Accounting CH 8
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What is a Balance Sheet?
A financial statement that summarises the types and monetary amounts of a business' assets, liabilities and owners equity on a given specific date.
Why is the balance sheet important?
It provides information that helps internal and external users evaluate a business' ability to achieve its primary goals of earning a satisfactory profit and remaining solvent.
(It provides a snapshot of a business' financial position).
What time frame does a balance sheet present a business financial position for?
A balance sheet presents a business' financial position on a specific date, allowing users to 'take stock' of a business' assets, liabilities and owners equity on that date.
State the accounting equation in broad definition and in accounting terms?
Economic resources = Claims on Economic Resources.
Assets = Liabilities + Owner's Equity.
Why is a balance sheet called a balance sheet?
Because the Assets of a business must "balance" with the Liabilities + Owners equity.
What is a balance sheet also know as?
Statement of financial position.
When is a balance sheet normally prepared?
At the end of each accounting period/operating cycle (but can be prepared at any other time to give a "snapshot" of the business financial position).
What are net assets?
Assets minus liabilities.
What is a classified balance sheet?
A balance sheet shows subtotals for assets, liabilities and owners equity in related groupings.
- (makes it easier for the user to read).
- (e.g all current assets, such as cash and accounts receivable, are grouped together).
What are assets?
Are economic resources that will provide future benefits to a business.
detail some examples of physical and non-physical assets.
- Land, buildings, supplies to be used, inventory.
- Non Physical:
- Accounts receivable, patents, intellectual property.
What are current assets?
Cash and assets that the business expects to convert into cash, sell or use up withing one year (or one operating cycle).
What are some examples of current assets?
- Marketable Securities.
- Prepaid items.
What order are current assets presented in?
In order of their liquidity (how quickly they can be converted into cash).
What is liquidity?
Measure of how quickly an asset can be converted into cash or be paid.
What are assets that are not classified as current assets called?
What are some examples of non-current assets?
- Long term investments.
- Property, Plant and Equipment.
- Intangible Assets.
- Other assets not classified as non-current assets.
What assets does Property and Equipment include?
All physical, long-term assets used in the operations of a business.
(assets that have a physical existence are listed in this category).
What can property and plant also be referred to?
- Fixed Assets
- Operating Assets.
What are some examples of Property and Equipment?
Land, buildings, equipment, furniture.
What is the book value of an asset?
The original cost minus the related accumulated depreciation.
What is the accumulated depreciation of an asset?
The total amount of depreciation expense recorded over the life of an asset to date.
(The portion of an asset's cost that has been "used up" to earn revenue to date).
What are intangibles?
- AKA intangible assets.
- Assets that do not have a tangible or physical substance (nonphysical) but entitle the owner to future economic benefits.
What are some examples of tangibles?
- Intellectual property:
- Management rights.
- Purchased goodwill.
- Brand recognition.
What value is land listed on the balance sheet as?
Its original cost.
What are liabilities?
The economic obligations of a business.
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