Balance Sheet quiz level 2

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.

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.

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.

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.

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.

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.

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 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).

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 .

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

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

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

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.

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.

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

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 .

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

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.

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.

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.

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.

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

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.

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 .

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 .

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

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.

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

Identifiable intangible assets are amortized over their useful lives .

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 .