Chapter 5 - Balance Sheet: sometimes referred to as the...

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Balance Sheet: sometimes referred to as the statement of financial position. Reports the assets, liabilities, and SE of a business enterprise at a specific date. Helps to predict the amount, timing, and uncertainty of cash flows. Provides basis for comp. rates of return and evaluating capital structure. Liquidity: the amount of time expeted until an asset is realiz or otherwise converted into cash or until a liability has to be paid. Creditors int. in short-term liq ratios. (cash or near cash to short term liab.) > liq = less risk. Solvency: ability of a company to pay its debts as they mature. Companies w/ higher debt are more risky b/c they need more of assets to meet fixed obligations. Financial Flexibility: measures the “ability of an enterprise to take effective actions to alter the amtns and timing of cash flows so it can respond to unexp needs and opportunities.” Is affected by liquidity and solvency. > fin flex = higher abil to survive bad times, lower risk of failure. Limitations of Balance Sheet: 1) most assets and liab are reported at historical cost. Has high reliabil but not reported at fair value. 2) companies use judgments and estimates to determine many items. 3) omits items that are of financial value but that a company can’t record objectively. (ex. IBM skill of making computer chips) Classifications in the Bal. Sheet: bal. sheets are classified, or group together in similar items to arrive at signif subtotals. Arranged so imp relationships are shown. 1) assets that differ in type or expected function in comp central ops or other act. (inventories, prop plant equip) 2) assets and liab w/ diff implications for comp fin flexibility. (assets in ops vs. assets for investment) 3) assets and liabil w/ diff general liquidity characteristics (cash vs. inventories) [three general classes are assets, liabilities, and equity] Assets: probable future econ benefits; Liabil: probable future sacrifices of econ benefits; Equity: residual interest in assets of entity remaining after liabil are deducted. (Assets: current assets, LT inventories, PPE, intangible assets, other assets) (Liabil: current liabilities, LT debt) (Owner’s Equity: Capital Stock, Add paid in capital, RE) Current Assets: Casg and other assets a comp expects to convert to cash, sell, or consume in 1 year or in op cycle, whichever is longer. They are presented in balance sheet in order of liquidity; given w/ basis of valuation. (Cash and Cash Equiv (Fair Value); ST invest (generally FV); receivables (Est acct collectable); Inventories (Lower of cost of market); Prepaid exp (cost)) generally, if comp expects to convert asset into cash or use it to pay a current liability in year or op cycle, classified as current asset. Cash:
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