CFA_L1_Assignment_95_Lesson 2: Assets and Liabilities: Current versus Non-Current

Specifically, a liability may be classified as a current liability if:

- It is expected to be settled in the entity's normal operating cycle; - It is primarily held for the purpose of trading; - It is due to be settled within one year after the balance sheet date; or - The entity does not have an unconditional right to defer settlement of the liability for at least one year after the balance sheet date.1IAS 1, Presentation of Financial Statements, paragraph 69.

for intangible assets, U.S. GAAP only allows the _____ model.

1. cost

(an example of an asset that is not separately identifiable) is the excess of the amount paid to acquire a business over the fair value of its net assets.

Goodwill

Trading securities:

These are debt and equity securities (e.g., stocks and bonds) that are acquired with the intent of earning trading profits over the near term.

Available-for-sale securities:

These are debt or equity securities that are neither expected to be traded in the near term, nor held till maturity.

Which of the following financial assets/liabilities is most likely to be measured at amortized cost? a. Bonds payable b. Derivatives c. Nonderivative instruments with face value exposures hedged by derivatives

a. Bonds payable are measured at amortized cost. Derivative instruments and nonderivative instruments with face value exposures hedged by derivatives are measured at fair value.

Mark-to-market is a process of ...

adjusting the values of trading assets and liabilities to reflect their current market values.

marketable investment securities can be classified under:

available-for-sale securities, - held-to-maturity securities - trading securities

Bizcom International uses historical cost as a measurement base for its assets, while Telecard Inc. uses fair value. Given that over the past few years, prices of noncurrent assets have significantly increased, Bizcom is most likely to report: Higher assets than Telecard. Lower assets than Telecard. The same amount of assets as Telecard.

b. Lower assets than Telecard. - Telecard reports its assets at fair value and therefore, reflects the current higher prices on its balance sheet.

Goodwill based on a company's performance and its future prospects is most likely known as: a. Accounting goodwill. b. Economic goodwill. c. Potential goodwill.

b. Accounting goodwill is based on accounting standards and is only reported for acquisitions when the purchase price exceeds the fair value of the acquired company's net assets. Economic goodwill is not reflected on the balance sheet and is based on a company's performance and its future prospects.

Jacob wants to calculate and compare the financial ratios of two companies, Alpha Inc. and Beta Inc. He observes the following: Alpha Inc. has acquired several subsidiaries and has recognized the associated goodwill amounting to $40,000. Further, the company has recognized impairment of goodwill amounting to $5,000. Beta Inc. has recognized internally generated goodwill amounting to $32,000. Which of the following statements is least accurate regarding adjustments to be made by Jacob to the two companies' financial statements in order to make their ratios comparable? a. Both of the companies' goodwill should be excluded from the balance sheet. b. Only Beta Inc.'s goodwill should be excluded from the balance sheet, as it has been generated internally. c. The impairment expense of $5,000 should be added back to Alpha Inc.'s income statement.

b. Income statement values should be adjusted by removing (adding back) impairment expense and the balance sheet should be adjusted by excluding goodwill.

Which of the following is least likely to be reported as a liability on the balance sheet? a. Deferred revenue b. Prepaid expense c. Accrued expense

b. Prepaid expense arises when a company pays cash before expense is reported on the income statement, and is an asset for the company.

Which of the following statements regarding inventory valuation is most accurate? a. Under IFRS, inventory is reported at the lower of fair value or net realizable value. b. Standard cost should take into account normal levels of material, labor, and excess capacity. c. The retail method reduces selling price by the gross profit margin to determine the cost of inventory.

c. Under IFRS, inventory is reported at the lower of cost or net realizable value. Standard cost should take into account normal levels of material, labor, and actual capacity.

Working capital is the excess of a company's: a. Assets over its liabilities. b. Non-current liabilities over its noncurrent assets. c. Current assets over its current liabilities.

c. Working capital is calculated as current assets less current liabilities.

Which of the following is least likely an example of the measurement bases used to value items listed on the balance sheet? a. Present value b. Current cost c. Economic cost

c. Economic cost is not a measurement base. The measurement bases of assets and liabilities include fair value, historical cost, current cost, and present value.

Which of the following statements regarding available‐for‐sale securities is least accurate? They are neither expected to be traded in the near term, nor held till maturity. They are reported at fair market value on the balance sheet. Gains and losses associated with these securities are reported on the income statement.

c. Only realized gains and losses associated with available‐for‐sale securities are reported on the income statement. Unrealized gains and losses associated with these securities are reported in the statement of changes in shareholders' equity.

