Ch 5 Financial Position and Cash Flows V2

Ch 5 Financial Position and Cash Flows V2 -...

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Financial Position and Cash  Flows (Ch 5) 1
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2 Financial Position and  Cash Flows Balance Sheet Usefulness Limitations Classification Format Additional information Techniques of disclosure Terminology Statement of Cash Flows Purpose Content and format Preparation Usefulness Perspectives IFRS / Private GAAP Comparison Comparison chart Looking ahead
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3 Financial Position and  Cash Flows Balance Sheet Usefulness Limitations Classification Format Additional information Techniques of disclosure Terminology Statement of Cash Flows Purpose Content and format Preparation Usefulness Perspectives IFRS / Private GAAP Comparison Comparison chart Looking ahead
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4 Balance Sheet: Usefulness Also known as 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 (time until asset is realized or liability has to be paid) Solvency (ability to pay debts and related interest) Financial flexibility (ability to respond to unexpected needs and opportunities)
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5 Balance Sheet: Limitations 1 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 2. Judgement and estimates are used in determining many of the items reported on the Balance Sheet Many “soft” numbers (estimates) are included which may be uncertain 3. The balance sheet does not report items that cannot be recorded objectively (e.g. internally generated goodwill)
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6 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 Balance Sheet: Classification
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7 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
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8 Elements Of The Balance Sheet Assets : Present economic benefits that the entity has rights or access to (and others do not)
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This note was uploaded on 01/05/2012 for the course BACK 1ALL taught by Professor Mach during the Spring '11 term at Folsom Lake College.

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Ch 5 Financial Position and Cash Flows V2 -...

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