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ACCT351 (ch.3)
SFP/BS and Statement of Cash Flows
| Question | Answer |
|---|---|
| what is the SFP/BS? | statement of financial position/balance sheet. shows a snapshot of a company's resources at a specific point in time |
| what is a company's liquidity ad solvency, and what do they combine to represent? | liquidity: ability to adapt to it's financial structure and resources to meet changing circumstances insolvency: when a company can't pay it's debts as they fall due (or when liabilities exceed assets) *both combine to represent "financial flexibility" |
| what is the SCF? | statement of cash flows. assesses movement of cash from three key activities. |
| what are the three key activities in the SCF? | operating, financing, and investing |
| what circumstances create a high risk of insolvency? | if debt is high, and cash balances are low |
| how should assets to be used for more than one year be referred to under IFRS and ASPE? | IFRS: non-current ASPE: long-term |
| what does faithfully representative mean? | statement is complete, neutral, and free from errors |
| how should material uncertainties about a company's ability to continue be treated (if it is a going concern)? | they should be disclosed |
| how should classes of similar items be disclosed? (types of inventory, items of PPE, etc) | they should be disclosed separately on the financial statements |
| what is the order of reporting for assets? | order of liquidity |
| what is the order of reporting for liabilities? | order of when they become due or payable |
| what additional information should be disclosed on the SFP/BS? | measurement basis, and due dates/interest rates for payables |
| what is a current asset? | assets to be realized within one year from reporting date |
| what are some examples of current assets? | cash, cash equivalents, AR, Inventories, prepaid expenses, supplies, short term investments, income taxes receivable, etc. |
| what is a non-current/long-term asset? | assets to be realized beyond one year from reporting date or operating cycle (longer of the two) |
| what are some examples of non-current/long-term assets? | long-term investments (strategic or non-strategic), joint-ventures, subsidiaries, investment property, biological assets, intangible assets, goodwill |
| what is a current liability? | obligations due within one year from the reporting date or reporting cycle (longer of the two) |
| what are some examples of current liabilities? | bank overdraft, bank indebtedness, AP, accrued liabilities, unearned revenue, taxes payable |
| what is a long-term/non-current liability? | obligations due beyond one year from reporting date or operating cycle (longer of the two) |
| what is equity? | a company's net assets (assets-liabilities) |
| what are some examples of equity? | share capital, contributed surplus, retained earnings, AOCI |
| what are some examples of valuation adjustments to asset accounts? | foreign exchange adjustments (cash), adjustments for fair values, adjustments to AR for AFDA, impairment, shrinkage, usage of supplies |
| what is non-controlling interest? | an item on the SFP/BS to express the portion of a subsidiary owned by third-party investors |
| what is an alternative option for ordering items in the SFP/BS under IFRS, but not ASPE? | order of reverse liquidity |
| when must the subsection "contributed capital" or "paid-in capital" exist? | if multiple types of shares are issued and/or if any contributed surplus exists |
| what should proper capital disclosures on the SFP/BS include pertaining to shares? | # of shares authorized, and # of shares issued/outstanding |
| how should changes in accounting estimates be applied? | prospectively |
| what does prospective application mean? | applied to current fiscal year if books haven't been closed, and for all years going forward |
| how should changes in accounting policy or errors/omission be applied? | retrospective adjustment with restatement |
| what does retrospective adjustment with resatement mean? | report as it had always been this way, and restate financial statements if they are comparative and include previous years data |
| what are the 2 conditions that allow a change in accounting policy? | 1. change in a primary source of GAAP 2. voluntary application by management to enhance relevance and reliability of information for IFRS (ASPE has some exceptions to relevance and reliability rule) |
| how is it referred to when a material future event could occur but can't be predicted with certainty | IFRS - Provision ASPE - Contingency |
| what is a provision? | a liability of uncertain timing or amount |
| what is a liability? | a preset obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources or economic benefits |
| what is a contingent liability? | a possible liability that will be confirmed (or not) by uncertain future events out of the control of the entity or... a present liability not recognized because i) payment to settle is improbable or ii) amount of liability can't be measured reliably |
| what is a contingent asset? | a possible asset whose existence will be confirmed by the occurrence (or non occurrence) of future events not wholly in control of the entity |
| how should contingent liabilities be reported | contingent liabilities should be disclosed in the financial statement notes |
| how should contingent assets be recorded? | contingent assets are not to be recorded until realized but can be included in the notes if it's probable that an inflow of economic benefit will occur |
| what is a subsequent event? | significant events that occur after the reporting date but pertain to the previous reporting period |
| how should subsequent events be reported? | if they occur before reporting date: included in financial statements if relating to operations post-reporting period: included in notes |
