CH 5 - Class Notes.word


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CHAPTER 5 FINANCIAL POSITION + CASH FLOWS BALANCE SHEET : Usefulness aka Statement of Financial Position The balance sheet provides information For evaluating the capital structure and For computing rates of return on invested assets It is also useful for assessing an enterprise’s Liquidity = ability to pay current and maturing liabilities Solvency = ability to pay debt and related interest Financial Flexibility = ability to respond to unexpected needs and opportunit- ies BALANCE SHEET : Limitations Many assets and liabilities are stated at historical cost Information presented is reliable, however Reporting at current fair value would result in more relevant information Judgement + estimates are used in determining many of the items reported on the Balance Sheet Many “soft” numbers (estimates) are included which may be uncertain The balance sheet does not report items that cannot be recorded objectively (e.g. internally generated goodwill) BALANCE SHEET : Classification Similar items are grouped together, with sub-total Items with different characteristics are separated Individual balance sheet items should be reported: Separately Sufficient detail in order to: Allow users to assess amounts, timing, and uncertainty of future cash flows Allow users to evaluate liquidity, financial flexibility, profitability, and risk Helps to calculate important ratios (e.g. current ratio to assess li- quidity) Considerations for reporting items separately: Assets that differ in their type or expected function in the central operations (e.g. inventory vs. capital assets) Liabilities with different implications for the entity’s financial flexibility (e.g. long term debt vs. current debt) Assets and liabilities with different general liquidity characteristics (e.g. cash vs. receivables)
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Assets, liabilities, and equities with characteristics that allow for easy measure- ment or valuation ELEMENTS OF THE BALANCE SHEET : Assets : Probable future economic benefits as a result of past transactions or
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