BFAR CHAPTER 5 DISCUSSION QUESTIONS
Discuss the steps in preparing a worksheet.
1. Enter the account balances in the unadjusted trial balance columns and total the amounts. 2. Enter the adjusting entries in the adjustments columns and total amounts. 3. Compute each accounts adjusted balance by combining the unadjusted trial balance and the adjustment figures. Enter the adjusted amounts in the adjusted trial balance columns. A simple convention to observe when extending amounts from trial balance to the adjusted trial balance follows: > Add when the type of adjustment (debit or credit) is the same as the unadjusted trial balance. > Subtract when the type of adjustment (debit or credit) is different from the unadjusted balance. 4. Extend the asset, liability and owner's equity amounts from the adjusted trial balance columns to the balance sheet columns. Extend the income and expense amounts to the income statement columns. Total the statement columns. 5. Compute profit and loss as the difference between total revenues and total expenses in the income statement. Enter profit or loss as a balancing amount in the income statement and in the balance sheet, and compute the totals of the final columns.
In what ways is the worksheet useful to accountants?
Accountants often use a worksheet to help transfer data from the unadjusted trial balance to the financial statements. This multi-column document provides an efficient way to summarize the data for financial statements. The Accountant generally prepares a worksheet when it is time to adjust the accounts and prepare financial statements. Note, however, that it is possible to prepare financial statements directly from the adjusted trial balance at the end of the accounting period if the business has relatively few accounts.
What Does Liquidity Mean in Accounting?
In accounting, liquidity refers to the ability of a business to pay its liabilities on time. Current assets and a large amount of cash are evidence of high liquidity levels. It also refers to how easily an asset can be converted into cash on short notice and at a minimal discount. Assets such as stocks and bonds are liquid since they have an active market with many buyers and sellers. Companies that lack liquidity can be forced into bankruptcy even if it's solvent.
What are the objectives achieved in the preparation of the statement of changes in equity?
It summarizes the changes that occurred in owners' equity. Changes in an enterprises equity between two balance sheet dates reflects the increase and decrease in its net assets during the period.
Define liquidity, financial flexibility and solvency.
Solvency refers to the business' long-term financial position, meaning the business has positive net worth and ability to meet long-term financial commitments, while liquidity is the ability of a business to meet its short-term obligations. Financial flexibility refers to the capacity of a company to preserve its liquidity and supply cash against unexpected fluctuations that occur in an operational environment. Ballada > LIQUIDITY refers to the availability of cash in the near future after taking account of the financial commitments over this period. FINANCIAL FLEXIBILITY is the ability to take effective actions to alter the amounts and timings of cash flows so that it can respond to unexpected needs and opportunities. This includes the ability to raise new capital or tap into unused lines of credit. SOLVENCY refers to the availability of cash over the longer term to meet financial commitments as they fall due.
How Do You Assess Solvency?
Solvency refers to the business' long-term financial position. A solvent business is one that has positive net worth - the total assets are more than the total liabilities Solvency is assessed using solvency ratios. These ratios measure the ability of the business to pay off its long-term debts and interest on debts.
What is a statement of cash flows? Identify and differentiate the three categories of cash flows.
Statement of cash flow provides information about the cash receipts and cash payments of an entity during a period. It is a formal statement that classifies cash receipts (inflows) and cash payments (outflows) into operating, investing and financing activities. This statement shows the net increase or decrease in cash during the period and the cash balance at the end of the period; it also helps the project the future net cash involved in the preparation of the cash flow statement. Cash flow from Operating Activities records all the receipts from the sale of goods, the performance of services, royalties, fees, commissions and other revenues and then will be subtracted by the payments (i.e expenses), while Cash flow from Investing Activities is making and collecting loans; acquiring and disposing of investments in debt or equity securities, and obtaining and selling property and equipment and other productive assets, and lastly, Cash flow from Financing Activities include obtaining resources from owners and creditors.
