Balance Sheet quiz level 1

A liquidity-based presentation, rather than a current/noncurrent presentation, may be used by such entities as banks if broadly presenting assets and liabilities in order of liquidity is reliable and more relevant.

The non-controlling interest in consolidated subsidiaries is shown separately as part of shareholders’ equity.

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.

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.

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.

A contra asset account is netted against (reduces) the balance of an asset account.

The allowance for doubtful accounts reduces the balance of accounts receivable.

Accumulated depreciation, not depreciation expense, is a contra asset account.

Sales returns and allowances create a contra account that reduce sales, not an asset.

The cash ratio determines how much of a company’s near-term obligations can be settled with existing amounts of cash and marketable securities.

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

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

Trade receivables are typically reported at net realizable value, based on estimates of collectability.

trade receivables are reported net of an allowance for doubtful accounts or at their net realizable value.

trade receivables are amounts owed to a company by its customers for products and services already delivered, not for items with delivery pending.

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

The other ratios are more suited to longer-term concerns.

Paying rent in advance will reduce cash and increase prepaid expenses, both of which are assets.

Assets = Liabilities + Equity and, therefore, Assets – Liabilities = Equity

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

Other comprehensive income is also a component of equity, but it is defined as items of comprehensive income not reported on the income statement.

Dividends payable represent dividends that have been declared but not yet paid. Not all earnings not yet paid out would be accrued as a liability: only those that have been declared as dividends.

A patent has no physical substance and is a right to do something that brings future benefit .

P/P/E have physical substance.

Deferred tax liabilities result when, for a given period, taxable income and the associated income tax payable are less than the reported financial statement income before taxes 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 in financial statement income in earlier periods than those for which taxable income is reported, then the financial statement income and associated reported income tax expense will be less than taxable income and actual income tax payable. A deferred tax liability occurs only in the opposite case, when taxable income
and income tax payable are smaller. Deferred tax liabilities result from timing differences between financial statement income and taxable income when taxable income is lower than financial statement 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 result in lower depreciation expense than accelerated methods. This approach would produce higher taxable income than financial statement income, with no resulting deferred tax liability.

Under US GAAP, intangibles must be valued at historical cost; under IFRS they can be valued at cost or revaluation.

(IFRS, a classified balance sheet must present current assets before non-current assets) is incorrect. Under IFRS, a classified balance sheet does separate current assets from non-current assets, but non-current assets could be presented first.

(IFRS, a commercial real estate company should use a liquidity based presentation) is incorrect. A commercial real estate company would have many non-liquid assets and would not likely use the liquiditybased presentation under IFRS. A commercial bank would use this format.

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

Accrued liabilities are expenses that have been reported on a company’s income statement but have not yet been paid.

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

Treasury shares or treasury stock are shares in the company that have been repurchased by the company and not cancelled.

preferred shares are a separate class of equity or financial liability based upon their characteristics and rights that take precedence over the rights of common shareholders.

contributed capital is the amount contributed to the company by owners and is evidenced through the issuance of common shares.

The cash received from customers represents an asset. The obligation to provide a product in the future is a liability called “unearned income” or “unearned revenue.” As the product is delivered, revenue will be recognized and the liability will be reduced.

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).

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

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 is one with separately classified current and non-current assets and liabilities.

(liquid or non-liquid) is incorrect because a liquidity-based balance sheet, not a classified balance sheet, presents assets and liabilities in order of liquidity.

(tangible or intangible) is incorrect because a classified balance sheet separately classifies assets and liabilities as either current or non-current (not tangible or intangible).

Payments due within one operating cycle of the business, even if they will be settled more than one year after the balance sheet date, are classified as current liabilities.

Payment received in advance of the delivery of a good or service creates an obligation or liability. If the obligation is to be fulfilled at least one year after the balance sheet date, it is recorded as a non-current liability, such as deferred revenue or deferred income. Payments that the company has the unconditional right
to defer for at least one year after the balance sheet may be classified as non-current liabilities

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

For all financial statement items, an item should be recognized in the financial statements only if it is probable that any future economic benefit associated with the item will flow to or from the entity and if the item has a cost or value that can be measured with reliability.

Intangible assets have no physical substance, are real assets because they provide future benefit gained from the right to use it and they are reported at historical cost just like all other assets.

Current liabilities are those liabilities, including debt, 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.

Common equity is a component of the balance sheet and represents the owners’ residual interest in the company’s assets after deducting its liabilities.

Common equity includes the initial investment by the shareholders and the retained earnings; this definition is incomplete.

Assets are a component of the balance sheet and represent resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow.

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

(start of the reporting period) is incorrect because items measured at current value reflect the value that was current at the end of the reporting period (not at the start of the reporting period).

(midpoint of the reporting period) is incorrect because items measured at current value reflect the value that was current at the end of the reporting period (not at the midpoint).

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

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.

Accrued means incurred and not yet paid. Not yet paid means it is owed. Owed is a liability. The obligation is paid within one year making it a current liability.

Goodwill and inventory are assets used for producing future benefit.

Retained earnings is the profits the owners keep which is part of owner's equity.

Working capital is defined as the excess of current assets over current liabilities.

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 .

Assets are resources that are expected to provide future benefits and are controlled as a result of past transactions. Liabilities are obligations resulting from past events that are expected to require a future outflow of resources. Equity is a residual interest in assets after deducting liabilities.

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.