2015, Study Session # 8, Reading # 26

UNDERSTANDING BALANCE SHEETS

CI =
I&E =
CA =
CL =

Comprehensive Income
Income & Expenses
Current Assets
Current Liabilities

G/W = Goodwill
IS = Income Statement
BS = Balance Sheet

GP =
HC =
FV =
A&L =

Gross Profit
Historical Cost
Fair Value
Assets & Liabilities

26.a

Assets are a companys economic resources from which future economic benefits are
expected to flow & can be created by operating, investing & financing activities.

Liabilities are obligations owed by an entity & created by operating & financing activities.

Stockholders equity is residual interest in assets that remains after subtracting a firms
liabilities & can be created by operating & financing activities.

26.c

Common Balance Sheet formats

Account Format

Report Format

Assets on left hand side & liabilities &

equity right hand side.

Assets, liabilities & equity are

presented in one column.

Classified balance sheet separately classifies current and non-current assets and liabilities.

26.d

Assets & Liabilities

Assets

Liabilities

Current assets assets likely be converted into cash or used

up within one year or one operating cycle, whichever is greater.

Operating cycle time from inventory acquisition to cash
collection.

Noncurrent assets not to be converted into cash or used up
within one year or operating cycle. (Provide info about
investing activities).

IFRS require current/ noncurrent format unless liquidity-based
presentation is more relevant and relible.

Minority interest pro-rata share of subsidiarys net assets
not owned by parent company.

Current liabilities obligations that will be satisfied within

one year or one operating cycle whichever is greater.

CA CL = working capital.

Noncurrent liabilities life of more than one year & provide
information about financing activities.

26.e

Historical cost value that was exchanged at the acquisition date. Verifiable & objective but may be less relevant.
Fair value amount at which knowledgeable, willing parties exchange asset or settle liability in an arms-length transaction.
Standard costing assigning predetermined costs to goods produced.
Retail method measure inventory at retail price & then subtract G.P in order to reflect cost.
Long term assets with physical substance are tangible assets.
B/S value of tangible assets = HC Accumulated depreciation.
H.C = original costs + costs necessary to get the asset ready for use.
Intangible assets long term assets that lack physical substance. Financial securities are not intangible assets.
Unidentifiable intangible assets cannot be purchased separately & may have infinite life (tested for impairment at least annually).

Copyright FinQuiz.com. All rights reserved.

2015, Study Session # 8, Reading # 26

26.e

Internally created intangibles

IFRS

U.S.GAAP
Expensed as incurred.
Research Stage

Development Stage

Expensed

Capitalized

Goodwill excess of purchase price over acquirers share in the F.V of identifiable A&L acquired in acquisition.

Net income can be manipulated by allocating more of the acquisition price to goodwill & less to other assets.

Analyst should eliminate G/W impact for comparability.

Financial Assets Investment securities (stock & bonds), derivatives, loans & receivables.
Financial Liabilities derivatives, notes payable & bonds payable.
Financial A&L are reported on B.S at FV (marking to market) or amortized cost.
Realized G/L for all categories are reported in IS.
Most financial liabilities are at amortized cost.
Derivatives which are a liability to the company, non-derivative instruments & held-for-trading liabilities are reported at FV.

Marketable Investment Securities

Held-to-maturity

Trading securities

Debt securities (held till maturity).

B/S at amortized cost.
Amortized cost = par value disc/ premium.
Subsequent in MV is ignored.

Debt & equity securities (short

term).

B/S at FV.

Unrealized G/L (income statements).

Available for sale

Neither held till maturity nor traded in the
near term.

FV at B/S.

Unrealized G/L in OCI

26.f

Contributed capital total amount paid in by the common & preferred shareholders.
Authorized shares # of shares that may be sold under firms articles of incorporation.
Issued shares shares actually sold to shareholders.
Outstanding shares issued share reacquired shares.
Treasury stock stock that has been reacquired rather than being cancelled.
U.S.GAAP firms can report CI in I.S or in in equity or separate statement.
IFRS firms can report either of the two: 1) a separate I.S and a second statement
including OCI or 2) a single statement of OCI.

26.g

Statement of in stockholders equity transactions that
equity accounts for the
period.

Statement includes transactions with shareholders & reconciliations of beginning &ending
equity a/c balance including capital, additional paid-in-capital, retained earnings &
accumulated OCI.

Copyright FinQuiz.com. All rights reserved.