Balance Sheet quiz level 2

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.

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 .

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.

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 .

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.

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 .

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.

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.

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

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

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 .

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.

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

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 .

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.

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.

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.

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 .

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.

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.

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

Identifiable intangible assets are amortized over their useful lives .

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.

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

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

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.

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.

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 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.