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Intermediate Accounting Ch. 4
Study Terms and Notes
59
Accounting
Undergraduate 3
09/09/2009

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Term
What's another name for a Balance Sheet?
Definition
Statement of Financial Position
Term
What reports the financial position (assets,liabilities, and equity) of a company at a particular date?
Definition
Balance Sheet
Term
What does the Balance Sheet show and "not show"?
Definition
The balance sheet does not attempt to show the total fair value of a company. Rather, it is meant to be useful to external users who wish to estimate the company's fair value
Term
The Balance Sheet is useful for assesing what? (5)
Definition
1) Liquidity

2) Financial Flexibility

3) Operating Capability

4) Income Producing Performance

5) Capital (or "net assets" A-L=E)
Term
This is something that the Balance Sheet assesses and it refers to how quickly a company can convert an asset into cash to pay its bills.
Definition
Liquidity
Term
Refers to the ability of a company to use its financial resources to adapt to change
Definition
Financial Flexibility
Term
refers to the ability of a company to maintain a given physical level of operations
Definition
Operating Capability
Term
this is income relative to capital (A-L=E)
Definition
Income Producing Performance

(e.g., Return on Investment)
Term
Assets - Liabilities
Definition
Capital( "net assets")
Term
the process of formally recording and reporting an element in the financial statements; it includes depiction of an element in both words and numbers, with the amount included in the totals
Definition
Recognition
Term
What are the four things that make up the criteria for an item to be RECOGNIZED?
Definition
1) must meet the definition of an element (asset,liability,equity)

2) must be measurable

3) must be relevant

4) must be reliable
Term
Which SFAC # give the criteria of an item to be recognized?
Definition
SFAC #5
Term
What is an asset? (3)
Definition
(a) probable future economic benefit
(b) obtained or controlled by a company
(c) as a result of past transactions or events.
Term
What is the primary attribute to an asset?
Definition
service potential
Term
What is service potential?
Definition
the potential to benefit from the asset
Term
What is a Liability? (3)
Definition
(a) probable future sacrifices of economic benefits
(b) arising from present obligations of a company (with little to no discretion to avoid) to transfer assets or provide services in the future
(c) as a result of past transactions or events
Term
What is Stockholder's Equity?
Definition
residual interest in the assets of a company that remain after deducting liabilites (A-L=E)
Term
What is the predominant measurement (valuation) of Balance Sheet Elements?
Definition
Historical Cost
Term
This is the exchange price of the transaction in which the asset was acquired. Primarily used to value "non-financial" assets and liabilites
Definition
Historical Cost
Term
The amount of cash (or cash equivalent) that could be obtained on the date of the balance sheet by selling the asset in an orderly liquidation.
Definition
Fair Value (exit value)
Term
Does Fair Value measure "financial" or "non-financial" assets and liabilities
Definition
"financial"
Term
What are the two alternatives to measuring (valuing) an element?
Definition
1) Historical Cost

2) Fair Value (exit value)
Term
How do we determine fair value? (3 levels)
Definition
Level 1: the most desireable and reliable; quoted price for identical asset (or liability) in active market; i.e., looking it up on Yahoo or whatever

Level 2: Adjusted quoted price (exit value) for similar asset (or liability); i.e. for a building we may look at comps to see what other similar buildings are valued at

Level 3: Unobservable inputs (e.g. PV of expected cash flows); may be RELEVANT but not as RELIABLE
Term
What are some approaches to a valuation technique? (3)
Definition
1) market approach

2) income approach

3) cost approach
Term
Do companies have to disclose the projections of future cash flows?
Definition
Yes, in the footnotes
Term
These are very short term, low risk investments
Definition
cash equivalents
Term
Why are receivables more liquid than inventory?
Definition
You know your going to get your money/ Factoring may be possibly the way to get the money
Term
What is FACTORING?
Definition
when a company can sell its receivables
Term
What is inventory valued at?
Definition
lower of cost or market
Term
What is the order of current assets from the highest liquidity to the lowest liquidity?
Definition
1) Cash

