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Ch. 4 ACCT 300 WKU

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Ch. 4 ACCT 300 WKU

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Ch. 4 ACCT 300 WKU

balance sheet (AKA statement of financial position) - answer-reports the assets, liabilities, and stockholders' equity of a business enterprise at a specific date (1) provides information about the nature and amounts of investments in enterprise resources, obligations to creditors, and the owners'...

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ch 4 acct 300 wku

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Course Ch. 4 ACCT 300 WKU

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CH. 4 ACCT 300 WKU EXAM

balance sheet (AKA statement of financial position) - answer-reports the assets,
liabilities, and stockholders' equity of a business enterprise at a specific date
(1) provides information about the nature and amounts of investments in enterprise
resources, obligations to creditors, and the owners' equity in net resources
(2) helps in predicting the amounts, timing, and uncertainty of future cash flows

analysts use the balance sheet to assess a company's... - answer-liquidity, solvency, and
financial flexibility

liquidity - answer-describes 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, in general
the greater a company's liquidity the lower its risk of failure
***refers to the "nearness to cash" of assets and liabilities

solvency - answer-refers to the ability of a company to pay its debts as they mature,
companies with higher debt are relatively more risky because they will need more of
their assets to meet their fixed obligations (interest and principal payments)

liquidity and solvency affect a company's... - answer-financial flexibility

financial flexibility - answer-measures the ability of an enterprise to take effective
actions to alter the amounts and timing of cash flows so it can respond to unexpected
needs and opportunities, the greater a company's financial flexibility the lower its risk of
failure

limitations of the balance sheet - answer-(1) most assets and liabilities are reported at
historical cost
(2) companies use judgments and estimates to determine many of the items reported in
the balance sheet
(3) the balance sheet necessarily omits many items that are of financial value but that a
company cannot record objectively

balance sheet accounts are... - answer-classified
this means that balance sheets group together similar items to arrive at significant
subtotals

companies should report these balance sheet accounts separately... - answer-(1) assets
that differ in their type or expected function in the company's central operations or other
activities (ex: merchandise inventories reported differently than PPE)
(2) assets and liabilities with different implications for the company's financial flexibility
(ex: asset manufacturing equipment reported differently than asset held for investment)
(3) assets and liabilities with different general liquidity characteristics (ex: cash should
be reported differently than inventories)

the three general classes of items included in the balance sheet are... - answer-assets,
liabilities, and equity

, assets - answer-probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events

liabilities - answer-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

equity - answer-residual interest in the assets of an entity that remains after deducting
its liabilities, in a business enterprise, the equity is the ownership interest

asset classifications - answer-(1) current assets
(2) long-term investments
(3) property, plant, and equipment
(4) right-of-use assets
(5) intangible assets
(6) other assets

liabilities and owners' equity classifications - answer-(1) current liabilities
(2) long-term debt
(3) owners' (stockholders') equity

current assets - answer-are cash and other assets a company expects to convert into
cash, sell, or consume either in one year or in the operating cycle, whichever is longer

the operating cycle... - answer-is the average time between when a company acquires
materials and supplies and when it receives cash for sales of the product (for which is
acquired the materials and supplies)

the cycle operates from... - answer-cash through inventory, production, receivables, and
back to cash

merchandising company operating cycle - answer-cash, merchandise inventory, sales,
accounts receivable, cash

manufacturing company operating cycle - answer-cash, raw materials, work in process,
finished goods, sales, accounts receivable, cash

current assets are presented in the balance sheet in order of... - answer-liquidity

items included in "cash and cash equivalents" - answer-- cash = currency and demand
deposits at a financial institution (examples of demand deposits are checking, savings,
and money market accounts)
- cash equivalents = short-term, highly liquid investments that will mature within three
months or less (example is a certificate of deposit (CD), if a company invests funds into a
three-month CD, those funds would be included in the cash and cash equivalents line
item on the balance sheet)
***^^^reported at approximate fair value on the balance sheet

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Ch. 4 ACCT 300 WKU

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