Accounting 312- ch 4 - Accounting 312 Chapter 4 The Balance...

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Accounting 312 Chapter 4- The Balance Sheet The balance sheet (aka statement of financial position) reports the assets, liabilities and shareholders’ equity of a business enterprise at a specific date -info about the nature and amts of investments in enterprise resources, obligations to c reditors, and the owners’ equity in net resources -helps in predicting the amts, timing and uncertainty of future cash flows Usefulness of the Balance Sheet -basis for computing rates of return and evaluating the capital structure of the enterprise -asses a co’s risk and future cash flows -assess liquidity - 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 *creditors are interested in short term liquidity ratios which indicate if a co will have the resources to pay its current obligations *stockholders use liquidity to assess possibility of future cash dividends or buyback of shares *greater liquidity, lower risk of failure -assess solvency - ability of a co to pay its debts as they mature *when a co carries a high level of long term debt relative to assets, it has lower solvency *higher debt are more risky because need more assets to meet fixed obligations -liquidity and solvency affect financial flexibility - measures the ability of an enterprise to take effective actions to alter the amts and timing of cash flows so it can respond to unexpected needs and opportunities *co may become so loaded with debt (financially inflexible) that is has limited sources of cash to finance expansion or pay off maturing debt Limitations of the Balance Sheet 1. state assets and liabilities at historical cost so the info has high reliability but it is not relevant to fair value 2. companies use judgments and estimates to determine many of the items reported in the BS (ie: number of receivables it will collect, useful life of warehouse) 3. the balance sheet necessarily omits many items that are of financial value but that a company cannot record objectively (ie: knowledge and skill of Intel employees in developing new computer chips can be co’s greatest asset, but intangible so not recorded) Classification of the BS -classify individual items in sufficient detail (not just total assets, net assets, total liabilities, etc)
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This note was uploaded on 01/23/2011 for the course ACCOUNTING acc312 taught by Professor Halwhite during the Fall '10 term at University of Michigan.

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Accounting 312- ch 4 - Accounting 312 Chapter 4 The Balance...

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