Balance Sheet quiz level 2

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 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 .

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.

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

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 receivedividends.

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

An adverse audit opinion arises when in anauditor’s opinion, the financial statements materially depart fromaccounting standards and are not presented fairly. A classifiedbalance sheet groups together the various classes of assets andliabilities.

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.

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

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 .

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

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).

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

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

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

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

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.

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.

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

The debt-to-equity ratio, a solvency ratio, is anindicator of financial risk.

A company’s value is a function of many factors, includingexpected future cash flows and current market conditions. Importantaspects 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 nota reason that intrinsic or market value may be different from equity reported
on the balance sheet. The balance sheet is intended to disclose all relevantinformation about what an entity owns (or controls), what it owes, and whatthe owners’ claims are at a specific point in time.

The balance sheet information is presented as of a specificpoint in time. The income statement and cash flow statement are financialstatements that are evaluated spanning a period of time.

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 .

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.

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.

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 .

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 .

Trade receivables are amounts owed to a company by itscustomers for products and services already delivered. They are typicallyreported at net realizable value, an approximation of fair value based onestimates of collectability.

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

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

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 balance sheet provides important informationabout a company’s financial condition, but it is limited in its abilityto provide all the detail necessary to determine a company’smarket or intrinsic value. One limitation is that under currentaccounting standards, some assets and liabilities are measuredat historical cost but others are measured on a current valuebasis.

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

IFRS requires that the statement of shareholders’equity present information about the effects of any accountingchanges that have been retrospectively applied to previousperiods.

(carrying amounts of each component of equity as of the end of the year only) is incorrect because IFRS requires that companies present areconciliation of the carrying amounts of each component ofstockholders’ equity as of the beginning and end of the year, notjust 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 assetfor one entity and a financial liability or equity instrument foranother are financial instruments, as defined under IFRS.

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

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