Ch 2.1- understanding financial statements

Question 1

Liquidity

Answer 1

companys ability to repay short term loans

Question 2

solvency

Answer 2

companys abilitiy to durvive over time

Question 3

Profitabilitiy

Answer 3

operating success in a time period

Question 4

2 ratios to consider before buying a share

Answer 4

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

Question 5

CLASSIFIED statement of FP

Answer 5

simplified fp (groups similar assets/liabilities together)

Question 6

Assets

Answer 6

the resources that a company owns or controls that will provide future economic benefits.

Question 7

Current Assets

Answer 7

assets whose value will be realized <1 year

Question 8

Non current assets

Answer 8

assets whose value will be realized >1 year

Question 9

How do companies list assets on FP

Answer 9

most liquid-least liquid

Question 10

trading investments

Answer 10

current asset/ this is an investment in debt or equity secruity that will be cash <1 year

Question 11

A/R

Answer 11

Accounts receivable are amounts owed to a company by customers who purchased products or services on credit (on account).

Question 12

N/R

Answer 12

Notes receivable are amounts owed to a company by customers or others that normally bear interest (which distinguishes them from accounts receivable).

Question 13

Inventory

Answer 13

Inventory consists of goods held for sale to customers or that will be used to produce goods that will be sold to customers.

Question 14

Supplies

Answer 14

Supplies include consumable items like office supplies and cleaning supplies that are not for sale.q

Question 15

Prepaid expenses

Answer 15

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.

Question 16

Long term investments-

debt

Answer 16

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

Question 17

Long term investments-

equity

Answer 17

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.

Question 18

What is depreciation

Answer 18

it is the process of long term goods losing value over time

Question 19

How is depreciation reported on the FP

Answer 19

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

Question 20

contra asset account

Answer 20

ACCUMULATEDD DEPRECIIATON

An account that is offset against (reduces) another related asset account on the statement of financial position.

Question 21

HOW TO find carrying amount

Answer 21

cost- accumulated depreciation = carrying amount

Question 22

Ammortization

Answer 22

depreciaiton of intangible assets (good will, copyrishts)

Question 23

IFRS AND ASPE on depreciaiton and ammortization

Answer 23

aspe: use ammortization for both

ifrs: ammortization= intaginble
depreciation= tangible

Question 24

Goodwill

Answer 24

• 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.

Question 25

GOOD WILL BETCH

Answer 25

• Only arises from the result of a merger or acquisiton of another company

Question 26

Liabilities

Answer 26

t obligations that result from past transactions and will result in the transfer of an economic resource. A

THINGS THE COMPANY OWES

Question 27

Current liabilities

Answer 27

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.

Question 28

Non current liabilities

Answer 28

liabilities due in >1 year

Question 29

Current liabilities section order

BADNC

Answer 29

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

Question 30

bank indebtedness

Answer 30

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.

Question 31

accounts payable

Answer 31

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.

Question 32

deferred revenue

Answer 32

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).

Question 33

can deferred revenue be a nc liability

Answer 33

yes! if the services are due later than 1 year

Question 34

notes payable

Answer 34

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.

Question 35

non current liablities order

Answer 35

NO ORDER BUT INCLUDEs:

Notes payable, including bank loans payable, mortgages payable, and bonds payable

Lease liabilities

Pension and benefit obligations

Deferred liabilities

Question 36

mortgages payable

Answer 36

a nc liablitiy that has a house or property as security for the loan

Question 37

bonds payable

Answer 37

typically issued by large corporations and governments, are like notes payable but often trade in active markets, similar to shares.

Question 38

Lease liabilities

Answer 38

include amounts that a company will pay in the future on long-term rental contracts used for equipment or other property.

Question 39

pension and benefit obligations

Answer 39

Pension and benefit obligations are amounts companies owe employees for retirement benefits.

Question 40

Deferred income tax liabilities

Answer 40

are income taxes pertaining to items in current year income that a company will likely pay in a subsequent period.

Question 41

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.

Answer 41

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.

Question 42

Shareholders equity

Answer 42

Made up of share capital/Capital stock and retained earnings

Question 43

Share capital/Capital stock

Answer 43

the capital earned from giving common shares or preferred shares to invesotrs

Question 44

Retained earnings

Answer 44

net income that has been retained year over year