Response to the following:
The balance sheet is essentially a listing of a company's assets, liabilities, and equity at a given date in time. In addition, it also provides an evaluation of the company's liquidity and financial flexibility and aids in assessing risk and predicting cash flows.
Current assets and current liabilities are extremely important to any business. As assets and liabilities with a short-term duration, they are used during the operating cycle of a business. Current assets are generally funded by short-term liabilities, such as accounts payable. Funding for current assets is vital to keep a company in good financial circumstances. As a result, cash flow is essential for a company's operations and is considered to be the source of internal financing within a business.
Provide a brief answer, in your own words, to these questions:
1) Could a company show a profit and still be short of cash? Please explain.
2) Most financial statement readers believe that property, plant and equipment, and intangible assets (most notably goodwill) are the most misstated assets on the balance sheet. Why?
3) Certain liabilities, such as contingencies, pose special challenges to the accountant. What guidance does GAAP provide to help answer these questions:
a. Should we record the liability on the books?
b. What is the amount of the liability that should be recorded?
c. When should we record the liability, if ever?