chapter 2 Flashcards
what is considered the assets of a company?
everything they own
what is a classified statement of financial position/ balance sheet?
when the assets and liabilities are put in terms of current and non current
what are current assets?
anything convertible to cash in less than 1 year
what is the operating cycle for assets?
12 months
when listing all of the assets on a balance sheet how should they be ordered?
from most liquid to least liquid
what are the 6 kinds of current assets?
cash
short term investments
accounts receivable
supplies
inventory
prepaid expenses
what are short term investments?
investments that are meant to be held for less than 1 year
what is accounts receivable?
revenue that is not received yet, bit you have send the invoice
what is the average time it takes to receive an accounts receivable?
30 days
what are supplies?
any physical supplies around the office like pens, paper cleaning supplies, and they stay an asset until they are used
what is inventory?
merchandise that has been bought for resale at a later date
what are pre paid expenses?
things that have been pre paid and give you some value over a certain time period. EG insurance policy
what are long term assets?
assets that will provide the corporation with benefit for over a year
what are the 4 types of long term assets?
long term investments
PPE- property, plant and equipment
intangible assets
goodwill
what are long-term investments?
any bond or stock that you are holding for a long term for income or for strategic reasons
what is PPE-property, plant, equipment?
any tangible assets like land, buildings or equipment
what are intangible assets?
any sort of intellectual assets, EG a company making an app
what is good will?
the good reputation a company has or the good workers or good work culture, any thing like that
when can good will be accounted for?
only when the company is sold, because that is the only time there is a price put on it
what are the 2 kinds of liabilities?
current liabilities
non current liabilities
what are current liabilities?
obligations that must be satisfied or paid within the next 12 months
what are the 6 current liabilities?
bank indebtedness
accounts payable
accrued liability
deferred revenue
notes payable
current portion of long term debt
what is bank indebtedness?
what we owe the bank EG lines of credit or overdraft
what is accounts payable?
money that is owed to suppliers for good we have already received
typically how long do you have to pay an accounts payable?
30 days
what are accrued liabilities?
wages payable
income tax payable
PST payable
GST payable
what is deferred revenue?
when you have received the revenue but you have not given out the good or service EG gift card
what are notes payable?
when you owe a company creditors and the creditors wants a more concrete proof
what is current portion of long term debt?
what ever current portion of long term debt is due
what is an example of current portion of long term debt?
if you have a loan for 20,000 in 5 equal payments, first one due at the end of the year, the current portion of long term debt on the balance sheet would be 4,000
what is a line of credit?
when you only need to make interest payments for a certain amount of time before needing to make principle payments, but banks can demand payment
what are non-current liabilities?
obligations due and owing later than a year
what are the 3 non-current liabilities?
bank loans payable (paying bank loans)
mortgage payable (paying mortgages)
bonds payable (making bond coupon payments)
what is the difference between a bank loan and a mortgage?
bank loan has no collateral
mortgage has collateral
what are the 2 components of share holders equity?
contributed capital (shares people bought)
retained earnings (left over profit for owners)
what are the 5 categories on a classified balance sheet/ statement of financial position?
current assets
long-term assets
current liabilities
non-current liabilities
shareholders equity
how you do you deprecation and amortization on a balance sheet?
through cost allocation
what is cost allocation?
when you allocate the costs over the life of the equipment against the revenue it produces
what can we use to help with cost allocation?
straight line allocation
what is straight line allocation?
depreciation expense= (cost-selvedge value) / years of estimated life
for a 25,000 dollar piece of equipment, what would would the straightline allocation/ cost allocation look like, if it has a 4 year life and 0 salvedge?
in long term assets:
equipment= 25,000
accumulated depreciation= 5,000
net carrying value= 20,000
what 3 things does the foundation for accrual basis of accounting guide decisions about?
what to present in financial statements
alternative ways of reporting economic events (must be the most accurate way)
appropriate ways of communicating this information
(you must use your own judgment too!)
what are the 5 key items financial reporting must be?
objective of general purpose financial reporting
qualitative characteristics of useful financial information
cost constraint
elements of financial statements
measurement of the elements of financial statements
what is the objective of general-purpose financial reporting?
to provide information that is useful to existing and potential investors, lenders and other creditors who are making decisions about providing resources to a company based on the accounting info
what are 2 decisions that potential investors, lenders and other creditors are making based on accounting information?
if they should be buying, selling or holding equity and debt, this person would be looking at the financial future
if they should be providing or settling loans or other credit, they would look at how much debt you have and if you can pay debt back
is financial information provided by general purpose financial statements?
yes
what are the 6 fundamental qualitative characteristics about financial reporting?
relevance
faithful representation
comparability
verifiability
timeliness
understandability
why is relevance importing in financial reporting?
the information has relevance if ti makes a difference in users decision and may have predictive value or confirmatory value, if stuff is left out or misstated in a report will that impact the decision of users
why is faithful representation important in financial reporting?
information should reflect economic reality and information must be complete, neutral and free from error
why is comparability important In financial reporting?
when different companies use the same accounting principles and apply them consistently each year you can compare companies
why is verifiability important in financial reporting?
independent consensus that information is faithfully represented accurately
why is timeliness important in financial reporting?
available before it loses its usefulness in decision making
why is understandability important in financial reporting?
classified, characterized and presented clearly and concisely so someone who doesn’t have a background in account can understand it
what is cost constraint?
it ensure that the value of the accounting information being provided by financial reporting is greater than the cost of providing it, and the benefits should justify the costs of providing and using it
what is going concern assumption?
the business will continue operating in the foreseeable future
what does the going concern assumption provide?
a foundation for accounting and justification for using cost as the value of certain assets
what are the 6 elements of financial statements?
assets
liabilities
equity
revenue
income
expenses
what have accountants developed that describe which, when and how the elements of statements should be recognized, measured and reported?
the generally accepted accounting principles (GAAP)
what are the 2 ways to measure the value of something according to GAAP?
historical cost
fair value
what is historical cost measurement?
assets and liabilities should be recored at their cost when acquired
what is fair value measurement?
certain assets and liabilities can be recored and reported at their current and fair value, and you can update that value every 3 years
has accounting impacted the environment?
yes users have begin demanding more information about a companies environmental, social and governance (ESG) factors and now public companies are preparing sustainability reports
what is the different in depreciation in international financial reporting standards (IFRS) and accounting standards for private enterprise (ASPE)?
IFRS: its called depreciation
ASPE: its called amortization
what is difference in how we present earnings per share in IFRS and ASPE?
IFRS: you are required to present in financial statements
ASPE: not required to present in financial statements
what are the 3 use comparisons for financial statements?
intracompany comparisons
inter company comparisons
industry average comparison
what is intra company comparisons?
compare 2 or more periods for the same company
what are inter company comparisons?
compare a company with their competitors
what are industry average comparison?
comparisons on averages for a particular industry
what are the 3 kinds of ratio analysis?
profitability ratios
liquidity ratios
solvency ratios
what are profitability ratios?
they measure a companies income or operating success for a given period of time
what are liquidity ratios?
they measure the companies short term ability to pay its maturing obligations and meet unexpected needs for cash
what are solvency ratios?
they measure the companies ability to survive over a long period of time
what is good for profitability ratios?
higher is better
what is good for solvency ratios?
lower is better, typically 2 dollars of assets for every one dollar of liabilities
what is good for liquidity ratios?
higher is better
