Quiz 2

1. What are:
a. The usefulness of Balance Sheet
 By providing information on assets, liabilities, and equity, the statement of financial
position provides a basis for computing rates of return and evaluating the capital
structure of the enterprise.
 To assess a company's risk and future cash flows. In this regard, analysts use the
statement of financial position to assess a company's:
o Liquidity: 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
o Solvency refers to the ability of a company to pay its debts as they mature.
o Liquidity and solvency affect a company's financial flexibility, which measures the
ability of a company to take effective actions to alter the amounts and timing of cash
flows so it can respond to unexpected needs and opportunities.
b. The limitation of Balance Sheet
 Most assets and liabilities are reported at historical cost. As a result, the information
provided in the statement of financial position is often criticized for not reporting a more
relevant fair value.
 Companies use judgments and estimates to determine many of the items reported in the
statement of financial position
 The statement of financial position necessarily omits many items that are of financial
value but that a company cannot record objectively.
2. The differences between:
a. Current assets and noncurrent assets:
 Current assets: 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.
 Noncurrent assets: are those not meeting the definition of current assets.
b. Current liabilities and noncurrent liabilities:
 Current liabilities: obligations that a company generally expects to settle in its normal
operating cycle or one year, whichever is longer.
 Noncurrent liabilities: obligations that a company does not reasonably expect to liquidate
within the longer of one year or the normal operating cycle
3. 3 activities in Cash Flow:
a. Operating activities involve the cash effects of transactions that enter into the
determination of net income.
b. Investing activities include making and collecting loans and acquiring and disposing of
investments (both debt and equity) and property, plant, and equipment.
c. Financing activities involve liability and equity items. They include (a) obtaining resources
from owners and providing them with a return on their investment, and (b) borrowing
money from creditors and repaying the amounts borrowed.
4. Sources of information used in the preparation of Cash Flow:
a. comparative statements of financial position
b. the current income statement
c. selected transaction data.