The Balance Sheet and Financial Disclosures Essay

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Chapter 3 The Balance Sheet and Financial Disclosures

Questions for Review of Key Topics

Question 3-1

The purpose of the balance sheet, also known as the statement of financial position, is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement that reports events occurring during a period of time, the balance sheet is a statement that presents an organized array of assets, liabilities, and shareholders’ equity at a point in time. It is a freeze frame or snapshot picture of financial position at the end of a particular day marking the end of an accounting period.

Question 3-2

The balance sheet does not portray the
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Retained earnings equals net income less dividends paid to shareholders from the inception of the corporation.

Question 3-11

Disclosure notes provide additional detail concerning specific financial statement items. Included are such data as the market values of financial instruments and off-balance-sheet risk associated with financial instruments and details of pension plans, leases, debt, and assets. Common to all companies’ disclosures are certain specific notes such as a summary of significant accounting policies, descriptions of subsequent events, and related third-party transactions. However, many notes are designed to fit the disclosure needs of the particular reporting company. In fact, any explanation that helps investors and creditors make decisions should be included.

Answers to Questions (continued)

Question 3-12

The disclosure of the company’s significant accounting policies is extremely important to external users in terms of their ability to compare financial information across companies. It is critical to a financial analyst involved in assessing future cash flows of two construction companies to know that one company uses the percentage-of-completion method in recognizing gross profit, while the other company uses the completed contract method.

Question 3-13

A subsequent event is an event that occurs after the date of the financial statements
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