Chapter 2

Question 1

classified balance sheet

Answer 1

groups together similar assets and liabilities.

Question 2

groupings help readers determine…

Answer 2

whether the company has enough to pay its debts and the claims of short and long term creditors on the company’s total assets

Question 3

currents assets

Answer 3

assest that a company expects to convert into cash or use up within 1 yr or its operating cycle. which ever is longer. Ex: cash, short term investments, receivables, inventory and prepaid expenses

Question 4

operating cycle

Answer 4

average time it takes to go from cash to cash revenue

Question 5

long term investments

Answer 5

investments in stock/bonds (longer than 1 yr), long term assets (land, building) that company isn’t currently using

Question 6

property, land, and equipment

Answer 6

long and useful lives that are currently being used.

Question 7

depreciation

Answer 7

allocating the cost if assets to a # if yrs. companies assign a portion of an assets cost as an expense each yr

Question 8

accumulated depreciation

Answer 8

total amount of depreciation that the company has expensed in the asset’s life

Question 9

intangible assets

Answer 9

ex: goodwill, patents, copy rights. exclusive right to the above mentioned

Question 10

current liabilities

Answer 10

obligations that company must pay within 1 yr/operating cycle. Ex: accounts payable, wages, bank loans payable.

Question 11

long term liabilities

Answer 11

obligations expected to be paid in over a yr. Ex; bonds payable, mortgage payable, lease liabilities

Question 12

stockholders equity

Answer 12

composed of common stock and retained earnings.

Question 13

where are details of debt described?

Answer 13

notes in the financial statement. they are recorded as one amount but later detailed

Question 14

common stock

Answer 14

investments of assets into the business by the stockholders

Question 15

retained earnings

Answer 15

the income retained for use in the business

Question 16

profitability ratios

Answer 16

measure the income or operating success if a company during a period of time

Question 17

liquidity ratios

Answer 17

meaure short term liability of the company to pay its maturing obligations and to meet unexpected needs for cash

Question 18

solvency ratios

Answer 18

measure the ability if the company to survive over a long period of time

Question 19

earnings per share

Answer 19

net income/ average # of common shares outstanding during the yr. provides a useful perspective for determining the investment in return

Question 20

formula for earnings per share

Answer 20

net income- preferred stock dividends/

average # of common shares outstanding

Question 21

liquidity

Answer 21

obligation to pay back dues within 1 yr

Question 22

working capital

Answer 22

difference between the amounts of current assets and current liabilities (current assets - current liabilities)

Question 23

current ratio

Answer 23

part of liquidity ratios. current assets/current liabilities. better measure of liquidity than working capital. Weakness: it doesn’t take into account the composition of the assets. can the company meet its near term obligations

Question 24

solvency/solvency ration

Answer 24

its ability to pay interest as it comes due and pay the balance of the debt due/measure the ability of the company to survive over a long period of time

Question 25

debt to assets ratio

Answer 25

=total liabilities/ total assets. measures the percentage of total financing provided by creditors rather than stockholders. the higher 5 of debt financing, the riskier the company. can the company meet its long term obligations

Question 26

free cash flow

Answer 26

cash provided by operations-capital expenditures-cash dividends. tells a company’s ability to generate cash. company must invest in new property, land and equip. just to maintain its current level of operations. also to pay dividends, and pay off debt

Question 27

review agencies

Answer 27

pg 63-64

Question 28

review last pages of ch 2

Answer 28

review and do exercise