Chapter 2 Flashcards
Classified Balance Sheet definition
a balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections
Current Assets definition
Assets that a company expects to convert to cash or use up within one year, or the operating cycle, whichever is longer
Current liabilities definition
Obligations that a company expects to pay within the next year or operating cycle, whichever is longer
Current Ratio definition
A measure of liquidity, computed as
Current Assets/ Current liabilities
Debt to Assets Ratio definition
A measure of solvency, calculated as
total liabilities/ total assets
It measures the percentage of total financing provided by creditors (rather than stockholders)
Intangible Assets definition
Assets that do not have physical substance
Liquidity definition
The ability of a company to pay obligations that are expected to become due within the next year or operating cycle
Liquidity Ratios definition
Measures of the short term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
Long Term Investments definition
Generally,
- Investments in stocks and bonds of other corporations that a company holds for more than one year;
- Long-term assets, such as land and buildings, not currently being used in the company’s operations
- Long term notes receivable
Long Term Liabilities (debt) definition
Obligations that a company expects to pay off AFTER one year
Operating Cycle definition
The average time required to purchase inventory, sell it on account, and then collect cash from customers- that is go from cash to cash
Property, Plant, and Equipment definition
Assets with relatively long useful lives that are currently used in operating the business
Ratio definition
An expression of the mathematical relationship between one quantity and another
Ratio Analysis definition
A technique that expresses the relationship among selected items of the financial statement data
Solvency definition
The ability of a company to pay its interest as it comes due and to repay the balance of debt due at its maturity
Solvency ratios definition
Measures of the ability of a company to survive over a long period of time
Working capital definition
The difference between the amounts of current assets and current liabilities
What are the 4 standard classifications of assets?
- Current assets
- Long term investments
- Property, Plant and Equipment
- Intangible Assets
What are the 3 standard classifications of liabilities?
- Current liabilities
- Long- term liabilities
- Stockholders’ Equity
Groupings on financial statements help readers determine what 2 things
- Whether the company has enough assets to pay its debts as they come due
- The claims of short and long term creditors on the company’s total assets
List the 5 most common assets in order of liquidity
- Cash
- Investments
- Accounts receivable
- Inventories
- Pre-paid expenses
What are two other names for PPE
- Fixed assets
2. Plant assets
Accumulated depreciation definition
This account shows the total amount of depreciation that the company has expensed thus far in the asset’s life
Depreciation definition
The allocation of the cost of an asset to a number of years
Name 4 popular intangible assets
- Goodwill
- Patents
- Copyrights
- Trademarks
What is another name of intangible assets?
“Other assets”
What are 5 common current liabilities?
- Accounts payable
- Salaries and wages payable
- Notes payable
- Unearned revenue
- Current maturities of long term obligations
What are 5 common long term liabilities?
- Bonds payable
- Mortgages payable
- Long term notes payable
- Lease liabilities
- Pension liabilities
Intracompany comparisons
Cover two years for the same company
Industry Average Comparisons
Based on average ratios for particular industries
Intercompany comparisons
Based on comparisons with a competitor in the same industry
Working Capital Formula
Current Assets- Current Liabilities
What are the two ratio which measure liquidity?
What are their formulas?
Working Capital= current assets- current liabilities
Current Ratio= current assets / current liabilities
Which liquidity ratio is a more dependable indicator of liquidity?
Current ratio
What is a weakness of the current ratio?
It doesn’t take into account the composition of the current assets
Why is debt financing riskier than equity financing?
Debt must be repaid at specific points in time, whether the company is performing well or not.
The ________ the percentage of debt financing, the riskier the company
higher
Debt to Equity Ratio Formula
Describe how to apply this ratio
Total liabilities/ stockholders equity
the higher the ratio is, the lower the solvency
The adequacy of the debt to assets ratio is often judged in light of the company’s _________
Net income
