Understanding Balance Sheets

What are accounts payable?

Amounts the firm owes for goods or services purchased on credit

What are some limitations of the balance sheet in financial analysis?

Assets are reported at historical cost, fair value, and amortized cost, so there might not be consistency with valuation Also, some assets and liability that do not appear on the balance sheet that have value (value of employees or reputation)

What are intangible assets?

Assets that are non-monetary and lack physical substance

What are "other current assets?"

Assets that might not be material if shown separately Examples are prepaid expenses and deferred tax assets

What are current assets?

Assets that will likely be converted into cash or used up within one year or one operating cycle

Under IFRS, how is investment property reported?

At amortized cost (just like PPE) or the fair value method

How are financial liabilities reported on the balance sheet?

At amortized cost. Amortized cost = issue price minus any principal payments, plus any amortized discount or minus any amortized premium

How are available for sale securities reported on an income statement?

At fair value

Under GAAP, what value are inventories reported at?

At the lower of cost or market.

Under IFRS, what value are inventories reported at?

At the lower of cost or net realizable value Net realizable value is the selling price less any completion costs or disposal (selling) costs

What is the difference between authorized, issued, and outstanding shares?

Authorized: Number of shares that may be sold Issued: Number of shares that have actually been sold Outstanding: Issued shares minus treasury stock

Do the IFRS and GAAP both allow reporting using the cost model and revaluation model?

Both allowed under IFRS, only cost model allowed under GAAP

What are identifiable intangible assets?

Can be acquired separately or are the result of rights or privileges conveyed to the owner (patents, trademarks, copyrights)

What are unidentifiable intangible assets?

Cannot be acquired separately and may have an unlimited life (goodwill)

What is unearned revenue?

Cash collected in advance of providing goods and services

What is a deferred tax liability?

Created when the amount of income tax expense recognized in the income statement (to shareholders) is greater than taxes payable (internal). This is good because it maximizes income to shareholders but actually the company has deferred the liability and can invest the money now.

What are deferred tax assets?

Created when the amount of taxes payable exceeds the amount of income tax expense recognized in the income statement With deferred tax assets, the firm will have either paid taxes early, or have paid too much tax, and is therefore entitled to some money back from the tax authorities.

What are current, quick, and cash ratios?

Current = CA/CL Quick = (Cash + marketable securities + receivables)/CL Cash = (Cash + marketable securities)/CL

What are trading securities?

Debt and equity securities acquired with the intent to profit over the near term

What are available for sale securities?

Debt and equity securities that are not expected to be held to maturity or traded in the near term

What are accrued liabilities?

Expenses that have been recognized on the income statement but are not actually contractually due Examples are taxes payable, interest payable, wages payable, and accrued warranty expense

How are financial assets such as trading securities, available for sale securities, and derivatives measured at?

Fair value (mark to market accounting)

What are marketable securities?

Financial assets that are traded in a public market whose value can be easily determined Examples are treasury bills, notes, bonds, and equity securities

Are all 3 costing methods (Average cost, FIFO, LIFO) permitted by IFRS and GAAP?

GAAP permits all 3 but IFRS does not permit LIFO

What are financial assets measured at amortized cost known as?

Held to maturity securities (debt securities to be held to maturity)

Under the cost model and under IFRS, what must be done to the asset if impaired?

IT must be written down to its recoverable amount and a loss is recognized in the income statement

When should a financial statement item be recognized?

If a future economic benefit is PROBABLE and the item's value or cost can be measured reliably

What must PPE be tested for under the cost model?

Impairment

What are financial assets?

Include investment securities, derivatives, loans, and receivables

What is accumulated other comprehensive income?

Includes all changes in stockholders' equity except transactions recognized in the income statement and transactions with shareholders (issuing stock, reacquiring stock, paying dividends)

What is included in historical cost when talking about the cost model for reporting PPE?

Includes the purchase price plus any necessary costs to get the asset ready for use (delivery, installation costs)

Under the cost model, how is PPE (excluding land) reported?

