Question

In: Finance

1. The balance sheet consists of assets and liabilities and equity. With a focus on liabilities,...

1. The balance sheet consists of assets and liabilities and equity. With a focus on liabilities, discuss the connectedness of these three components.

2. Discuss the components needed to determine the present value of a noncurrent liability.

3. Discuss the relationship between the income statement and the shareholders' equity section of the balance sheet.

4. Discuss the purpose of other comprehensive income and accumulated other comprehensive income.

5. Compare and contrast book value per share and market capitalization.

6. Evaluate the expected profitability and growth of a company with a price-tobook ratio of 1.4.

7. Which would you expect to find more useful financial statements for evaluating management performance: financial statements based on fair value or historic cost? Why?

Expert Solution

Answer 1. As per Accounting equation Assets= Liabilities+ Equity.That means to start a Business you have purchase some Assets ,to produce some Product to sell in the market to earn Income and that Asset is financed by your Capital ( Equity) , if there is some shortfall in equity that shortfall need to meet by liability. Therefore three items are interrelated to each other. According to the size of Assets your Liability and Equity amount will be decided.

2. Non Current liabilities means Long Term Debt Instrument like Bonds and Debenture and Term Loan from Bank of Financial Institutions. Cost of capital or Discounting factor is needed to find out the Net Present value of a Long term liability.

3. The Net Income derived from Income Statement is Revenue less expenses , taxes , preference dividend but before paying Common Dividend , goes to Statement of Share Holders Equity which is available to Equity Share Holders . So if the net income increase Statement of Share Holder equity will increase before paying up Common Equity Dividend. There are a direct relationship between the two.

4.Certain income items are excluded from the calculation of net Income and instead included in comprehensive income. Following items are major items of Other Comprehensive Income ( OCI)

a.The effective portion of gain or loss on hedging instrument in cash flow hedge.

b.Unrealized holding gains and losses due to changes in fair value of available for sale securities.

Translation gains and losses for financial statement of foreign operations

d. certain amount associated with accounting for defined benefit post retirement plans.

5. Book Value per Share Means Equity Share Value divided by Number of Equity Share where Market Capitalizations means Number of Equity Shares multiplied by Market Value per share.

6.The Price to Book Ratio of 1.4 Means the Investors are Currently paying $1.40 foe each $1.00of Book value of the companies share. The stocks of firms that are expected to perform well - improve profit. increase their market share , grow profitability - typically sell at higher P/B ratio than the stock of firm with less attractive outlook.Simply stated firms expected to earn high return relative to their risk typically sell at higher P/B multiple.

7.Financial Statement based on Fair Value is more suitable for evaluating Management performance that Financial Statement based on Historical cost.

jeff jeffy answered 1 year ago

define balance sheet assets liabilities equity

define balance sheetassetsliabilitiesequity

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