Understanding Balance Sheet and Statement of Cash Flows

School: Arizona State University - Course: ACC 340 - Subject: Accounting

CHAPTER 4 Balance Sheet and Statement of Cash Flows BALANCE SHEET 1.Uses Provides information about the entity's assets, liabilities, and equities. The balance sheet is used to help evaluate a firm's liquidity, solvency, and financial flexibility. __liquidity___- related to the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid _solvency_- refers to the ability of an enterprise to pay its debts as they mature Capital Structure- what percentage of assets have been financed by equity and debt Financial Flexibility- firm's ability to take effective action to alter the amounts and timing of cash flows so that it can respond to unexpected needs and opportunities The Balance Sheet aids in assessing risk(i.e. look at relationships that exist between how much debt a company has on their books vs. how much equity and assets) and predicting future cash flows(i.e. evaluate the future revenue generating ability of the assets). 2.Limitations Current market values are not reflected for most assets/liabilities because of the Going Concern Assumption. They are instead reported at historical cost. Estimates and judgments are needed: To determine the collectability of receivables To assess the salability of inventory To determine the useful lives of long-term assets Many items of financial value to the business are omitted: Assets such as the value of a company's human resources and research and development are not reported Some liabilities or commitments such as leases and certain contractual arrangements are "off balance sheet" ELEMENTS OF A CLASSIFIED BALANCE SHEET 1._assets_- Probable future economic benefitsowned or controlled by the entity as a result of past transactions or events. 2._liability__- Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. 3.__equity__- Residual interest in the assets of an entity that remains after deducting its liabilities. 1 Spring 2023 - © Erin Jordan, Ph.D., Arizona State UniversityACC 340 - Chapter 4 - Page

Sub-Classifications of Assets Current Assets Resources which are expected to be turned into cash, sold, or consumed within the next yearor operating cycle, whichever is _longer__. Presented in the order of liquidity_: 1)Cash & Cash Equivalents Includes cash on hand and in banks available for day-to-day operations. Excludes any cash restrictedfor specific purposes. Cash equivalents are short-term (3 months or less maturity) investments 2)Short-term investments Trading securities oDebt securities or Equity securities oValued at Market (a.k.a fair value) oAlways short term oUnrealized Holding L/G for TS reported on NI. Available-for-Sale (AFS) oDebt securities or Equity securities oValued at Market (a.k.a fair value) oShort or long term oUnrealized Holding L/G for AFS reported in OCI. Held-to-Maturity (HTM) oDebt securities only oValued at amortized cost oUsually long term