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Chapter_5 - Chapter 5 Financial Position and Cash Flows 1...

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1 Chapter 5 Financial Position and Cash Flows
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2 Balance Sheet: Usefulness B/S provides information for: Calculating rate of return on invested assets e.g.: ROA = NI/TA Evaluating capital structure : stocks vs. debts Assessing business risk and future cash flow Liquidity : able to quickly convert assets into cash when short-term debts are due? Solvency : able to meet long-term debt obligations? Financial flexibility : able to manage cash flow efficiently?
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3 Balance Sheet: Limitations Historical cost Reliable? Relevant? Accounting judgments and estimates, e.g.: Allowance for doubtful accounts Accumulated depreciations Not reporting items that cannot be objectively determined, e.g.: Human resources
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4 Balance Sheet: Classification Group similar items together Classify in sufficient details Report individual items separately, by Functions e.g., Inventory vs. PPE Implications on financial flexibility: e.g., Debt vs. Equity Degree of liquidity: e.g., Cash vs. A/R
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5 Balance Sheet: Classification Monetary vs. non-monetary : Monetary : measured at collectible/payable amounts e.g.: cash, A/R, A/P Nonmonetary : value in terms of a monetary unit not fixed (recorded value may not reflect true value) e.g.: Inventory, prepaid, PPE
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6 Balance Sheet: Classification Financial instruments vs. other Contracts between two or more parties Involving the receipt/delivery of cash or another financial instrument Marketable, tradable and measurable Examples: cash, investments, receivables, payables, debts, shares
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7 Balance Sheet: Classification Assets: Current assets Long-term investments PPE Intangible assets Other assets Liabilities & Owners’ Equity: Current liabilities Long-term debt Owners’ equity -- Capital shares -- Contributed surplus -- Retained earnings -- Accumulated other comprehensive income
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8 Current Assets Current assets are expected to be consumed, sold, or converted into cash within: o one year from the B/S date, or o the normal operating cycle, whichever is longer Presented in order of liquidity Cash: at stated value
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