Chapter 2 Flashcards
Assets
Economic resources controlled by an entity as a result of past transactions or events from which future economic benefits may be obtained
What are 3 essential characteristics of an asset
Embody future benefit
Entity can control access to benefit
Transaction giving entity the right to control the benefit has occurred
Liabilities
Obligations of an entity arising from past transactions of events, the settlement of which may result in transfer or use of assets
3 essential characteristics of liabilities
The embody a duty/responsibility to others at a specified time, by transfer of assets or services
They responsibility leaves the entity no discretion to avoid it
The transaction/event obligating the entity has already occured
Liabilities do not have to be…
Legally enforceable (as long as they otherwise meet the definitions of a liability)
Liabilities may arise through…
Contractual obligations, statutory requirements or other means such as constructive obligations
Equity
The ownership interest in the assets of a profit-oriented enterprise after deducting liabilities
Current assets
Will be used/converted to cash in 1 year or less
Operating cycle
Average time it takes from purchase of inventory to sale of goods, the collection of cash from customers
Long term investments
Investments in stocks/bonds, long term assets, long term notes receivable
Depreciations
Allocating the cost of an asset to a number of years
Current liabilities
Obligations the company is to pay within the next year or operating cycle (which ever is longer)
Includes current maturities of long-term obligations
Long-term liabilities
Bonds payable, mortgages payable, long-term notes, leases liabilities, pensions, etc.
Ratio analysis
Expresses the relationship among selected items of financial statement data
Liquidity
The ability to pay obligations expected to become due within the next year
