Ch 2 Flashcards
What does the balance sheet tell?
What obligations will be due in the near future
And what assets will satisfy them
Main objective of financial reporting?
Provide useful info to those making financial decisions
What does the income statement tell?
Revenues and expenses for thine period
What does the statement of cash flows tell?
Where cash came from and how it
Was used for the period
What’s the importance of notes of financial statements?
Provide essential details on company’s accounting policies
And key factors affecting financial condition and performance
Decision makers that use financial reporting?
Investors, creditors, insiders, government agencies
Understandability
Quality of accounting info that makes it comprehensible
For those willing to spend the necessary time
Relevance
Capacity of info to make a difference in a decision
Predictive value
Ex. If a company with good earnings has just been named in a lawsuit, are they worth lending to?
Confirming value
When something definite happens
Ex. You invest in a company because they will increase their exposure to Asian markets, you then learn the company has acquired a Chinese subsidiary, making your investment good
Faithful representation
Quality of info that makes it complete, neutral and free from error
Comparability
For accounting info, the quality that allows
a user To analyze 2 or more companies and
look for similarities and differences
Depreciation
Process of allocating cost of long term tangible
Asset over its useful life
Consistency
For accounting info, the quality that allows
A user to compare two or more accounting
Periods for a single company
Materiality
Magnitude of accounting info omission
Or misstatement that will affect judgement
Of someone relying on the info
Conservatism
The practice of using the least optimistic estimate
When two estimates of amounts are equally likely
Used for uncertainty on how to account for item or transaction
Classified balance sheet
Separates assets into current and non current
Operating cycle,( determining the operating cycle is a key skill to understanding any business)
Period of time between the purchase of inventory
And the collection of any receivable from sale of inventory
Current asset
Asset that is expected to be realized in cash or sold
Or consumed during the operating cycle or within one year if cycle shorter than one year
Non current assets
Long term assets, property, plant, equipment
Intangible assets
Provide benefits for the long term,
They lack physical substance
Ex. Trademarks, copyrights, franchise rights, patents and goodwill
Current liability
Obligation that will be satisfied in the next operating cycle or one year if operating cycles shorter
Long term liability
Liability that won’t be satisfied within a year
Stockholders equity
Contributed capital and earned capital, retained earnings
Liquidity.
Ability of company to pay its debts as they come due
Working capital
Working capital = current assets - current liabilities
May signal inability to pay creditors on a timely basis
Or the company isn’t investing its funds productively as it has too many resources
Current ratio
Current ration = current assets/current liabilities
Allows for comparison of liquidity of different companies of different sizes over time
The higher the ratio, the more liquid the company
2:1 is a good rule of thumb
2 measures of liquidity
Working capital, current ratio
Single step income statement
Income statement in which all expenses are added together and subtracted from revenues
Multi step income statement
Income statement that shows classifications of revenues
And expense, as well as important subtotals
Sales, cost of goods sold, gross profit, operating expenses, income form operations, other revenues and expenses, net income
Gross profit
Gross profit = sales - cost of goods sold
4 important subtotals on multi step income statement
Gross profit
Income from operations
Income before taxes
Income tax expense
Profit margin
Profit margin = net income/sales
Good indicator for profitability
What does it mean if a profit margin is high?
Means the company is generating revenue while controlling its costs
It is important to compare a company’s profit margin with 2 things ?
Prior years and industry norms
What link does the statement of retained earnings provide? What does it show?
Link btw income statement and balance sheet
Explains changes in retained earnings during period
Statement of cash flows
Summarizes company’s operations, investing and financing activities for the period
Operating activities
Concern purchase and sale of product
Investment activities
Involve acquisition and sale of long term or non current assets such as long term investments; property, plant, equipment and intangible assets
Financing activities
Result for issuance and repayment, or retirement, long term liabilities, capital stock and payment of dividends
Auditor’s report AKA Report of independent accountants
Opinion rendered by public accounting firm concerning
The fairness of presentation of financial statements