It is reported at amortized cost (historical cost minus depreciation, amortization, depletion and impairment)

What does it mean when accounts receivable are reported at net realizable value?

Its value is based on bad debt expense, which increases allowance for doubtful accounts (contra asset) (The value that can be realized)

What are some solvency ratios?

LT Debt to equity, total debt to equity, debt ratio (Debt/assets), Financial leverage (assets/equity)

What is the difference between liquidity and solvency?

Liquidity is the ability to make short term obligations whereas solvency is the ability to meet long-term obligations

Under the cost model and under GAAP, what must be done to the asset if impaired?

Loss recovery is not permitted under GAAP

What is market when describing the value at which inventories can be reported at?

Market is usually equal to replacement cost but cannot be greater than net realizable value or less than net realizable value less a normal profit margin

What are liquidity ratios?

Measure the firm's ability to satisfy its short-term obligations as the come due

What are solvency ratios?

Measure the firm's ability to satisfy long-term obligations

What is the retail costing?

Measuring inventory at retail prices and then subtracting gross profit in order to determine cost

What is noncontrolling interest?

Minority shareholders' pro rata share of net assets of a subsidiary that is not wholly owned by the parent

Are unrealized gains and losses for available for sale securities recognized on the income statement?

No they are not but they are reported in other comprehensive income as part of shareholders' equity

What are notes payable?

Obligations in the form of promissory notes owed to creditors and lenders Can also be reported as noncurrent liabilities if their maturities are greater than one year

What are current liabilities?

Obligations that will be satisfied within one year or one operating cycle, whichever is greater

What is standard costing and which types of firms use this method?

Often used by manufacturing firms, involves assigning predetermined amounts of materials, labor, and overhead to goods produced

What is the revaluation model?

PPE is reported at fair value less accumulated depreciation

What is preferred stock?

Pay dividends hand have priority during liquidation

What is a liquidity based format?

Present asset and liabilities in the order of liquidity

What does it mean to capitalize a cost?

Record the item on the balance sheet instead of expensing it on the income statement

What does a balance sheet report?

Reports the firm's financial position at a point in time

What is a classified balance sheet?

Separates current and noncurrent assets and liabilities Required by both GAAP and IFRS

What are cash equivalents?

Short term, highly liquid investments that are readily convertible to cash and near enough to maturity that interest rate risk is insignificant Examples are treasury bills, commercial paper, and money market funds

What is treasury stock?

Stock that has been reacquired by the issuing firm but not yet retired

What is contributed capital?

The amount contributed by the common shareholders

What are the 2 models that PPE can be reported under?

The cost model or the revaluation model

What is goodwill?

The excess of purchase price over fair value of the identifiable net assets (A-L) acquired in a business transaction.

What is the recoverable amount of an asset?

The greater of fair value less selling costs, or value in use (present value of future cash flow stream of the asset)

What is the current portion of long term debt?

The principal portion of debt due within a year or operating cycle, whichever is greater

What is owner's equity?

The residual interest in assets that remains after subtracting an entity's liabilities

How are identifiable intangible assets reported under IFRS and GAAP?

The same as PPE. Both can use the cost method but only IFRS uses the revaluation method too. The revaluation model can only be used if there is an active market for the intangible asset

What is par value?

The stated or legal value of common stock

What is an operating cycle?

The time it takes to purchase inventory, sell the product, and collect the cash

Under GAAP, how are intangible assets that are created internally (R&D) reported?

They are expensed as incurred

Under IFRS, how is R&D (internally created intangible asset) reported?

They are expensed as incurred but must separately identify research and development Must expense costs during research stage but can capitalize costs during development stage

How does a manufacturing firm treat inventory differently than other firms do?

They separately report inventory of raw materials, work in process, and finished goods

What is the only way goodwill can be created?

Through a purchase acquisition. Internally generated goodwill is expensed as incurred.

What is investment property?

Under the IFRS: Assets that generate rental income or capital appreciation Under GAAP: No specific definition of investment property

When is an asset impaired?

When its carrying value exceeds its recoverable amount

Are unrealized gains and losses for trading securities/derivatives recognized on the income statement?

Yes