Ch 3 - Balance Sheet

The assets used to carry out a company's operations are called.....?

fixed assets

According to FASB what is the definition of an Asset?

probable future economic benefits obtained as a result of past transactions or events

What are intangible assets and a few examples?

Assets that have no physical substance or form and carry a high degree of uncertainty with regard to their future benefits. Examples of these include patents, copyrights, trademarks, franchises, and goodwill.

What are some examples of restricted cash and how is it classified on the balance sheet?

Ex: sinking fund or pension fund It is classified as a Long-term investment (not a current assets and thus may not be used for current operations)

How should the terms "reserve" and "surplus" be used?

Reserve is to be used only for APPROPRIATIONS of retained earnings. Surplus is to be discontinued entirely (surplus used to be used for retained earnings and is defined as - an amount of something left over when requirements have been met).

What is PP&E and does it depreciate?

Property, plant and equipment aka: Fixed assets- refers to the building, land, equipment and machinery a company uses to carry out its operations. All these assets depreciate with time except for land.

What are the two different forms of a balance sheet?

The account form- where assets are shown on the left and liabilities and capital are shown on the right. The report form- where assets are shown on the top followed by liabilities and then capital.

What is Working capital?

The excess of current assets over current liabilities (Where assets is larger than liabilities: A- l = working capital)

What are Subsequent Events and how are they disclosed?

They are events that occur AFTER the balance sheet date but BEFORE the statements are issued. If the events provide evidence about conditions that EXISTED at the balance sheet date, then the financial statements must be corrected and adjusted before they can be issued. If the event merely provides evidence about conditions that have arisen AFTER the balance sheet date, no adjustments or corrections to the financial statements are required. Instead they must be disclosed in the footnotes.

What are the 5 subgroups for assets?

current assets long-term investments property, plant & equipment intangible assets other assets

What are the subgroups for liabilities?

current liabilities long-term liabilities

Retained earnings normally has what type of balance?

A credit balance. A debit balance refers to a deficit (heavy losses sustained by a company)

What are two examples of probable and estimable loss contingencies?

Bad Debts Warranty expense *we record entries for each and reflect them in the body of the statements

What are the subgroups for Stockholders' Equity?

Capital Stock Additional Paid-in Capital Retained Earnings

What are Current Assets and what are some examples?

Cash or any other asset that will be converted into cash or consumed within 1 year or the operating cycle, whichever is longer. Ex: Cash / marketable securities / accounts receivable / merchandise inventory / prepaid items (rent, insurance, supplies etc).

What are organization costs?

Costs incurred in creating a corporation. They are immediately expensed.

Besides sinking funds and pension funds, What are other examples of long-term investments?

*long-term investments in bonds *buildings and land held for speculation *cash surrender value of life insurance *investments in nonconsolidated subsidiaries In all of these, the company has no intent to convert the asset into cash within the current period

What are current liabilities and what are some examples?

Liabilities that are payable within 1 year or the operating cycle (whichever is longer0 and are payable out of current assets or through the creation of other current liabilities. Examples: accounts payable / wages payable / taxes payable / expenses payable / short-term notes payable / current portion of long-term debt

Define Loss contingencies. How are they required to be reported?

Possible future events that MAY decrease assets or increase liabilities. *If the contingency is BOTH PROBABLE and ESTIMABLE, it should be recorded in a journal entry and be reflected in the body of the statements. *If it is NOT PROBABLE but merely RESONABLY POSSIBLE, not entry is made but the footnotes should disclose the contingency. *If it is NEITHER probably nor reasonably possible, but REMOTE, mothering should be done. Ex: Lawsuites against the company or tax disputes that may result in payment of additional tax

Define Gain contingencies. How are they required to be reported?

Possible future events that MAY increase assets or decrease liabilities. They should neither be recorded in the accounts nor be shown in the body of the statements; however, if there is a HIGH probability of occurrence, they should be disclosed in the footnotes. Ex: Possible receipts of gifts or donation / Disputes with government tax bodies from which a tax refund may result / Pending court cases against other parties that may lead to compensation

According to FASB, what is the definition of a liability?

Present obligations to transfer assets or provide services to other entities in the future, as a result of past transactions or events.

What principle is the balance sheet based on?

The Cost Principle- this means that assets are displayed at the price the company paid for their acquisition. Increases in the market value of assets are not recorded; decreases occasionally are.

Define Speculation with regard to investing

The act of trading in an asset or conducting a financial transaction that has a significant risk of losing most or all of the initial outlay with the expectation of a substantial gain.

According to FASB, what is the definition of Capital or Stockholder's equity?

The owners' interest in the assets that remain after deducting the liabilities. AKA: net assets

What is the current ratio?

The ratio of current assets to current liabilities (A/ L)

What is (1) another name for the balance sheet and (2) what is the purpose and (3) elements that make up a balance sheet?

aka: statement of financial position shows the financial position of a company at a given point in time. Its elements consist of assets, liabilities, and capital.

Accumulated other comprehensive income is shown where on the balance sheet?

in the stockholders' equity section of the balance sheet. Common Stock $XX Retained Earnings $XX Accumulated Other Comprehensive Income $XX Total Stockholder's Equity $XX