Chapter 1 Flashcards
Liquidity
The Company’s ability to meet short-term obligations.
Solvency
The Company’s ability to meet long-term obligations.
Balance Sheet
Presents a company’s current financial position by disclosing the resources the company controls (assets) and its obligations to lenders and other creditors (liabilities) at a specific point in time.
Owner’s Equity
Represents the excess of assets over liabilities. Owner’s equity is the owners’ or shareholders’ residual interest in the company’s assets after deducting its liabilities.
Relationship between 3 sections of the balance sheet
Assets= Liabilities + Owners’ equity
or
Owners’ equity= Assets - Liabilities
Also called accounting equation or balance sheet equation.
Statement of Changes in Equity
Reports changes in the owners’ investment in the business over time.
- Paid-in Capital
- Retained Earnings
Retained Earnings
The cumulative amount of the company’s profits that have been retained in the company.
Paid-in Capital
The amount of capital “paid in” by investors during common or preferred stock issuance, including the par value of the shares themselves. Paid in capital represents the funds raised by the business from equity, and not from ongoing operations.
Financial Flexibility
The ability of the company to react and adapt to financial adversities and opportunities
Cash flows from operating activities
Cash flows from day-to-day operations of the company.
Cash flows from investing activities
Cash flows from activities associated with the acquisition and disposal of long-term assets, such as property and equipment.
Cash flows from financing activities
Cash flows from activities related to obtaining or repaying capital to be used in the business.
Amortization
- The paying off of debt in regular installments over a period of time.
- The deduction of capital expenses over a specific period of time (usually over the asset’s life).
While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets.
Consolidated basis
Consolidated financial statements include the company and all its subsidiaries.
Operating Activities
Activities that are a part of the day-to-day business functioning of an entity.
Investing Activities
Activities associated with the acquisition and disposal of long-term assets.
Financing Activities
Activities related to obtaining or repaying capital
Assets
Economic resources of a company
Liabilities
Creditors’ claims on the resources of a company
Owners Equity
Residual claim on the economic resources of a company minus liabilities owed to creditors.
Revenue
Inflows of economic resourced to the company
Expenses
Outflows of economic resources or increases in liabilities
Allowance for bad debts
An estimate of the amount that will not be collected from accounts receivable.
Contra Account
Any account that is offset or deducted from another account.
An account on a corporation or entity’s financial statements that offsets the balance of a related and corresponding account. A contra account is found on financial statements as an offsetting account to represent the financial flip-side of a figure/asset/liability for book-keeping purposes. Contra accounts typically represent the offsetting nature of debits and credits on a company’s financials.
