Chapter 2 & 7: Terms & Formulas Flashcards
Operating Cycle
Average time it takes from the purchase of inventory to the collection of cash from customers.
Common Current Assets
- Cash
- Investments
- Receivables
- Inventories
- Prepaid Expenses
Accumulated Depreciation
Total amount of depreciation expensed thus far in an asset’s life.
Intangible Assets
Assets that do not have a physical substance.
Examples: Goodwill, Patents, Copyrights, or Trademarks
Current Liabilities
Obligations the company is to pay within the next year or operating cycle, whichever is longer.
(Example: Salaries & Wages Payable, Income Taxes Payable, or Interest Payable)
Common Stock
Investments of assets into the business by the stockholders
Retained Earnings
Income retained for use in the business
Ratio Analysis
Expresses the relationship between selected items of financial statement data.
Liquidity
The ability to pay obligations expected to become due within the next year or operating cycle.
Working Capital
The difference between the amounts of current assets and current liabilities.
Liquidity Ratios
Measures the short-term ability to pay maturing obligations and to meet unexpected needs for cash.
Solvency
The ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.
Solvency Ratios
Measures the ability of a company to survive over a long period of time.
Debt to Assets Ratio
Measures the percentage of total financing provided by creditors rather than stockholders.
Generally Accepted Accounting Principles
Set of rules/practices widely accepted as being the general guide for financial reporting.
Who determines the GAAP/ Guidelimes
Securities & Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB)
Public Company Accounting Oversight Board (PCAOB)
2 Qualities of Useful Information
Relevance & Faithful Representation
Relevance = info that would make a difference in a business decision
Faithful Representation
Information accurately depicts what really happened. (Info must be complete, non biased, and free from error)
5 Qualities of Useful Information
( Comparability) - different companies use same accounting principles
(Verifiable) - Independent observers using the same methods get similar results
(Understandability) - Info presented is clear and concise
(Consistency) - Company uses same accounting principles/methods year to year
(Timely) - Relevant
Monetary Unit
Requires that only things that can be expressed with money are included in accounting records
Economic Entity
Every economic entity can be separately identified and accounted for.
Periodicity
Life of a business can be divided into artificial time periods
Going Concern
Business will remain in operation for the foreseeable future
Historical Cost (Cost Principle)
Dictates that companies record assets at their cost
Fair Value
Assets & Liabilities reported at the price received to sell and asset or settle a liability.
Full Discolsure
Requires companies disclose ALL circumstances or events that would impact financial statement users
Cost Constraint
If something costs too much… DO NOT DO IT
3 Factors Lead to Fraud
- Opportunity
- Financial Pressure
- Rationalization
Sarbanes-Oxley Act
Corporate Executives/ Board of Directors must ensure a system of internal controls is reliable and effective.
Independent outside auditors must attest to the adequacy of the internal control system
Created the PCAOB
5 Primary Internal Control Components
- Control Environment
- Risk Assessment
- Control Activities
- Information & Communication
- Monitoring
Principles of Internal Control Activities
- Limit access to only authorized employees
- Segregate duties (one person shouldn’t do everything)
- Pre Numbered Document Procedures
- Independent Internal Verification
- Human Resource Controls (Background Checks)
Cash Includes
- Cash on hand
- Checks
- Cash in the bank
- short-term high liquid investments (ex: treasury bills or money-market funds)
Benefits of Using a Bank
- Minimizes cash on hand
- double record of transactions
- bank reconciliation
