Questions and Answers
Liquidity refers to the ability of an enterprise to pay its debts as they mature.
False
The balance sheet omits many items that are of financial value to the business but cannot be recorded objectively.
True
Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows.
True
Companies frequently describe the terms of all long-term liability agreements in notes to the financial statements.
Signup and view all the answers
An asset which is expected to be converted into cash, sold, or consumed within one year of the balance sheet date is always reported as a current asset.
Signup and view all the answers
Land held for speculation is reported in the property, plant, and equipment section of the balance sheet.
Signup and view all the answers
The account form and the report form of the balance sheet are both acceptable under GAAP.
Signup and view all the answers
The primary purpose of a statement of cash flows is to report the cash effects of operations during a period.
Signup and view all the answers
The statement of cash flows reports only the cash effects of operations during a period and financing transactions.
Signup and view all the answers
Financial flexibility is a company's ability to respond and adapt to financial adversity and unexpected needs and opportunities.
Signup and view all the answers
Collection of a loan is reported as an investing activity in the statement of cash flows.
Signup and view all the answers
Companies determine cash provided by operating activities by converting net income on an accrual basis to a cash basis.
Signup and view all the answers
Significant financing and investing activities that do not affect cash are not reported in the statement of cash flows or any other place.
Signup and view all the answers
Financial statement readers often assess liquidity by using the current cash debt coverage ratio.
Signup and view all the answers
Free cash flow is net income less capital expenditures and dividends.
Signup and view all the answers
Because of the historical cost principle, fair values may not be disclosed in the balance sheet.
Signup and view all the answers
Companies have the option of disclosing information about the nature of their operations and the use of estimates in preparing financial statements.
Signup and view all the answers
Companies may use parenthetical explanations, notes, cross references, and supporting schedules to disclose pertinent information.
Signup and view all the answers
The accounting profession has recommended that companies use the word reserve only to describe amounts deducted from assets.
Signup and view all the answers
On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners' equity account.
Signup and view all the answers
Study Notes
Liquidity and Definitions
- Liquidity signifies an enterprise's capability to convert assets into cash, not merely to pay debts as they come due.
- Items of financial value that can't be recorded objectively are omitted from the balance sheet.
Financial Statements and Flexibility
- Financial flexibility gauges a business's ability to manage changes in cash flow amounts and timing.
- Descriptions of long-term liability agreements are commonly found in the notes accompanying financial statements.
- Both account form and report form of the balance sheet comply with Generally Accepted Accounting Principles (GAAP).
Statement of Cash Flows
- The statement of cash flows serves more than just reporting cash effects of operations; it provides a comprehensive view of cash movements.
- It encompasses cash effects from operations, financing, and investing transactions.
- Collection of loans is classified as an investing activity within the statement of cash flows.
- Accrual net income is converted to a cash basis to determine cash generated by operating activities.
Financial Activities and Reporting
- Significant financing and investing activities that do not involve cash transactions are clearly noted in the statement of cash flows.
- Assessing liquidity often involves utilizing the current cash debt coverage ratio.
Cash Flow Calculations
- Free cash flow calculation should consider capital expenditures and dividends, correcting the misdefinition of net income alone.
- The historical cost principle means fair values may not always be reported in balance sheets.
Disclosure Practices
- Companies may not always disclose the nature of operations or estimates used in creating financial statements, contradicting common assumptions.
- Effective disclosure methods include parenthetical explanations, notes, cross-references, and supporting schedules to provide relevant information.
Terminology and Accounting Practices
- The term "reserve" is not limited to amounts deducted from assets, challenging the traditional usage in accounting.
- Adjunct accounts increase values related to an asset, liability, or owners' equity, rather than reducing them.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
