Lecture+Note+chapter+5+with+answers

Lecture+Note+chapter+5+with+answers - Chapter 5: Balance...

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Chapter 5: Balance Sheet In-class exercises:E5-1, E5-2, E5-4, E5-7, E5-8 Practice exercises: E5-3, E5-10, E5-16 Much of the content in chapter 5 will be reviewed again in later chapters when you study specific balance sheet items, and so we will not focus on these details in ACTG 2P31. You will be responsible only for the topics covered in class and in the homework assigned. I) II) PREPARATION OF A CLASSIFIED B/S 1
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USEFULNESS The B/S is useful for analyzing liquidity, solvency & financial flexibility. Define each of these. LIQUIDITY Ability to pay current and maturing obligations (amount of time expected to convert an asset into cash) SOLVENCY Ability to pay debts and related interest FINANCIAL FLEXIBILITY Ability to alter the amounts and timing of cash flows to respond to unexpected events LIST 3 LIMITATIONS OF A B/S PREPARED UNDER GAAP Historical cost Use of estimates Omit many items 2
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II) PREPARATION OF A CLASSIFIED B/S Define the following: FINANCIAL INSTRUMENT Contracts between two or more parties Cash Contractual Obligation or right for future cash Investment in other firms OPERATING CYCLE The average time between the acquisition of materials and supplies and the realization of cash CURRENT ASSET (LIABILITY) Cash and other assets that will ordinarily be realized within one year from the date of the balance sheet or within the normal operating cycle if longer CONTRA (ADJUNCT) ACCOUNT Contra account reduces an asset, liability, or OE. Adjunct account increases an asset, liability, or OE. 3
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Investment Held-to-maturity (cost, short or long term, debt only) Held-for-trading (fair market value, short term only, debt or equity) Available-for-sale (fair market value, short or long term, debt or equity) Tangible assets held for investment (cost, long-term) Equity investment for control (long term only, use equity method for reporting) Ratio Analysis Current Ratio = Current assets/Current Liabilities Quick ratio =[Cash +Cash Equivalent+Short-term Investment+A/R]/Current Liabilities Total Debt/Total Assets 4
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EXERCISE 5-1 1. If the investment in preferred shares is readily marketable and held with the intention of converting the shares to cash in the near term, then the account should appear as a current asset and be included with trading securities or available for sale investments. If, on the other hand, the investment in preferred shares is not readily marketable or is not held with the intention of selling, the account should be classified as non-current in available for sale investments. Nonmonetary and Financial Instrument. 2. Capital shares of shareholders’ equity. Nonmonetary and Financial Instrument. 3.
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Lecture+Note+chapter+5+with+answers - Chapter 5: Balance...

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