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Chapter 5

ACCO 310 NOTES_Chapter 5.docx

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Concordia University
ACCO 310

ACCO 310 NotesChapter 5The Balance SheetAUsefulness and Purpose of the Balance Sheet11Provides information about entitys assets liabilities and equity As the definition of assets and liabilities has undergone significant change be sure that students who have likely taken previous accounting courses understand the new definition and why it is appropriate 2Evaluates liquidity and financial flexibility 3Aids in assessing risk and predicting future cash flowsBLimitations of the Balance Sheet1Current value is not always reflected2Estimates and judgements must be used examplesaIn determining the collectability of receivablesbIn assessing the saleability of inventorycIn determining the useful lives of longterm assets3Omits many items that are of financial value to the businessaAssets such as the value of a companys human resources and research and developments are not reportedbSome liabilities and commitments such as leases and certain contractual Arrangements are reported in an off balance sheet manner4The amounts shown on the balance sheet are the result of the policy choices made5Numbers are often consolidated and this can hide some important detail6Some amounts simply do not show up on the balance sheeteg some leases or assets liabilities that cannot be estimatedsuch as internally generated knowhow intangiblesif these do not meet the definition of assets or liabilities as per the Conceptual Framework they cannot be recordedCClassifications in the Balance SheetReview definitions in text iAssetsiiLiabilitiesiiiEquityMajor Subclassifications in the Balance SheetThe IASB and FASB are working to establish consistent principles for aggregating information and to identify the totals and subtotals that should be reported2
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