Complete/answer the following questions. 1.List and describe the major classific

Question

Complete/answer the following questions.

1.List and describe the major classifications of the balance sheet.

2.Explain each of the following limitations of the balance sheet.

a.Many items that are of financial value are omitted.

b.Judgments and estimates are used.

c.Current fair value is not reported.

3.Define and explain how the balance sheet is useful for analyzing all of the following

a.liquidity.

b.solvency.

c.financial flexibility.

4.Identify and describe the major sections of a statement of cash flows.

5.The basis for classifying assets as current or noncurrent is conversion to cash within the operating cycle or one year, whichever is longer. Explain what this means and provide an example.

Explain why the following statement (while different) also accurately defines current versus noncurrent assets.

The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in inventory back into cash, or 12 months, whichever is longer.

6.Explain how each of the following describes long-term liabilities:

a.obligations not expected to be liquidated within the operating cycle.

b.obligations payable at some date beyond the operating cycle.

c.deferred income taxes and most lease obligations.

7.The stockholders' equity section is usually divided into what three parts? List and define each of the three parts.

Explanation / Answer

1. Major Classification of Balance Sheet

The balance sheet broadly classified into 3 major parts - Assets, Liabilities, and Equity.

The Assets side of the balance sheet again classified into as many as five separate Parts:

Current assets; Long-term investments; Property, plant and equipment; Intangible assets; and Other assets.

Liabilities

The liability side is further classified into only 2 parts –

Equity

The financial statement presentation for equity depends on the nature of the business organization for which it is prepared. Businesses generally may be organized as sole proprietorships, partnerships, or corporations. The illustrations in this book generally assume that the business is incorporated. Therefore, the equity section consists of:

2. Limitation of Balance Sheet

a. Many items that are of financial value are omitted

The balance sheet omits many items that are of financial value to the business but cannot be recorded objectively. Like employees of the business, future demand of current product of the company as such.

b. Judgments and estimates are used

While preparation of Balance Sheet, business must use judgments and estimates. Such as the collectability of receivables and the useful life of long-term tangible and intangible assets. Any error or mistake in such judgments are leads to inappropriate financials.

c. Current fair value is not reported

The financials are prepared on historical costs. There are certain items which have change in value due to various reason. Such change may be favorable or unfavorable, but the could not be consider while preparing financials. Like reduction in share price, or increase in land value etc.

3. Usefulness of Balance Sheet while –

a. Liquidity

Liquidity refers to an enterprise's ability to pay short-term obligations; the term also refers to a company's capability to sell assets quickly to raise cash. On the basis of Balance sheet we can calculate liquidity as difference between current assets and current liabilities. We can understand the operating cycle of company and confirm the position of liquidity by confirming the values of the assets.

b. Solvency

A solvent company is one that owns more than it owes. With the help of Balance Sheet we can calculate net values of financial assets, i.e. assets less liabilities (other than equity ) which should be more or equal to Equity and Retained earnings.

c. Financial flexibility

The accounting term financial flexibility is used to describe a company's ability to react to unexpected expenses and investment opportunities. Balance sheet can provide the liquidity of company or ability to borrow funds or issue stock etc.

4. Identify and describe the major sections of a statement of cash flows –

There are 3 major sections of cash flows wise Operating Activity, Investing Activity, Financing Activity, etc.

a. Operating Activity

This includes all activities from primary business of the company. The net cash flow represents the position of core activity and its impact on business. Negative cash flow represents loss or investment of short term fund for long term purpose.

b. Investing Activity

This includes all activities in which the company has expended cash with the expectation of generating an additional income or profit for the company. It includes purchases of assets, sale of asset etc.

c. Financing Activity

This includes the activities related to procurements of funds or repayment of funds of the business. The inflow from this activity represents business is obtaining funds from the investors in term of debt or equity, as the case may be.

Dear student as per chegg policy , we can provide only 4 questions answer at a time. Hence you are requested to ask the question 5,6 and 7 separately.

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