What Do the Terms Liquidity and Solvency Mean?

Chapter 6 (1 MC, 2E):

• Know how to prepare a balance sheet

• Statement of cash flow under the indirect method.

Chapter 8 (2 MC 2 E):

• Know how to record a comprehensive contract,

• know how to record under the percentage of completion method (Cumulative Percentage Completed= Total Costs Incurred to Date/ Estimated Total Cost of Project)

Chapter 9 (4 MC 2 E):

• know about the adjusting entry for aging method and percentage-of-sale method, for aging method we are directly calculating the ending balance, for percentage-of-sale method, unless we are told that the bad debt is certain percent of its ENDING account receivable, we are directly calculating the adjustment.

• Also, know how to record under both Gross method and Net method

Chapter 10 (3 MC 2 E)

• LIFO/FIFO/AVG Method,

• Calculate LCM (total/individual/grouping),

First calculate market price by comparing ceiling (SP-Disposal) and floor (SP-Disposal-NPM),

Second multiply that market value by units of each,

Third compare market to cost, get the lower one to record as cost

Record adjustment

• Gross Profit/Retail Method (cost-to-retail doesn’t take markdown into considerations)

1. What are the limitations of the balance sheet? What useful aspects are there of the balance sheet? Chapter 6

Useful aspects:

• Estimate rate of return

• Assess risks

• Summarize obligations, and resources to generate cash flows

Limitations:

• Base on historical values

• Base on estimations and judgement (NRV of Account Receivables)

• A lot not recorded: goodwill, human capitals

2. What do the terms Liquidity and Solvency mean? Chapter 6

• Liquidity: nearness to cash, how quickly can the company convert the asset into cash and pay liabilities with minimal loss. To pay maturing debts and investors. Liquidity is a company's ability to meet short-term obligations from short-term resources. It measures how quickly a company can convert assets into cash with minimal risk of loss in order to meet its current obligations.

• Solvency: long term ability to pay its obligations. Solvency is a company's ability to meet long-term obligations as they come due.

• Financial Flexibility: ability to respond to unexpected needs and opportunities

3. Know the basic current and long-term assets and liabilities and stockholder’s equity accounts which appear on a balance sheet and how to prepare a complete balance sheet in either the account or report formats when presented a set of accounts and related account $ balances –Chapter 6. Recall I am likely to give you more information than is needed to present a balance sheet in proper form.

Assets:

• Short-term investment,

o Other Assets: lands held for resale

Liability:

• Accrued Liabilities

o Pension obligations

Stockholder Equity:

• Comprehensive Income

• Non-controlling Interest

Account format: lists assets on the left side and liabilities and stockholds’equity on the right side

Report format: lists liabilities and stockholders’ equity directly below assets on the same page

4. Know the statement of cash flows well---know what is presented in the 3 sections of the cash flow statement under the indirect method of presentation-know what operating, investing and financings cash flows are and be able to recognize transactions under each category. When presented with a series of transactions and financial information be able to compute the net cash inflows and outflows for each of the 3 sections. Be able to recognize non cash transactions. Be able