2) Short Term Investments

3) Short Term Receivables

4) Inventories

5) Short Term Prepaids
Term
This is the time it takes to purchase inventory, produce a product or service, complete the sale, and collect the cash
Definition
Operating Cycle
Term
these will be converted to cash or used in operations within one year or operating cycle, whichever is longer
Definition
Current Assets
Term
What must corporations disclose in the Statement of Changes in Stockholder's Equity?
Definition
they must disclose the changes in its stockholder's equity accounts (Beginning Equity and Ending Equity)
Term
A Statment of Changes in Equity disclosure may appear in what? (3)
Definition
1) a financial statment

2) a supporting schedule

3) a note to the financial statments
Term
What are the major financial statments of a company and what do they show?
Definition
1) Balance Sheet- shows the financial position at the end of the period

2) Income Statement- shows the results of operations

3) Statment of Cash Flows- shows the cash inflows and cash outflows

*4) Statment of Changes in Stockholder's Equity- self explanatory
Term
What does a company's financial position include?
Definition
A financial position includes economic resources (assets), economic obligations (liabilities), and equity, and their relationship to each other at a moment in time
Term
What are two purposes of a company's balance sheet?
Definition
1) To provide info about its liquidity, operating capability, and financial flexibility

2) to provide a basis for evaluatiing income producing performance
Term
is the monetary value of the net assets invested by stockholders, as well as from earnings retained by the corporation
Definition
financial capital
Term
is the monetary value of the net assets invested by stockholders, as well as from earnings retained by the corporation
Definition
financial capital
Term
refers to maintaining the stockholders' equity of the corporation to provide a return of investment
Definition
capital maintenance
Term
Why is capital maintenance important?
Definition
Information about the maintenance of a corporation's capital is important in assessing the adequacy of a corporation's profitablity and its ability to provide a return on investment
Term
These are the major sections (and the components of each section) of a company's balance sheet:
Definition
1) ASSETS- Current Assets; Long Term Investments; Property, Plant, and Equipment; Intangible Assets; Other Assets

2) LIABILITIES- Current Liabilities, Long Term Liabilities, Other Liabilities

3) STOCKHOLDER'S EQUITY- Contributed Capital( Capital Stock and Additional Paid in Capital); Retained Earnings; Accumulated Other Comprehensive Income
Term
Current Assets may include five items:
Definition
1) cash (and cash equivalents)
2) temporary investments in marketable securities
3) Receivables
4) Inventories
5) Prepaid Items
Term
Examples of Current Liabilities:
Definition
1) Accounts Payable
2) Taxes Payable
3) Unearned Rent
4) Salaries Payable
5) estimated liabilites for warranties
6) current portion of long term debt
Term
Current Assets - Current Liabilities=
Definition
Working Capital
Term
Requires a description of all significant accounting policies to be included as an integral part of the financial statments
Definition
APB Opinion No. 22, "Disclosure of Accounting Policies"
Term
A donated fixed asset (from a governmental unit) for which the fair value has been determined should be recorded as a debit to fixed assets and a credit to what?
Definition
Unrealized Capital
Term
On October 2, 2005, a company borrowed cash and signed a 3 year interest bearing note on which both the principal and interest are payable on October 2, 2008. At December 31, 2007 the accrued interest should be reported on the balance sheet as a what?
Definition
Current Liability
Term
Rent Revenue collected one month in advance should be accounted for as what?
Definition
Current Liability
Term
includes cash and cash equivalents (maturities less than or equal to 3 months, e.g., T-Bills, money market funds) that are unrestricted, valued at current market value
Definition
Cash
Term
What is Cash valued at?
Definition
current market value
Term
trading and available for sale portfolios (including CD's), valued at current market value at the balance sheet date
Definition
Short Term Investments
Term
What are Short Term investments valued at?
Definition
current market value
Term
e.g., A/R, post-dated checks, rent receivable, etc.; valued at net realizable value (i.e. gross accounts receivables less allowance for uncollectible accounts)
Definition
Short Term Receivables
Term
What are Short Term Receivables valued at?
Definition
net realizable value
Term
e.g., merchandise, raw materials, work in process, finished goods; valued at lower of cost or market, must disclose cost flow assumption/method (e.g. LIFO, FIFO, weighted/moving average, dollar-value LIFO)
Definition
Inventories
Term
What are Inventories valued at?
Definition
lower of cost or market
Term
e.g., insurance, rent, supplies; generally, valued at historical cost
Definition
Short Term Prepaids
Term
What are Short Term Prepaids valued at?
Definition
historical cost
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