Podcast
Questions and Answers
What are the three sections of the balance sheet?
What are the three sections of the balance sheet?
Assets, Liabilities, and Shareholders' Equity.
An asset must be owned or controlled by the company and must arise from a past transaction or event in order to be reported on the balance sheet.
An asset must be owned or controlled by the company and must arise from a past transaction or event in order to be reported on the balance sheet.
True
Which of the following is NOT a current asset?
Which of the following is NOT a current asset?
What is the rule of thumb for determining operating cash?
What is the rule of thumb for determining operating cash?
Signup and view all the answers
What is the formula for calculating inventory turnover?
What is the formula for calculating inventory turnover?
Signup and view all the answers
Which inventory valuation method is NOT allowed under IFRS?
Which inventory valuation method is NOT allowed under IFRS?
Signup and view all the answers
What does the acronym DIO stand for?
What does the acronym DIO stand for?
Signup and view all the answers
What are the two main reasons analyzing DIO is important?
What are the two main reasons analyzing DIO is important?
Signup and view all the answers
What is the formula for the cash flow impact of DIO?
What is the formula for the cash flow impact of DIO?
Signup and view all the answers
How are accounts receivable reported on the balance sheet?
How are accounts receivable reported on the balance sheet?
Signup and view all the answers
What type of analysis is used to estimate uncollectible accounts?
What type of analysis is used to estimate uncollectible accounts?
Signup and view all the answers
What are the two main ratios used to measure the magnitude of the accounts receivable position?
What are the two main ratios used to measure the magnitude of the accounts receivable position?
Signup and view all the answers
A lengthening of DSO is generally a favorable trend for a company.
A lengthening of DSO is generally a favorable trend for a company.
Signup and view all the answers
What does PPE stand for?
What does PPE stand for?
Signup and view all the answers
How is PPE reported on the balance sheet?
How is PPE reported on the balance sheet?
Signup and view all the answers
What is the formula for PPE turnover?
What is the formula for PPE turnover?
Signup and view all the answers
What does a high PPE turnover generally imply?
What does a high PPE turnover generally imply?
Signup and view all the answers
A higher PPE turnover generally leads to lower profitability.
A higher PPE turnover generally leads to lower profitability.
Signup and view all the answers
What does the term "percent used up" refer to in the context of PPE?
What does the term "percent used up" refer to in the context of PPE?
Signup and view all the answers
What are the two main exclusions from depreciable asset costs when calculating average useful life?
What are the two main exclusions from depreciable asset costs when calculating average useful life?
Signup and view all the answers
How is goodwill defined?
How is goodwill defined?
Signup and view all the answers
Goodwill is considered an indefinite intangible asset subject to annual impairment testing.
Goodwill is considered an indefinite intangible asset subject to annual impairment testing.
Signup and view all the answers
What are the two steps in accounting for M&A deals?
What are the two steps in accounting for M&A deals?
Signup and view all the answers
Intangible assets lack physical substance and are intended to serve the business operations on a permanent basis.
Intangible assets lack physical substance and are intended to serve the business operations on a permanent basis.
Signup and view all the answers
What is the main distinction between internally generated and externally bought intangible assets?
What is the main distinction between internally generated and externally bought intangible assets?
Signup and view all the answers
Which of the following is NOT an example of an intangible asset?
Which of the following is NOT an example of an intangible asset?
Signup and view all the answers
Finite intangible assets are subject to amortization, while indefinite intangible assets are subject to annual impairment testing.
Finite intangible assets are subject to amortization, while indefinite intangible assets are subject to annual impairment testing.
Signup and view all the answers
What is the purpose of common size analysis?
What is the purpose of common size analysis?
Signup and view all the answers
Which of the following types of analyses does common size analysis enable?
Which of the following types of analyses does common size analysis enable?
Signup and view all the answers
Study Notes
Chapter 2: Balance Sheet: Asset
- This chapter examines assets on a balance sheet.
- It defines assets as items that provide future economic benefits.
- Assets must be owned or controlled by the company and must arise from a past transaction or event.
- Assets are categorized as current or non-current.
Different Current Assets
- Cash: Currency and bank deposits.
- Cash equivalents: Investments with maturities of 90 days or less.
- Short-term investments: Marketable securities expected to be sold within a year.
- Accounts receivables (net): Amounts due from customers from sales on credit (after deducting uncollectible amounts).
- Inventories: Goods purchased or produced for sale to customers.
- Prepaid expenses: Costs paid in advance for rent, insurance, advertising, and other services.
Analyzing Cash and Cash Equivalents
- "Cash and Cash equivalents" can be liquidated immediately.
- Crucial for determining operating cash needed to run the business.
- Excess cash is the amount above operating cash.
- Operating cash is usually around one percent of total sales.
Analyzing Inventory
- Inventory represents goods purchased or produced for sale.
- Ending inventory (closing stock) is calculated by multiplying quantity by value.
- Inventory valuation methods: FIFO, LIFO, and Weighted Average.
- FIFO (First-In, First-Out) assumes first goods in are first goods sold.
- LIFO (Last-In, First-Out) assumes last goods in are first goods sold (not permitted in IFRS).
- Inventory turnover and days inventory outstanding (DIO) are metrics for analyzing inventory management.
- A lower DIO is preferable, as it indicates faster inventory turnover and better cash flow.
Analyzing Accounts Receivables
- Accounts receivable represents amounts due from customers arising from sales on credit.
- Reported on balance sheets net of the allowance for doubtful (uncollectible) accounts.
- Aging analysis helps to estimate uncollectible accounts.
- Accounts receivable turnover and days sales outstanding (DSO) are metrics for analyzing credit management.
- A higher degree of accounts receivable growth compared to sales could indicate that the company is excessively granting credit or that credit quality is deteriorating.
Different Non-Current Assets
- Property, plant, and equipment (PPE): Land, buildings, and equipment (after deducting accumulated depreciation).
- Long-term investments: Investments the company does not intend to sell within a year.
- Intangible assets: Assets without physical substance (e.g., patents, trademarks, licenses).
- Goodwill: Residual of the purchase price when a company engages in mergers and acquisitions.
Analyzing Property, Plant, and Equipment (PPE)
- PPE turnover measures productivity and efficiency.
- A higher turnover means the company is using its investment effectively.
- Average useful life is derived using the equation (Decreciable asset costs + Decreciable asset costs previous period) / 2 all divided by depreciation expense.
- Percent used up measures the proportion of a company's depreciable assets that have been used in their useful lives.
Analyzing Intangible Assets
- Intangible assets lack physical substance but provide long-term economic benefits.
- Internally generated intangible assets are usually expensed.
- Externally bought intangible assets can be capitalized and amortized.
- Common types include marketing-related assets, customer-related assets, artistic assets, contract-based assets, and technology-based assets.
Analyzing Goodwill
- Goodwill is the difference between the purchase price and the net asset value of an acquired company.
- Goodwill is subject to annual impairment testing.
- Companies account for M&A transactions by recognizing all the assets/liabilities of the target.
- Goodwill is computed by subtracting the net assets from the purchase price and is a component of the cost to generate future cash flows.
Common Size Analysis
- Common size analysis expresses balance sheet and income statement items as a percentage of a base amount (e.g., total assets or total sales, respectively).
- This facilitates cross-sectional comparisons (over a time period or comparing with other companies).
- Trend analysis compares the same item across time, showcasing changes in position.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This chapter explores the concept of assets on a balance sheet, defining them as items that offer future economic benefits. It categorizes assets into current and non-current, detailing various types of current assets including cash, cash equivalents, and accounts receivable.
