Chapter 2 Flashcards
CBS (Classified Balance Sheet)
Groups together similar assets and similar liabilities using a number of standard classifications and sections
Accounting equation
Assets= liabilities + stockholders equity
Current assets
Assets that a company expects to convert to cash or use up within one year of its operating cycle whichever is longer
Operating cycle
The average time required to go from cash to cash in producing revenue
Longterm investments
Generally 1) investments in stocks and bonds of other corps that are held for more than one year 2) long term assets such as land or buildings that a company is not currently using in its operating activities 3) long term notes receivable
Depreciation
The allocation of the cost of an asset to a number of years
Intangible assets
Assets with no physical substance and yet are often very valuable
Current liabilities
Obligations that the company is to pay within the next year or operating cycle whichever is longer
Profitability ratios
Measure the operating success of a company for a given period of time
Earnings per share
Measures the net income earned on each share of common stock
Liquidity
A company’s ability to pay obligations expectws to become due within the next year or operating cycle
Working capital
Current assets- current liabilities
Liquidity ratios
Measure the short teem ability of the company to pay its maturing obligations and to meet unexpected needs for cash
Current ratio
Current assets/ current liabilities
Solvency
A company’s ability to pay interest as it comes due and to repay the balance of a debt due at its maturity
Solvency ratios
Measure the ability of the company to survive over a long period of time
Debt to assets ratio
Total liabilities/ total assets
Measures the percent of total financing by creditors
Free cash flow
The net cash provides by operating activities after adjusting for capital expenditures
Free cash flow
Net cash provided by op activities- capital expenditures-cash dividends
Generally Accepted Accounting Principles
GAAP set of US accounting principles and standards that have authoritative support
Securities and Exchange Commission
The agency of the US gov that oversees US financial markets and accounting standard setting bodies
Financial accounting standards board
FASB the primary accounting standard setting body in the US
International accounting standards board
IASB issues standards called international financial reporting standards-adopted by many countries outside the US
Public company accounting oversight board
PCAOB determines auditing standards and reviews the performance of auditing firms-result of Sarbanes-Oxley Act
Comparability
When dif companies use the same accounting principles
Consistency
A company uses the same accounting principles and methods from year to year
Verifiable
Independent observers using the same methods obtain similar results
Monetary unit assumption
Requires that only those things that can be expressed in money are included in the accounting records
Economic entity assumption
States that every economic entity can be separately identified and accounted for
Periodicity assumption
Notice that the income statement, retained earnings statement, and statement of all cover periods of one year and the balance sheet is prepared at the end of each year
Going concern assumption
States that the business will remain in operation fir the foreseeable future
Historical cost principal
Dictates that companies record assets at their cost
Fair value principle
Indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
Full disclosure principle
Requires that companies disclose all circumstances and events that would make a difference to financial statement users
Constraint
Considered when deciding whether companies should be required to provide a certain type of info
Accounting info system
The system of collecting and processing transaction data and communicating financial info to decision makers
Accounting transactions
Economic events that require recording in the financial statements
Summary of transactions
Each transaction is analyzed in terms of its effect on, assets, and stockholders equity
The two sides of the equation must always be equal
The cause of each change in stockholders equity must be indicated
Account
An individual accounting record of increases or decreases in a specific asset, liability, stockholders equity, revenue, or expense item
Double entry system
The 2-sided effect of each transaction is recorded in appropriate accounts
fundamental qualities of useful info
1) relevance (accurate expectations of future)
2) faithful representation (nothing important has been omitted)
enhancing qualities of useful info
comparability consistency verifiability timeliness understandability
