Chapter 1&2 Flashcards
Assets
Owned by company & provide future economic benefits
Liabilities
Liabilities are
present obligations that result from past transactions,
and will result in the transfer of an economic resource.
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.
Deferred Revenue
Deferred revenue represents
an obilgation to provide a service or product in the future
because a payment has been received in advance.
E.g. airline tickets purchase
Can be current or non-current liability.
Deferred Liability
Same with Deferred Revenue.
Deferred liability is
a liability for products or services
that a customer has paid for
but will only receive from the company in the future.
List Order of Current Liability
Those due first are listed first.
(like North American companies)
List in the order in which
they are expected to be paid by due date.
E.g.
1. Bank Indebtedness
2. Accounts Payable
3. Deferred Revenue
4. Notes Payable (incl. Bank Loan Payable)
5. Current Portion of Long-Term Debt (Notes, Bank Loans, Mortgages)
List Order of Current Assets
List in order of liquidity.
Like North American companies normally do.
E.g.
1. Cash
2. Trading Investments
3. Accounts Receivable
4. Notes Receivable (incl. Loans Receivable)
5. Inventory
6. Supplies
7. Prepaid Expenses
Prepaid Expenses
Prepaid expenses represent
the cost of expenses like rent and insurance paid in advance of use.
Current Assets
because reflecting benefits a company will receive during the year
such as office space and insurance coverage.
Shareholders’ Equity
Shareholders’ equity is a residual amount equal to the difference between a company’s assets and its liabilities.
Shareholders’ equity has two components:
1. Share Capital
2. Retained Earnings
Other items could be included
a. comprehensive income
b. contributed surplus
Retained Earnings
= Revenues - Expenses - Div Dec
= Net income - dividends declared
Non-Current Liabilities
Obligations that are expected to be paid or settled after one year.
E.g.
1. Notes Payable (incl. Bank Loan Payable, Mortgage Payable, Bonds Payable)
2. Lease Liabilities
3. Pension & Benefit Obligations
4. Deferred Liabilities
Working Capital
A measure of liquidity.
Current Assets - Current Liabilities.
Current Ratio
= Current Assets / Current Liabilities
It is possible to compare companies of different sizes.
(LIQUIDITY RATIO)
Debt to Total Assets Ratio
Total Liabilities / Total Assets (%)
The higher the percentage of DTTA ratio,
the greater the risk that the company may be unable to pay its debts
and the related interest as they come due.
(SOLVENCY RATIO)
Basic Earnings per Share (EPS)
Determining net income on a per share basis.
Income Available to Common Shareholders / Weighted Average Number of Common Shares
Note that the income should deduct dividends for preferred shares before calculating EPS.
(Profitability Ratio)
Price-Earnings Ratio
Market Price per Share / Basic Earnings per Share
A higher P-E Ratio indicates that
investors consider that
the company’s earning potential
will be higher in the future.
P-E Ratio helps assess a company’s profitability
and expectations about future profitability.
Investors can also compare P-E Ratios to assess
how expensive/inexpensive each company’s shares
are relative to its EPS.
Investing high P-E ratios companies has more risk than lower ratios companies.
(PROFITABILITY RATIO)
Purpose of Statement of Cash Flows
Providing financial information
about the cash receipts and cash payments
of a business for a specific period of time.
Going Concern Assumption
繼續經營假設
An assumption that a company will keep operating in the future.
A foundation for the accounting process.
Enhancing Qualitative Characteristics of useful information
- Comparability - Different companies use the same accounting principles and apply them consistently each year
- Verifiability - Observers use the same methods obtain similar results
- Timeliness - Information to be available before it loses influence on decision-making
- Understandability - Clear and concise information that user can interpret and comprehend
Fair Value basis of accounting
The price would be paid to purchase the same asset or to settle the same liability today
Cost Constraint
The value of the information should be greater than the cost of providing it
Two fundamental qualitative characteristics of useful financial information
-
Relevance
a. Predictive value
b. Confirmatory value
c. Materiality -
Faithful Representation
a. Complete
b. Neutral
c. Free from material error
Non-current assets
- Long-term investment;
- Property, plant, & equipment;
- Intangible assets;
- Goodwill;
Financial statements showing information
DURING A PERIOD of time
- Statement of Income
- Statement of Changes in Equity
- Statement of Cash Flows
