be valued at the lower of cost or net realizable value (or “market” under U.S. GAAP). FIFO and average cost are two of the inventory cost flow assumptions among which a firm has a choice .

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 .

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.

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.

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 .

Treasury stock is non-voting and does not receive dividends.

Non-controlling interest is the portion in consolidated subsidiaries that is owned by others, i.e., shares in subsidiaries not owned by the parent.

An adverse audit opinion arises when in an auditor’s opinion, the financial statements materially depart from accounting standards and are not presented fairly. A classified balance sheet groups together the various classes of assets and liabilities.

Each category of the balance sheet is expressed as a percentage of total assets .

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).

Declaring a dividend decreases shareholders' equity and is reflected on the statement of changes in shareholders' equity. Buying a machine is unlikely to change shareholders' equity at the time of purchase. Investing cash in a security is an exchange of one asset for another and is also unlikely to change shareholders' equity at the time of the investment .

IFRS requires that the statement of shareholders’ equity present information about the effects of any accounting changes that have been retrospectively applied to previous periods.

(carrying amounts of each component of equity as of the end of the year only) is incorrect because IFRS requires that companies present a reconciliation of the carrying amounts of each component of stockholders’ equity as of the beginning and end of the year, not just the end of the year.

(contracts that give rise to a financial asset for one entity and a financial liability or equity instrument for another entity) is incorrect because contracts that give rise to a financial asset for one entity and a financial liability or equity instrument for another are financial instruments, as defined under IFRS.

Financial assets classified as held to maturity are measured at amortised cost. Gains and losses are recognized only when realized.

Trade receivables are amounts owed to a company by its customers for products and services already delivered. They are typically reported at net realizable value, an approximation of fair value based on estimates of collectability.

Present value is the present discounted value of future net cash inflows that the asset is expected to generate in the normal course of business. Trade receivables are typically reported at net realisable value.

Face value would not account for the potential for uncollectability. Trade receivables are typically reported at net realisable value.

Impairment write-downs reduce equity in the denominator of the debt-to-equity ratio but do not affect debt, so the debt-to-equity ratio is expected to increase. Impairment write-downs reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.

Common-size analysis (as presented in the reading) provides information about composition of the balance sheet and changes over time.

As a result, it can provide information about an increase or decrease in a company’s financial leverage.

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 balance sheet provides important information about a company’s financial condition, but it is limited in its ability to provide all the detail necessary to determine a company’s market or intrinsic value. One limitation is that under current accounting standards, some assets and liabilities are measured at historical cost but others are measured on a current value basis.

(reflects the company’s intrinsic value only at the end of the reporting period) is incorrect. Although the balance sheet reflects values as of the end of the reporting period, the balance sheet should not be viewed as a measure of a company’s intrinsic value, even at the end of the reporting period.

(adjusts the value of debt obligations only when interest rates change) is incorrect. The statement is not correct and hence not a limitation.

Within a liquidity-based presentation, assets and liabilities are presented broadly in order of liquidity. The asset section generally begins with liquid items such as cash and marketable securities.

land use rights are considered to be less liquid than marketable securities and would be expected to appear near the bottom of the asset section.

deferred revenue is a liability and would not be found within the asset section of a balance sheet.