Accounting Chapter 4 Flashcards

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Questions and Answers

What is a Classified Balance Sheet?

A balance sheet that provides details not included in the financial statements.

A balance sheet with only three broad account groupings.

A balance sheet that groups asset and liability accounts into categories. (correct)

A balance sheet that lists assets on the left and liabilities on the right.

What is a Unclassified Balance Sheet?

A balance sheet that lists accounts by decreasing liquidity.

A balance sheet with only three broad account groupings: assets, liabilities, and equity. (correct)

A balance sheet that groups asset and liability accounts into categories.

A balance sheet listing assets on the left and liabilities on the right.

Define Current Assets.

Resources expected to be converted to cash or consumed within the next year or operating cycle.

Give examples of Current Assets.

Cash, short-term investments, accounts receivable, notes receivable, merchandise inventory, prepaid expenses, supplies. Signup and view all the answers

How are assets organized on the Classified Balance Sheet?

Current assets before non-current assets, organized by decreasing level of liquidity. Signup and view all the answers

What does liquidity refer to?

The ability to be converted into cash. Signup and view all the answers

Define Non-current assets.

Assets that will be useful for more than one year. Signup and view all the answers

List examples of Property, Plant, and Equipment (PPE).

Land, buildings, equipment, and motor vehicles. Signup and view all the answers

What are long-term investments?

Investments held for more than one year or the operating cycle. Signup and view all the answers

Define intangible assets.

Resources that do not have a physical form, such as copyrights, patents, trademarks, and franchises. Signup and view all the answers

What are current liabilities?

Obligations that must be paid within the next 12 months. Signup and view all the answers

Provide examples of current liabilities.

Bank loans, accounts payable, accrued liabilities, unearned revenue, current portion of long-term liabilities, income taxes payable. Signup and view all the answers

What is the current portion of a long-term liability?

The principal amount of a long-term liability due in the next 12 months. Signup and view all the answers

Classify Non-current or long-term assets.

Include property, plant, equipment, and intangible assets. (D) Signup and view all the answers

Define non-current liabilities.

Borrowings that do not require repayment for more than one year. Signup and view all the answers

What is a mortgage?

A liability secured by real estate. Signup and view all the answers

What is an Account Form Balance Sheet?

A balance sheet listing assets on the left and liabilities on the right. (C) Signup and view all the answers

What does a Report Form Balance Sheet do?

Lists the asset accounts first, followed by liabilities and owner's equity. (B) Signup and view all the answers

What are notes to the financial statements?

Relevant details not included in the body of the financial statements. Signup and view all the answers

Define an audit.

An external examination of a company's financial statement information. Signup and view all the answers

What are internal controls?

Processes to direct, monitor, and measure the accomplishment of objectives. Signup and view all the answers

An unqualified auditor's report indicates that the financial statements are truthful.

True (A) Signup and view all the answers

A qualified auditor's report indicates that the financial statements are not or may not be truthful.

True (A) Signup and view all the answers

Study Notes

Balance Sheet Classes

Classified Balance Sheet: Groups assets and liabilities into categories for better organization.
Unclassified Balance Sheet: Simplifies financials into three broad categories: assets, liabilities, and equity.

Current Assets

Defined as resources expected to convert to cash or be consumed within a year or the operating cycle.
Includes accounts with short-term benefits that will not convert to cash.
Examples of Current Assets:
- Cash: physical currency, bank deposits, cheques, money orders.
- Short-term investments: cash that is reserved for short-term interest-bearing notes.
- Accounts receivable: amounts due within one year.
- Notes receivable: formal promises to pay due within one year.
- Merchandise inventory: items expected to be sold within one year.
- Prepaid expenses: costs like prepaid insurance or rent expiring within one year.
- Supplies: items expected to be consumed within the year.

Organization of Assets

Present current assets before non-current assets on the classified balance sheet.
Organized by decreasing liquidity.

Liquidity

Refers to the ease of converting an asset into cash.

Non-current Assets

Defined as assets useful for more than one year, including:
- Property, Plant, and Equipment (PPE): Tangible items used in business operations, such as land, buildings, and vehicles.
- Long-term Investments: Assets held for over one year, including notes receivable and investments in shares and bonds.
- Intangible Assets: Non-physical resources generating value like copyrights, patents, and trademarks.

Current Liabilities

Obligations requiring payment within the next 12 months or the entity's next operating cycle.
Listed by order of due date.
Examples of Current Liabilities:
- Bank loans and notes payable due within 12 months.
- Accounts payable.
- Accrued liabilities like wages and interest payable.
- Unearned revenue.
- Current portion of long-term liabilities.
- Income taxes payable.

Classification of Non-current Assets and Liabilities

Assets: Long-term investments, PPE, intangible assets.
Liabilities: Non-current or long-term liabilities.

Non-current Liabilities

Borrowings that do not require repayment for more than one year, such as long-term bank loans or mortgages.

Mortgage

A specific type of liability secured by real estate.

Balance Sheet Formats

Account Form Balance Sheet: Lists assets on the left and liabilities and owner's equity on the right.
Report Form Balance Sheet: Presents assets first, followed by liabilities and owner's equity.

Financial Statement Disclosures

Notes to Financial Statements: Provide relevant details not in the main statements, aiding external users in analysis.
Audit: An external examination of a company's financial statements and internal controls.

Internal Controls

Processes implemented by management to monitor and measure the agency's objectives, including fraud prevention.

Auditor's Reports

Unqualified Auditor's Report: Indicates financial statements are truthful.
Qualified Auditor's Report: Suggests the financial statements may not be entirely truthful.

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Description

Test your knowledge on the classified balance sheet and related disclosures with these flashcards. Each card covers essential terms and definitions that are vital for understanding financial statements in accounting. Perfect for students looking to reinforce their learning in this key area of finance.