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1. What is the usefulness of the equity section of the balance sheet? 2. Discuss the...

1. What is the usefulness of the equity section of the balance sheet?

2. Discuss the various measurement techniques used on the balance sheet to disclose assets and liabilities.

3. Discuss the goals to be accomplished by the presentation of cash flow information to investors?

Solutions

Expert Solution

Answer (1): Shareholder's Equity is the net worth of the shareholders. This reflect the percentage of common and preferred shareholders in the company. It also show the Retained earnings, Retained earnings is the amount of profit that is not distributed to shareholders but it is retained by the company for expansion purpose. Equity section proves the accounting equation, i.e. Assets - Liabilities should be equal to stockholder's equity. From the Equity section, investors analyze the debt-equity ratio. High number of equity indicates that company is more profitable and attractive.

Answer (2): Various measurement techniques used on the balance sheet to disclose assets and liabilities:

  1. Cash is measured by the current value.
  2. Marketable securities are measured by the Fair market value.
  3. Account Receivables are measured by the Estimated future value.
  4. Inventory is measured by the past as well as current value.
  5. Property and other fixed assets are measured by the past value after deducting the depreciation.

Answer (c): Cash flow statement shows the inflow and outflow of cash for a certain accounting period. It also shows the net cash from "Operating, Investing and Financing activities. This statement shows the adequate cash position in the company. Company should not have negative cash. Investors take the investment decision by analyzing financial statements including cash flow. One company's cash flows statement can be compared with other company's cash flow in the same industry. Investors can compare the various companies of the same industry.

ekkarill92 answered 1 year ago
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