chapter 2 Flashcards
how are assets and liabilities presented?
as current and non current, based on more to less liquid
how is an asset classified as current?
expected to be realized, sold or consumed within one year, held for trading, cash or cash equivalent
how is a liability classified as current?
it is due within one year, held of trading
what are some common current assets?
- cash
- short term or trading investments (investments in public companies, holding for trading purposes)
- accounts receivable
- inventory
- supplies (office supplies)
- prepaid expenses (insurance, rent, advertising)
what are some common non current assets?
- long term investments
- ppe
- intangible assets
- goodwill
what is goodwill?
A specific type of intangible that arises when one company purchases another. ourchasing a company for more than the amount of assets
what is ppe?
Property, plant and equipment includes physical assets used in ongoing business operations to generate income (land, buildings, vehicles, furniture)
what is depreciation?
a reduction of the value of the asset, any asset that has a limited useful life will be deprecated
what is depreciable amount?
the amount that I spent on an asset that I am expecting to use up, how much I thunk I’m gonna use up of an asset
depreciation expense ? (amortization expense)
amount used up in a given period
accumulated depreciation?
total depreciation expense taken so far
what is carrying amount?
how much potential my asset has left, the difference between an assets cost and accumulated depreciation at a point in time
what are intangible assets?
assets without physical substance that are used to earn business income (patents, copyrights)
what are the three criteria of liabilities?
- has to present obligation of the entity
- arises from past events
- settelemt of which is excepted to result in an outflow of economic resources
what are common current liabilities?
- bank indebtedness (short term loans from the bank)
- accounts payable (amounts owing to supplies )
- deffered revenues/ unearned revenues (payments received from customers for goods not yet delivered )
- notes/ loans payable (represents written promises to pay banks within a year)
- current portion of long term debt (represents the portion of a long term loan due within 12 months )
what are the two categories of shareholders equity?
common shares/ share capital, retained earnings
what is common shares?
amounts received from shareholders when shares were originally issued by the company, every company has at least common shares
what are retained earnings?
the net income that has not been declared to shareholders in the form of dividends
why do users perform financial statements?
- to compare a company to its competitors or to the industry
- to understand the overall health of the company
- to evaluate the company performance over time
- to find trends, insights and correlations
what are the three types of ratios?
liquidity ratios, solvency ratios and profitability ratios
what are liquidity ratios?
measure short term ability of the company to pay its obligations, helps assess a company ability to pay debts. need current assets and current liabilities
how is working capital calculated? (liquidity ratios)
current assets- current liabilities