| what are the two methods for preparing the statement of cash flows: | direct and indirect method |
| how is the SCF prepared using the direct method? | reports cash flows from operating activities into categories like cash from customers, cash to suppliers, cash to employees |
| how is the SCF prepared using the indirect method? | reports cash flows from operating activities starting with net income/loss adjusted for any non-cash items |
| what method for SCF preparation is used in this course? | the indirect method |
| what is the 8-step process for preparing the SCF using the indirect method? | 1. headings 2. record net income/loss 3. adjust non-cash income statement items 4. current assets/liabilities changes 5. non-current asset acc. changes 6. non-current liabilities and equity acc. changes 7. subtotal and reconcile 8. disclosures |
| what equation can be used to help when preparing the SCF? | cash + other assets = liabilities + equity |
| what items fall under the realm of operating activities? | cash generated or used in normal operations of the company based on income statement and changes in short-term working capital |
| which items fall under the realm of investing activities? | cash generated or used related to non-current (long-term) assets |
| which items fall under the realm of financing activities? | cash generated or used related to non-current liabilities and equity financing |
| what is working capital? | current assets - current liabilities |
| what information is required to complete the SCF | 1. income statement (current-year only) 2. comparative balance sheet (current and prior year) |
| what is a useful tool for preparing the SCF? | using "T" accounts to determine cash transactions like assets purchased (cost and accumulated depreciation), notes, bonds, common/preferred shares, dividends (retained earnings, dividends payable) |
| what supplemental disclosures are required on the SCF? | cash paid for interest, cash paid for income taxes, any other non cash transactions affecting non-current assets, liabilities, and equity accounts |
| how should bank overdrafts or short-term bank indebtedness be treated in the financial statements? | they should be netted against cash, not included as a change in operating section (could result in cash being reported as negative) |
| what are some examples of cash equivalents? | short term investments (GIC's, term deposits, etc.) that are convertible to a readily known amount of cash within one year |
| how are cash equivalents treated on the financial statements? | they are combines with cash and presented as "cash and cash equivalents" |
| what is the current ratio and what is it used to assess? | current assets/current liabilities (assesses ability to pay short term debt) |
| what is the quick ratio (or acid-test ratio) and what is it used to assess? | (cash + marketable securities + net receivables)/current liabilities *assesses ability to pay short term debt using near cash assets |
| what is the AR turnover ratio and what is it used to assess? | net sales/average net AR (365/AR turnover assesses #days) *assesses how quickly AR is collected |
| what is the days sales uncollected ratio and what is it used to assess? | AR/net sales x 365 *avg # days sales uncollected |
| what is the inventory turnover ratio and what is it used to assess? | COGS/avg inventory (365/inventory turnover assesses #days) *assesses how quickly inventory is sold |
| what are 2 examples of liquidity ratios? | current ratio and quick ratio |
| what are 5 examples of activity ratios? | AR turnover, days sales uncollected, inventory turnover, days sales in inventory, asset turnover |
| what is the days sales in inventory ratio and what is it used to assess? | (ending inventory/COGS) x 365 *avg # days for inventory to convert to sales |
| what is the asset turnover ratio and what is it used to assess? | net sales/avg total assets *ability of assets to generate sales |
| what is the return on total assets ratio and what is it used to assess? | net income/avg total assets x 100% *overall profitability of assets |
| what is the return on common shareholders equity ratio and what is it used to assess? | (net income - preferred dividends/(avg common shareholders equity including retained earnings)) x 100% *overall profitability of common shareholders investment |
| what is the earnings per share ratio and what is it used to assess? | net income - preferred dividends/weighted avg # common shares outstanding *net income for each common share |
| what is the payout ratio and what is it used to assess? | cash dividends/net income x 100% *% of earnings distributed as dividends |
| what are 4 examples of profitability ratios? | return on total assets, return on common shareholders equity, earnings per share, payout ratio |
| what is the debt ratio and what is it used to assess? | total liabilities/total assets x 100% *% of assets provided by creditors |
| what is the equity ratio and what is it used to assess? | total equity/total assets x 100% *% of assets provided by investors |
| what is the cash debt coverage ratio and what is it used to assess? | (net cash from operating activities x 100%)/average total liabilities *ability to pay debt from net cash from operating activities |
| what is the book value per common share ratio and what is it used to assess? | common shareholders equity/# of common shares outstanding *amount per common share if company liquidated at report date |
| what are 4 examples of coverage ratios? | debt ratio, equity ratio, cash debt coverage ratio, book value per common share |
| what is free cash flow? | remaining cash flow from operating activities after deducting cash spent on capital expenditures |
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