Question

Brian has a loan on a round baler. List all the places on the balance sheet where we would see information related to this loan (give the line name and section of the balance sheet each would be on)?

List two effects/impacts of completely writing off (depreciating) a tractor the year it is purchased?

Dustin purchased a new grain harvester using money from his operating loan. How would this affect his liquidity? What might it do to working capital and his current ratio?

True or False If the Debt/Equity ratio increases, the Debt/Asset ratio will also increase. Why or Why not?

Tallen made a mistake on his balance sheet and listed the value of market livestock as $20,000 higher than it should be. How does this error affect his measures of liquidity and solvency?

What is the difference between current and noncurrent?

True or False Prepaid Expenses are a non-Current Asset.

What is positive use of financial leverage? How would you determine if a firm has a positive use of financial leverage?

How are current assets valued on both cost and market based balance sheets? Why?

When is income recognized in agriculture? How does this differ from GAAP?

Answer 1

1. Brain's loan will be seen in many places in the balance sheet.

• The asset purchased or the round baler will be shown on the asset side of the balance sheet.
• The liability part (credit) such as notes payable will be shown on the liability side of the balance sheet.

2)The writing off of an asset in the year of purchase is not advisable because the loss of writing off will pertain to that particular year and apportionment of loss is not possible .Also deductions relating to depreciation cannot be claimed in the following years.The one time write off increases the debit balance in p&l account eventhough there is no actual cashflow.

3)Here the harvester is purchased using operating loan ,that means the asset (fixed) and the current liability also increase . THe value of current asset is not increased where as the current liability increased.Current ratio shows the short term financial soundness of the firm .A lower ratio signifies the difficulty in meeting the current obligations .Liquidity will also be decreased. Current ratio will be lower.

4)yes , higher the debt to equity ratio higher the protection enjoyed by the lenders.Higher the Assets to debt ratio higher the assets for covering the debts .Lenders enjoy high security in both cases.

5)Over valuing livestock by $20000 means current assets ,total assets and owners equity are all $20000 higher than they should be . Liabilities are not affected. There fore all liquidity and solvency measures will appear to be better than they actually are.

6)CURRENT:An asset or liability is classified as current if it is receivable or payable within 12 months , that is the value exhaustes in one year is termed to be current

NON -CURRENT: Where the amount whether receivable or payable pertains to more than one year( more than 12 months) it is said to be non- current.

7)False ,expences paid in advance are current assets as they are really short term.

8)A positive financial leverage means that assets acquired with funds provided by creditors generated a rate of return which is higher than the interest to be paid for the funds .

9)The sale of agricultural produce is clearly the revenue as defined by IAS 18.