CHAPTER 5 REVIEW - CHAPTER5REVIEW 1.

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CHAPTER 5 REVIEW 1. Chapter 5 presents a detailed discussion of the concepts and techniques that underlie the preparation and analysis of the balance sheet. Along with the mechanics of preparation, acceptable disclosure requirements are examined and illustrated. A brief introduction to the statement of cash flows is also presented. This explanation serves as a foundation for the more comprehensive discussion of this subject presented in Chapter 24. At the end of Chapter 5, a multi-page illustration of the financial statements and accompanying notes of a corporation is presented. This illustration may be referred to throughout your study of intermediate accounting as it includes information relevant to many of the topics discussed in subsequent chapters. Uses and Limitations of the Balance Sheet 2. (S.O. 1) For many years financial statement users generally considered the income statement to be superior to the balance sheet as a basis for judging the economic well-being of an enterprise. However, the balance sheet can be a very useful financial statement. If a balance sheet is examined carefully, users can gain a considerable amount of information related to liquidity, solvency and financial flexibility. Liquidity is generally related to 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 refers to the ability of an enterprise to pay its debts as they mature. Financial flexibility is the ability of an enterprise to take effective action to alter the amounts and timing of cash flow so that it can respond to unexpected needs and opportunities. *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. 3. Criticism of the balance sheet has revolved around the limitations of the information presented therein. These limitations include: (a) failure to reflect current value information, (b) the extensive use of estimates, and (c) failure to include items of financial value that cannot be recorded objectively. 4. The problem with current value information concerns the reliability of such information. The estimation process involved in developing current-value type information causes a concern about the objectivity of the resulting financial information. The use of estimates is extensive in the development of balance sheet data. These estimates are required by generally accepted accounting principles, but reflect a limitation of the balance sheet. The limitation concerns the fact that the estimates are only as good as the understanding and objectivity of the person(s) making the estimates. The final limitation of the balance sheet
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concerns the fact that some significant assets of the entity are not recorded. Items such as human resources (employee workforce), managerial skills,
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This note was uploaded on 09/30/2008 for the course ACCY 206 taught by Professor Madlinger during the Spring '08 term at Northern Illinois University.

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CHAPTER 5 REVIEW - CHAPTER5REVIEW 1.

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