Ch 2.1- understanding financial statements Flashcards
Liquidity
companys ability to repay short term loans
solvency
companys abilitiy to durvive over time
Profitabilitiy
operating success in a time period
2 ratios to consider before buying a share
1) EPS: earnings per share (how much income will u recieve for a share)
2) P-E ratio: how many times higher is the common share price compared to the EPS
CLASSIFIED statement of FP
simplified fp (groups similar assets/liabilities together)
Assets
the resources that a company owns or controls that will provide future economic benefits.
Current Assets
assets whose value will be realized <1 year
Non current assets
assets whose value will be realized >1 year
How do companies list assets on FP
most liquid-least liquid
trading investments
current asset/ this is an investment in debt or equity secruity that will be cash <1 year
A/R
Accounts receivable are amounts owed to a company by customers who purchased products or services on credit (on account).
N/R
Notes receivable are amounts owed to a company by customers or others that normally bear interest (which distinguishes them from accounts receivable).
Inventory
Inventory consists of goods held for sale to customers or that will be used to produce goods that will be sold to customers.
Supplies
Supplies include consumable items like office supplies and cleaning supplies that are not for sale.q
Prepaid expenses
Prepaid expenses represent the cost of expenses like rent and insurance paid in advance of use. They are current assets because they reflect benefits a company will receive during the year such as office space and insurance coverage.
Long term investments-
debt
Debt investments: Multi-year investments in debt securities (for example, loans, notes, bonds, or mortgages) that management intends to hold to earn interest
INVESTMNET IN OTHER COMPANIES
Long term investments-
equity
Equity investments: Equity securities (for example, shares) of other companies that management plans to hold for many years to generate investment income or for strategic reasons.
What is depreciation
it is the process of long term goods losing value over time
How is depreciation reported on the FP
The carrying amount is reported on the FP, but you show the whole thing like this
Land (doesnt depreciate) 40000
Buildings 75000
Less: Depreciation 15000 60000
Equipment 1000
Less: Depreciaiton 500 500
Total Property, plant, equip 100500
contra asset account
ACCUMULATEDD DEPRECIIATON
An account that is offset against (reduces) another related asset account on the statement of financial position.
HOW TO find carrying amount
cost- accumulated depreciation = carrying amount
Ammortization
depreciaiton of intangible assets (good will, copyrishts)
IFRS AND ASPE on depreciaiton and ammortization
aspe: use ammortization for both
ifrs: ammortization= intaginble
depreciation= tangible
Goodwill
- Only arises from the result of a merger or acquisiton of another company; If during the purchase of a company, if you pay ABOVE the market value of the company you are acquiring, the DIFFERENCE is called goodwill (This is positive synergies); THIS IS NEVER AMMORTIZED, but you can test this for impairment.
GOOD WILL BETCH
- Only arises from the result of a merger or acquisiton of another company
Liabilities
t obligations that result from past transactions and will result in the transfer of an economic resource. A
THINGS THE COMPANY OWES
Current liabilities
Current liabilities are obligations that companies expect to pay or settle within one year of the company’s financial statement date or within its operating cycle, whichever is longer.
Non current liabilities
liabilities due in >1 year
Current liabilities section order
BADNC
1) bank indebtedness
2) ap
3) deferred revnue
4) np
5) current portion of long term debt
**this OR list it in the order of accounts that are due first
bank indebtedness
Bank indebtedness is a short-term loan from a bank, typically occurring when a company uses an operating line of credit to cover cash shortfalls.
accounts payable
Accounts payable represent amounts owed by the company to suppliers for purchases made on credit (account). Other types of payables can arise from amounts owed by the company for salaries, interest, sales tax, rent, income tax, and similar items. For these types of payables, a company may have to record estimated amounts.
deferred revenue
Deferred revenue represents an obligation to provide a service or product in the future because a payment for this good or service has been received in advance. For example, airlines receive payments from passengers purchasing tickets prior to taking their flights. Because the airline has an obligation to provide a flight, it will record a current liability (deferred revenue).
can deferred revenue be a nc liability
yes! if the services are due later than 1 year
notes payable
Notes payable (also known as loans payable) are promises in writing to pay amounts owed, often to banks but also to suppliers or others. Notes payable normally bear interest (which distinguishes them from accounts payable). A note payable to a bank is called a bank loan payable. It is common to refer to notes and loans interchangeably, and we will do so in this text. Notes can be current or non-current. When a company has a non-current or long-term note or loan payable (such as a five-year bank loan), a portion of the loan is often repayable each year. Companies will report the portion due within the next year as the current portion of long-term debt (also known as current maturities of long-term debt), while the remaining portion is reported as a non-current liability.
non current liablities order
NO ORDER BUT INCLUDEs:
Notes payable, including bank loans payable, mortgages payable, and bonds payable
Lease liabilities
Pension and benefit obligations
Deferred liabilities
mortgages payable
a nc liablitiy that has a house or property as security for the loan
bonds payable
typically issued by large corporations and governments, are like notes payable but often trade in active markets, similar to shares.
Lease liabilities
include amounts that a company will pay in the future on long-term rental contracts used for equipment or other property.
pension and benefit obligations
Pension and benefit obligations are amounts companies owe employees for retirement benefits.
Deferred income tax liabilities
are income taxes pertaining to items in current year income that a company will likely pay in a subsequent period.
Deferred revenue is a liability for products or services that a customer has paid for but will only receive from the company in the future.
Deferred revenue is a liability for products or services that a customer has paid for but will only receive from the company in the future.
Shareholders equity
Made up of share capital/Capital stock and retained earnings
Share capital/Capital stock
the capital earned from giving common shares or preferred shares to invesotrs
Retained earnings
net income that has been retained year over year