Differentiate the two forms in which a balance sheet may be presented.
The balance sheet can be presented in either the REPORT FORMAT or ACCOUNT FORMAT. The REPORT FORMAT simply lists the asset, followed by the liabilities then by the owner's equity in a vertical sequence. The ACCOUNT FORMAT lists the assets on the left and the liabilities and owner's equity on the right. Either balance sheet format is acceptable.
Financial statement are prepared in a certain order-from income statement to statement of changes in equity, to balance sheet and to statement of cash flows. Explain the rationale behind.
The income statement is reported first as it reports all income and expenses during the period. the profit or loss is the final figure in this statement and this figure could be used in preparing the next financial statement which is the Statement of Changes in Equity which considers the profit or loss figure from the Income statement as one of the determining factors that explains the changes in owner's equity. The Statement of Financial Position reports the ending owner's equity, taken directly from the statement of changes in equity. The Statement of cash flow reports the net increase and decrease in cash during the period ends with the cash balance reported in the balance sheet. This statement is prepared based on information from the income statement and the balance sheet.
What useful information does an income statement provide to the business owner?
The income statement shows a company's performance based on expense, income, gains, and losses, which can be put into a mathematical equation to arrive at the net profit or loss for that time period. This information helps you make timely decisions to make sure that your business is on a good financial footing.
Discuss the differences between the direct and indirect method of presenting cash flows from operating activities. (INTERNET)
The main difference between the direct method and the indirect method involves the cash flows from operating activities, the remaining sections (i.e. investing & financing activities remain unchanged). Direct Method Under the direct method, each line item of the accrual-based income statement is converted into cash receipts or cash payments. Under the accrual method of accounting, the timing of revenue and expense recognition may differ from the timing of the related cash flows. Under cash-basis accounting, revenue and expense recognition occur when cash is received or paid. Simply stated, the direct method converts an accrual-basis income statement into a cash-basis income statement. Indirect Method Under the indirect method, net income is converted to operating cash flow by making adjustments for transactions that affect net income but are not cash transactions. These adjustments include eliminating noncash expenses (e.g., depreciation and amortization), non-operating items (e.g., gains and losses), and changes in balance sheet accounts resulting from accrual accounting events. Benefits / Drawbacks: The primary advantage of the direct method is that it presents the firm's operating cash receipts and payments, while the indirect method only presents the net result of these receipts and payments. Therefore, the direct method provides more information than the indirect method. This knowledge of past receipts and payments is useful in estimating future operating cash flows. The main advantage of the indirect method is that it focuses on the differences in net income and operating cash flow. This provides a useful link to the income statement when forecasting future operating cash flow. Analysts forecast net income and then derive operating cash flow by adjusting net income for the differences between accrual accounting and the cash basis of accounting.
Discuss the differences between the direct and indirect method of presenting cash flows from operating activities. (BALLADA)
Under the DIRECT METHOD, the entity's net cash provided (used in) operating activities is obtained by adding the individual operating cash inflows and then subtracting the individual operating cash outflows. While under the INDIRECT METHOD derives the net cash provided by (used in) operating activities by adjusting profit for income and expense items not resulting from cash transactions. The ADJUSTMENT begins with profit followed by the addition of expenses and charges (e.g. depreciation) that did not entail cash payments. Then, increases in current assets and decreases in current liabilities involved in the determination of profit but which did not actually increase or decrease cash are subtracted from profit. Finally, decreases in current assets and increases in current liability are added to profit to obtain net cash provided by (used in) operating activities.
After accomplishing the worksheet, the debit and credit columns if the trial balance, adjustments, adjusted trial balance, income statement and balance sheet balance. Does it mean that worksheet is free from error? Prove your answer.
Yes, because while preparing the financial statements you will discover errors in a certain account that causes the imbalances of the totals of a specific financial statement, and that will be corrected immediately before accomplishing all the financial statements.