Which of the following financial assets/liabilities is least likely to be measured at fair value? a. Available‐for‐sale financial assets b. Financial liabilities held for trading c. Loans and receivables

c. Loans and receivables are measured at amortized cost.

Under U.S. GAAP and IFRS, accounting goodwill resulting from acquisitions is ...

capitalized.

Note that goodwill is only created (recognized) in a purchase acquisition. Internally generated goodwill is expensed.

chyea

3d ← These are taxes (based on taxable income) have not actually been paid yet.

income taxes payable

These are identifiable, non-monetary assets that lack physical substance.

intangible asset

cash equivalents are highly liquid and expected to mature in

less than 90 days

an impairment charge does what...

reduces net income and decreases the carrying value of goodwill to its actual value

Which of the following is most likely classified as an identifiable intangible asset? Trademarks Land and buildings Goodwill

trademarks Land and buildings are tangible assets, whereas goodwill is an unidentifiable intangible asset.

2.4.1 Property, plant, and equipment (PP&E) are examples of...

non-current assets

3b ← These financial liabilities are borrowings from creditors that are documented by a loan agreement. Depending on the agreed repayment date, _____________ may also be included in non-current liabilities.

notes payable

Under IFRS, investment property may be valued using the ________ or ________ model.

1. cost model or the fair value model.

The purchase price may exceed the fair value of the target company's identifiable (tangible and intangible) net assets because of the following reasons:

- Certain items of value (e.g., reputation, brand) are not recognized in a company's financial statements. - The target company may have incurred research and development expenditures that may have not been recognized on its financial statements but do hold value for the acquirer. - The acquisition may improve the acquirer's position against a competitor or there may be possible synergies.

_____________ : These are liquid assets that are likely to be converted into cash or realized within one year or one operating cycle, whichever is longer. The operating cycle is the average time taken by a company to convert the funds used to purchase inventory or raw materials into cash proceeds from sales to customers. Current assets may be listed in order of liquidity, with cash being the first item listed.

1. Current assets

______________ : These are obligations that are likely to be settled within one year or one operating cycle, whichever is longer.

1. Current liabilities

_________ assets include investments in securities (e.g., stocks and bonds) and receivables, while ________ liabilities include bonds payable and notes payable.

1. Financial 2. financial

________ allow some liabilities such as trade payables and accruals for employees to be classified as current liabilities even though they might not be settled within one year.

1. IFRS

__________ : These are less liquid assets and are not expected to be converted into cash within one year or within one operating cycle. They represent the infrastructure that the firm uses in its operations and other investments made from a strategic or long-term perspective.

1. Non-current assets (also known as long-term or long-life assets

_______________ : These liabilities are not expected to be settled within a year or within one operating cycle. Non-current liabilities are a source of long-term finance for a company.

1. Non-current liabilities

The ______________ provides important information about the value of certain assets and information about expected future cash flows, but does not always accurately represent the value of the company as a whole.

1. The balance sheet

Analysts must understand the difference between _______ and ________ goodwill.

1. accounting and economic

Under IFRS, intangible assets may be reported using either the _______ or ________ model. However, the revaluation model can only be selected if there is an active market for the asset.

1. cost model or the revaluation model

Both IFRS and U.S. GAAP require that assets and liabilities be grouped separately into their ______ and ________ portions, which makes it easier for analysts to examine the company's liquidity position as of the balance sheet date.

1. current and non-current

Excessively ________ levels of working capital indicate that the company is not utilizing its resources efficiently.

1. high

Intangible assets with indefinite useful lives are not amortized, but are tested for _____________ at least annually.

1. impairment

give an example, ya twerp

1. land can be on the balance sheet as a historical cost even tho it may have risen significantly in recent history -- therefore it is understated on the dam balance sheet

An increase in the allowance for doubtful accounts (the company's estimate of uncollectable amounts) results in a _____ value reported under trade receivables (assets), and bad debts (expense) being reported on the income statement.

1. lower

The _________ diversified the customer base, the lower the credit risk of accounts receivable.

1. more

Under IFRS, inventory is reported at the lower of cost and ______________ Under U.S. GAAP, inventory is reported at the lower of cost and _________.

1. net realizable value (NRV). 2. market

If the entity has an unconditional right to defer the settlement of the liability for at least 1 year after the balance sheet date, it must recognize it as a ____________ liability.

1. noncurrent

Only ______________ associated with available‐for‐sale securities are reported on the income statement. ____________________ associated with these securities are reported in the statement of changes in shareholders' equity.

