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.

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

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 .

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

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

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.

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.

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.

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

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.

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.

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 .

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.

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 .

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

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

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.

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.

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

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.

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 .

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 .

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.

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.

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 .

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.

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 .

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 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.