Video: Balance Sheet / Statement of Financial Position Objectives

In this lesson, Nick Palazzolo, CPA, breaks down the essentials of constructing a classified balance sheet, starting from a trial balance with supporting documents. He explains how items on the balance sheet are grouped into categories such as cash, investments, and fixed assets. The lesson also demystifies the process of identifying and correcting errors found within the balance sheet, whether from input mistakes or classification issues. Through practical examples, Nick demonstrates how to reconcile balance sheet amounts with supporting evidence like bank reconciliations and amortization schedules for bond interest. Furthermore, Nick sheds light on the significance of analyzing fluctuations in financial ratios from comparative balance sheets, useful in assessing covenant compliance and a company’s financial health. Get ready to deepen your understanding of the balance sheet and enhance your analytical skills in assessing financial positions.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Let's talk about some learning objectives here. So we're going to prepare a classified balance sheet from a trial balance and supporting documentation. Classified balance sheets will see it breaks everything out into classes. That's all it is. It specifies we have cash and cash equivalents, investments, fixed assets, whatever it may be.

And I'm sure plenty of you are familiar from work, whether it's at a firm or a company, that you have taken a trial balance, turned it into a balance sheet and prepared it for maybe an audit, prepared it, maybe for presentation. That's going to be one area that you might be familiar with from the workplace. Next, adjust the balance sheet to correct identified errors. That's pretty broad. There might be errors in input, there might be errors in classification.

We'll see a couple of different examples such as that. Next, detect, investigate, and correct discrepancies while agreeing the balance sheet amounts to supporting documentation. Pretty straightforward. We are going to make sure the balance sheet ties to supporting documentation, such as the accounts receivable aging schedule, the bank wreck, the bank statements, the amortization schedule for bond interest, whatever it may be. Lastly, calculate fluctuations in ratios and interpret the results while reviewing comparative balance sheets.

Something here again, you might have seen. So, for example, if you get a bank loan, you have bank covenants, meaning you need to maintain a certain ratio, certain Quick ratio, certain asset test ratio, certain debt to equity ratio that the bank wants to see to mitigate its own risk, to know that you are in a healthy financial position. You're going to want to learn, memorize and practice these formulas to prepare for. Very likely there might be a Sim that has a bank covenant that you have to

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Financial Statements: For-profit Entities

Module: 5 Concepts, 58 Videos

Balance Sheet / Statement of Financial Position Overview

1:46

Balance Sheet / Statement of Financial Position Objectives

2:06

The Accounting Equation

4:21

Classified Balance Sheet