1. realized gains and losses 2. Unrealized gains and losses

The _______ method reduces selling price by the gross profit margin to determine the cost of inventory.

1. retail

Under IFRS, PP&E may be valued using either the cost model or the ___________ model. However, companies need to ensure that the chosen method is applied to all the assets within a particular class of assets. U.S. GAAP only allows the _______ model for reporting PP&E.

1. revaluation 2. cost model

The difference between current assets and current liabilities is known as ______________

1. working capital.

marketable securities

1b ← These are also financial assets and include investments in debt and equity securities that are traded on public markets. Their balance sheet values are based on market price.

trade recievables

1c ← Also considered financial assets, trade receivables represent amounts owed to the company by customers to whom sales have been made. These amounts are usually reported at net realizable value (an estimate of fair value based on the company's expectations regarding collectability).

inventories

1d ← These are physical stocks held by the company in the form of finished goods, work-in-progress, or raw materials. Measurement of inventory differs under IFRS and U.S. GAAP.

Which of the following is an analyst most likely to examine in order to learn more about a firm's operating activities? 1. Dividends declared 2. Accounts receivable 3. Goodwill

2. Accounts receivable - If an analyst wants to evaluate a company's operating activities, she is likely to review its current assets including accounts receivable.

3a ← These are amounts owed by the business to its suppliers for purchases on credit. Analysts are usually interested in examining the trend in the levels of trade payables relative to purchases to gain insight into the company's relationships with its suppliers.

2.3.1 Trade payables (accounts payable)

Held-to-maturity securities:

These are debt securities that are purchased with the intent of holding them till maturity.

L1FR-PQ2627-1410 Held‐to‐maturity investments are most likely measured at: a. Amortized cost. b. Historical cost. c. Fair value.

a. Held‐to‐maturity investments are measured at amortized cost.

Which of the following statements regarding held‐to‐maturity securities is most accurate? a. Unrealized gains and losses from changes in market value are ignored and not recognized on the financial statements. b. They are purchased with the intent of holding them for at least 10 years. c. Realized gains and losses are included in other comprehensive income as part of shareholders' equity.

a. Unrealized gains and losses from changes in market value are ignored and not recognized on the financial statements. - In order to classify securities as held to maturity, a company should have the intent as well as the ability to hold the investment until maturity. Realized gains and losses are recognized on the income statement.

Accounting goodwill is based on

accounting standards and is only reported for acquisitions when the purchase price exceeds the fair value of the acquired company's net assets.

3e ← These are expenses that have been recognized on the income statement but have still not been paid for as of the balance sheet date.

accrued liabilities

Mike sold goods worth $4,500, but is yet to receive cash for them. This will most likely lead to an increase in: Accrued revenue. Deferred expense. Deferred revenue.

accrued revenue - Revenue reported on the income statement before cash is received results in accrued revenue or accounts receivable, which is an asset.

Which of the following is least likely a current liability? a. Trade payables expected to be settled within 18 months after the balance sheet date. b. Financial liabilities expected to be settled within 1 year after the balance sheet date, whose original term was 3 years. c. A liability that the entity has an unconditional right to defer settlement of for 2 years after the balance sheet date.

c. A liability that the entity has an unconditional right to defer settlement of for 2 years after the balance sheet date. - International Accounting Standards allow some liabilities such as trade payables and accruals for employees to be classified as current liabilities even though they might not be settled within 1 year. Financial liabilities expected to be settled within 1 year are classified as current liabilities even if their original term was more than 1 year. If the entity has an unconditional right to defer the settlement of the liability for at least 1 year after the balance sheet date, it must recognize it as a noncurrent liability.

3 ← These are a company's obligations that are expected to be settled within one year or one operating cycle, whichever is greater. Current liabilities that are typically found on the balance sheet include the following:

current liabilities

3c ← These represent portions of long-term debt obligations that are expected to be paid within a year of the balance sheet date or within one operating cycle, whichever is greater.

current portion of long-term liabilities

whats another word for unearned revenue?

deferred revenue bruhhh

2a ← These are long-term assets that have physical substance. Examples of tangible assets treated as PP&E include land, plant, machinery, equipment, and any natural resources owned by the company.

long term assets

does goodwill affect cashflow>

no

goodwill is not amortized, but...

tested for impairment annually

3f ← This arises when a company receives cash in advance for goods and services that are still to be delivered. The company is obligated to either provide the goods or services or to return the cash received.

unearned revenue

Economic goodwill, ...

which is not reflected on the balance sheet, is based on a company's performance and its future prospects.