chapter+5+note+with+answers

chapter+5+note+with+answers - Chapter 5: Balance Sheet...

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Chapter 5: Balance Sheet In-class exercises:E5-1, E5-4, E5-7, E5-8, E5-10 Practice exercises: BE5-2, BE5-6, E5-2, E5-5, E5-11 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. 1
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USEFULNESS Show assets, Liabilities, equity, useful for analyzing capital structure, risks, 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 Example: Liquid assets Ability to raise funds Ability to adjust operations LIST 3 LIMITATIONS OF A B/S PREPARED UNDER GAAP Historical cost Use of estimates Omit many items 2
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PREPARATION OF A CLASSIFIED B/S Balance sheet accounts are classified so that similar items are grouped together to arrive at significant subtotals. The material is arranged so that important relationships are shown. Similar items are grouped together, with sub-total Items with different characteristics are separated Individual balance sheet items should be: Reported separately, and in 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 liquidity) More choice and flexibility is permitted under IFRS with respect to the format of the balance sheet (reverse order liquidity is more common). 3
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Balance Sheet: Classification Considerations for reporting items separately: 1 Assets that differ in their type or expected function (e.g. inventory vs. capital assets) 2. Liabilities with different implications for the entity’s financial flexibility (e.g. long term debt vs. current debt) 3. Assets and liabilities with different general liquidity characteristics (e.g. cash vs. receivables) 4. Assets, liabilities, and equities with characteristics that allow for easy measurement or valuation 4
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Elements Of The Balance Sheet Assets : Present economic benefits that the entity has rights or access to (and others do not) Liabilities : Present economic obligation/burden that is enforceable Equity (or net assets): The residual interest in assets after liabilities are deducted Assets Liabilities and equity Current assets Long-term investments Property, plant, and equipment Intangible assets Other assets Current liabilities Long-term debt Shareholders’ equity Capital shares Contributed surplus Retained earnings Accumulated other comprehensive income CONTRA (ADJUNCT) ACCOUNT Contra account reduces an asset, liability, or OE. Adjunct account increases an asset, liability, or OE.
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chapter+5+note+with+answers - Chapter 5: Balance Sheet...

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