Chapter 2 Flashcards
What do assets break down into?
Current Assets and Non Current Assets
What does liabilities break down into?
Current Liabilities and Non Current Liabilities
What does Shareholders Equity break down into?
Common Shares and Retained Earnings
What do Current Assets and Non current assets break down into and what do they do?
Accounts; Accounts are subdivisions of current and non current assets that consists of individual transactions.
What are the 5 sections of the balance sheet?
Current Assets, Non current assets, Current Liabilities, Non current Liabilities and Equity.
What are Current Assets?
Current assets are assets that are expected to be converted into cash or will be sold or used up within one year of the date on the company’s balance sheet.
Accounts are listed in order of liquidity, which is the ease in which the items can be turned into cash
What are some examples of Current Assets?
Cash (includes actual cash on hand and cash held in banks or other institutions)
Accounts receivable (amounts owed by customers who purchased products or services on credit)
Inventory (goods held for sale to customers)
Supplies (include consumable items like pens, paper, cleaning supplies etc.)
Prepaid Expenses (represent the cost of expenses paid in advance)
What are Non-Current Assets?
Non-current assets are assets which are not expected to be converted into cash, sold, or used up by the business within one year of the date on the company’s balance sheet.
Non-current assets are essentially all assets that are not classified as current assets.
Accounts are listed in order of permanency, which means assets with the longest useful life are typically recorded first
What are some examples of Non-Current Assets?
Land (tangible asset with a relatively long useful life that is expected to appreciate in value) Plant Equipment (tangible asset with a relatively long life that is expected to depreciate in value) Intangible assets (assets that have no physical form or substance, but still possess value) Goodwill (results from the acquisition of another company when the price paid exceeds the book value)
What is Depreciation?
Depreciation is the allocation of the cost of a tangible asset over the assets estimated useful life
All tangible non-current assets have an “estimated useful life”
Except for land which does not have a useful life as land has an unlimited useful life
What is the Formula for how much something will depreciate each year?
Cost of the asset / estimated useful life = annual expense
What are Current Liabilities?
Current liabilities are obligations that are to be paid or settled within one year of the date on the company’s balance sheet
Essentially….what are the debts that the company is going to have to pay in the short term?
What are some examples of Current Liabilities?
Accounts payable (represents amounts owed to suppliers for purchases made on credit)
Bank loans payable (represents amounts owed to creditors that are due within the next 12 months)
Income tax payable (represents amounts owed to the government for income taxes)
Unearned Revenue (represents cash received in advance from a customer before revenue is earned)
What are Non-Current Liabilities?
Non-current liabilities are obligations that are expected to be paid or settled after one year, they are also known as long term liabilities
What are some examples of Non-Current Liabilities?
Notes payable (represents amounts owed to suppliers for purchases made on credit) Bank loans payable (represents amounts owed to creditors that are due after the next 12 months) Bonds payable (represents a debt instrument used by large companies and governments)
What are the 2 categories of Shareholders Equity and what are they defined as?
Shareholders equity is divided into two parts: share capital and retained earnings
Share Capital: represents amounts contributed by the shareholders in exchange for shares of ownership
Retained Earnings: represent the cumulative profit that has been retained in the corporation
What are the 3 main categories of ratios
Liquidity ratios
Solvency Ratios
Profitability Ratios
What do liquidity ratios measure?
Whether or not the company can survive in the short run (current liabilities) and if the company be able to meet any unexpected needs for cash
What are the 2 liquidity ratios?
Working Capital
Current Ratio
What is working capital and how do you calculate it?
The difference between current assets and current liabilities.
It is simply an indicator of how much additional funds we have over the next twelve months in comparison to our debts
What is a current ratio and how do you calculate it?
For every dollar of current liabilities the company has X dollars of current assets
Current Ratio = Current Assets / Current Liabilities
What do solvency ratios measure?
Solvency ratios allow a user to measure the company’s ability to survive in the long-term
What is the main solvency ratio we look at
Debt-to-Total Assets Ratio
What is a debt to asset ratio and how do you calculate it?
Of every dollar of assets owned by your company, how many cents is owned by someone else.
Debt-to-Assets = Total Liabilities / Total Assets
What do profitability ratios do?
Profitability ratios measure a company’s operating success for a specific period of time
What are the 2 profitability ratios?
Earnings per Share
Price Earnings Ratio
What is a Earnings per Share (EPS) ratio and how do you calculate it?
The earnings per share ratio (EPS) measures the profit earned on each common share
Earnings Per Share = Profit Available to Common Shareholders / Average Number of Common Shares
What is a Price Earnings Ratio ratio and how do you calculate it?
The PE ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings
Price Earnings Ratio = Market Price per Share / Earnings per Share
