Chapter 2 Flashcards
classified balance sheet
groups together similar assets and liabilities.
groupings help readers determine…
whether the company has enough to pay its debts and the claims of short and long term creditors on the company’s total assets
currents assets
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
operating cycle
average time it takes to go from cash to cash revenue
long term investments
investments in stock/bonds (longer than 1 yr), long term assets (land, building) that company isn’t currently using
property, land, and equipment
long and useful lives that are currently being used.
depreciation
allocating the cost if assets to a # if yrs. companies assign a portion of an assets cost as an expense each yr
accumulated depreciation
total amount of depreciation that the company has expensed in the asset’s life
intangible assets
ex: goodwill, patents, copy rights. exclusive right to the above mentioned
current liabilities
obligations that company must pay within 1 yr/operating cycle. Ex: accounts payable, wages, bank loans payable.
long term liabilities
obligations expected to be paid in over a yr. Ex; bonds payable, mortgage payable, lease liabilities
stockholders equity
composed of common stock and retained earnings.
where are details of debt described?
notes in the financial statement. they are recorded as one amount but later detailed
common stock
investments of assets into the business by the stockholders
retained earnings
the income retained for use in the business
profitability ratios
measure the income or operating success if a company during a period of time
liquidity ratios
meaure short term liability of the company to pay its maturing obligations and to meet unexpected needs for cash
solvency ratios
measure the ability if the company to survive over a long period of time
earnings per share
net income/ average # of common shares outstanding during the yr. provides a useful perspective for determining the investment in return
formula for earnings per share
net income- preferred stock dividends/
average # of common shares outstanding
liquidity
obligation to pay back dues within 1 yr
working capital
difference between the amounts of current assets and current liabilities (current assets - current liabilities)
current ratio
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
solvency/solvency ration
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
debt to assets ratio
=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
free cash flow
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
review agencies
pg 63-64
review last pages of ch 2
review and do exercise
