ACCT 621 Chapter 2 Flashcards
Classified balance sheet
A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.
Current assets
Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.
Current liabilities and examples
Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.
such as accounts payable, salaries and wages payable, notes payable, interest payable, income taxes payable and current maturities of long-term obligations—payments to be made within the next year on long-term obligations
Current ratio
A measure of liquidity computed as current assets divided by current liabilities.
Debt to assets ratio
A measure of solvency calculated as total liabilities (current and long-term) divided by total assets. It measures the percentage of total financing provided by creditors.
Solvency
The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.
Solvency ratios
Measures of the ability of the company to survive over a long period of time.
Earnings per share (EPS)
A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the weighted-average number of common shares outstanding during the year.
Free cash flow
Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.
Intangible assets
Assets that do not have physical substance.
Liquidity
The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.
Liquidity ratios
measure the short-term ability to pay maturing obligations and to meet unexpected needs for cash.
Long-term liabilities (long-term debt) and its examples
Obligations that a company expects to pay after one year.
such as: bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.
Operating cycle
The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.
Profitability ratios
Measures of the operating success of a company for a given period of time. such as earnings per share.
Property, plant, and equipment
Assets with relatively long useful lives that are currently used in operating the business.
Ratio
An expression of the mathematical relationship between one quantity and another.
Ratio analysis
A technique that expresses the relationship among selected items of financial statement data.
Working capital
one measure of liquidity that is the difference between the amounts of current assets and current liabilities.
Standard Balance sheet classification
Assets:
- Current assets
- Long-term investments
- Property, plant, and equipment
- Intangible assets
Liabilities and Stockholders’ Equity:
- Current liabilities
- Long-term liabilities
- Stockholders’ equity
Standard Balance sheet classification helps
help readers determine:
(1) whether the company has enough assets to pay its debts as they come due,
(2) the claims of short- and long-term creditors on the company’s total assets.
common tyoes of current assets
(1) cash
(2) investments (such as short-term securities)
(3) receivables (accounts receivable, notes
receivable, and interest receivable)
(4) inventories
(5) prepaid expenses
(insurance and supplies).
order of current assets
in the order in which they expect to convert them into cash.
some liabilities can be be either short term or long term
like notes payable
a company’s current assets are important in
assessing its short-term debt-paying ability.
Long-term investments are
often referred to simply as
investments.
Long-term investments generally include
(1) investments in stocks and bonds of other corporations that are held for more than one year
(2) long-term assets such as land or buildings that a company is not currently using in its operating activities
(3) long-term notes receivable.
Property, plant, and equipment is sometimes called
fixed assets or plant assets.
Depreciation
allocation of the cost of an asset to a number of years.
Companies do this by systematically assigning a portion of an asset’s cost as an expense each year (rather than expensing the full purchase price in the year of purchase).
The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation.
accumulated depreciation
the total amount of depreciation that the company has expensed thus far in the asset’s life.
sometimes intangible assets
are reported under a broader heading called
Other assets
intangible assets
assets that do not have physical substance and yet often are very valuable.
such as goodwill, patents, copyrights and trademarks or trade names
Common stock is sometimes
called
capital stock.
Earnings per share helps users
compare a company’s performance with that of previous years. is useful for determining the investment return.
how to calculate earnings per share (basic apprcoah)
divide earnings available to common stockholders by weighted-average common shares outstanding during the year
earnings available to common stockholders
It is an earnings amount calculated as net income less dividends paid on another type of stock, called preferred stock (Net income − Preferred
dividends).
comparisons of earnings per share across companies are
not meaningful because of the wide variations in the numbers of shares of outstanding stock among companies.
disadvantage of current ratio
it does not take into account the composition of the current assets. For example, a satisfactory current ratio does not disclose whether a portion of the current assets is tied up in slow-moving inventory
why is Debt financing more risky than equity fi nancing
because debt must be repaid at specifi c points in time, whether the company is performing well or not. Thus, the higher the percentage of debt financing, the riskier the company.
The higher the percentage of total liabilities (debt) to total assets means
the greater the risk that the company may be unable to pay its debts as they come due.
The debt to assets ratio helps
users determine if a company can meet its long-term obligations.
a high free cash flow amount means
higher solvency
free cash flow helps
users determine the amount of cash a company generated to expand operations, pay off debts, or
increase dividends.
Long-Term Investments include
- Investments in stocks and bonds of other corporations that are held for more than one year.
- Long-term assets such as land or buildings that a company is not currently using in its operating activities.
- Long-term notes receivable.
debt to equity ratio
evaluates solvency using a ratio of liabilities divided by stockholders’ equity. The higher this “debt to equity” ratio, the lower is a company’s solvency.
