Chapter 2 - adm1340

Chapter 2 - A Further Look at Financial Statements L1: Identity the sections of a classified statement of financial position The balance sheet - The statement of financial position or the balance sheet presents a company's financial position, assets, liabilities, and shareholder's equity Short term and Long term assets, liabilities and equity - This grouping helps readers determine Whether the company has enough assets to pay its debts as they come due The claims of short-term and long-term creditors and lenders on the company's total assets Assets - Assets: The resources that company owns or controls that will provide future economic benefits Current assets: benefits will be realized within a year Non current assets: benefits will be realized over more than a year Current assets - Current assets: Assets that are expected to be converted into cash or to be sold or used up within one year of the company's financial statement date or its operating cycle, whichever is longer Operating cycle: The average period of time it takes for a business to pay cash to obtain products or services and then receive cash from customers for these products or services (usually less than a year) In service businesses , this is the time it takes to pay employees, provide services on account and collect cash from customers In merchandising companies it is different Common types of current assets - Cash - Held for trading investments: Investments in debt securities such as bonds of another company, or equity securities such as shares of another company that are bought with intention of reselling them in order to earn income from fluctuations in their price - Accounts receivable: Amounts owed to company by customers who purchased products/services on credit (on account) and are supported with an invoice Accrued revenues : Types of receivables not supported by an invoice such as interest, sales tax, rent
- Notes receivable, including loans receivable: Amounts owed to the company by customers with a written promise to pay These are interest bearing, unlike A/R - Inventory: Goods held for sale to customers - Supplies: Consumable items such as office and cleaning supplies that expect to be used up within a year - Prepaid expenses: The cost of expenses like rent and insurance paid in advance of use - Current assets are ordered on the balance sheet in terms of liquidity , which is when they are expected to be converted into cash - Cash equivalents: Short-term, highly liquid investments with very little risk than can be easily sold Non current assets or long term assets - Non current assets: Assets that are not expected to be converted into cash, sold, or used up by a business within one year Types of non current assets - Long term investments (or investments) Multiyear investments in debt securities such as loans, notes, bonds, mortgages Equity securities such as shares that company decides to hold to generate investment revenue - Property, plant, and equipment : Are tangible assets with relatively long useful lives currently being used in operating the business Listed in terms of longest useful life: land, buildings, equipment, furniture, computers and vehicles Most companies record property, plant and equipment at cost but some choose to record it at their current value/fair value instead, this is the revaluation model Depreciation: These assets have estimated lives in which they are expected to generate revenue (become consumed or used up overtime) Land is not depreciated due to its infinite life Companies calculate depreciation by assigning a portion of the asset's cost to a depreciation expense account each year Accumulated depreciation: The account where depreciation expense is recorded to date over the life of the asset Is a Contra asset account: Balance is subtracted from the balance of the asset it relates to Assets that are depreciated are reported at cost - accumulated
depreciation on the balance sheet = book value or carrying amount - Intangible assets: Non current assets that are not physical and represent a right granted to or held by a company Divided into those with definite useful lives and with indefinite useful lives Similar to tangible assets, intangible assets with finite lives are depreciated, however, the term used is amortization instead Amortization: Refers to the allocation of cost of certain kinds of intangible assets (IFRS differentiates, ASPE uses amortization for both) Patents, copyrights, franchises, trademarks, trade names, and licenses are all intangible assets - Goodwill: Results from acquisition of another company when the price paid is higher than the value of the purchased company's net identifiable assets Net identifiable assets = value of assets - value of any liabilities assumed as part of the purchase Goodwill = fair value of assets acquired - fair value of any liabilities assumed Has no physical substance and cannot be separated by company Not amortized and reported separately from other intangible assets - Other assets: Assets that don't fit into any of these categories Ex: Non current receivables, deferred income tax/future income tax assets and property held for sale Deferred income tax: Income tax expected to be recovered in the following period Liabilities - Liabilities : Obligations that result from past transactions Current and Noncurrent Current liabilities - Current liabilities: Obligations that are to be paid within one year of the statement date or its operating cycle, whichever is longer Types of current liabilities - Bank indebtedness : A short term loan from bank typically when a company uses operating line of credit to cover cash shortfalls
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