Principles of Finance · free preview
The Balance Sheet
The balance sheet is a snapshot of assets, liabilities, and owner's equity bound by the accounting equation, with current and noncurrent classifications ordered by liquidity, and it carries limitations because many valuable items are recorded at historical cost or omitted entirely.
1. The accounting equation
The accounting equation
2. The classified balance sheet
The classified balance sheet
3. What the snapshot reveals
What the snapshot reveals
4. The limitations
The limitations
5. The equation's meaning
A firm buys a 1,000 dollar machine by signing a note payable. What happens to the accounting equation?
6. Classifying an item
Which item belongs in current assets on a classified balance sheet?
7. Order of liquidity
Why are assets on the classified balance sheet listed in descending order of liquidity?
8. Working capital defined
What is working capital, and what does it measure?
9. Historical cost limitation
Why can book value of equity badly understate what a successful company is worth?
10. Snapshot versus flow
Which question can the balance sheet answer that the income statement cannot?
11. The fundamental identity
Complete the accounting equation in words: assets equal liabilities plus what? Answer with two words.
12. The current cushion
What two-word term names current assets minus current liabilities? Answer in lowercase.
13. The year-or-less test
What one-word term describes assets expected to convert to cash or be consumed within one year? Answer in lowercase.
14. The off-balance-sheet gap
What two-word term names the difference between a firm's market value and the book value of its equity, largely reflecting unrecorded intangibles? Answer with two words.
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