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ACCT 327 test 2 Notes

ACCT 327 test 2 Notes - Chapter 5 Notes The Balance Sheet...

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Chapter 5 Notes The Balance Sheet: referred to as the statement of financial position. Reports assets, liabilities and SHE of a business enterprise at a specific date. o Provides a basis for computing rates of return and evaluating the capital structure of the enterprise. o Used to asses Liquidity: the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid Solvency: the ability of a company to pay its debts as they mature Financial Flexibility: the ability of an enterprise to take effective actions to alter the amounts of timing of cash flows so it can respond to unexpected needs and opportunities. Limitations of the balance sheet o Most assets and liabilities are reported at historical cost; low fair value. o Companies use judgments and estimates to determine many of the items reported in the balance sheet o Omits items that are of financial value but that a company cannot record objectively; skill of employees. Classification in the balance sheet o Current Assets: cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. Presented on the balance sheet in order of liquidity. o Major Items: Item Basis of Valuation Cash and equivalents fair value Short-term investments fair value Receivables Estimated amount collectible Inventories LCM Prepaid expenses Cost Cash equivalents are short term highly liquid investments the will mature within three months or less. Short term investments:
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Held to maturity: Debt securities that a company has the positive intent and ability to hold to maturity Trading: Debt and equity securities bought and held primarily for sale in the near term to generate income on short term price differences. Available for sale: Debt and equity securities not classified as held to maturity or trading securities. o Noncurrent assets Long term investments Investments in securities, such as bonds, common stock, or long term notes Investments in tangible fixed assets not currently used in operations such as land held for speculation Investments set aside in special finds such as sinking fund, pension fund, or plant expansion fund. Investments in nonconsolidated subsidiaries or affiliated companies. Property, plant, and equipment: Tangible long lived assets used in regular operations of the business Intangible assets: lack physical substance and are not financial instruments. They include patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists o Current liabilities are the obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.
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