Chapter 2 Flashcards
A further look at financial statements
Current assets
Assets that are expected to be converted into cash, sold or used up within one year of the company’s financial statement date.
Usually listed in order of liquidity on financial statements.
Operating cycle
Average period of time it takes for a business to pay cash to obtain products or services, then receive cash from customers for these products or services
Held for trading investments
CURRENT ASSETS: Investments in debt/equity securities of other companies, that are bought with the intention of selling them after a short period of time in order to earn income from their price fluctuations.
Accounts receivable
CURRENT ASSETS: Amounts owed by customers who purchased products or services on credit (on account)
Notes receivable
CURRENT ASSETS: Amounts owed by customers or others, that are normally interest-bearing and supported by a written promise to repay.
Inventory
CURRENT ASSET: Goods held for sale to customers.
Supplies
CURRENT ASSETS: Consumable items used in running a business, such as office and cleaning supplies.
Prepaid expenses
CURRENT ASSETS: Costs paid in advance of use (such as rent and insurance), that benefit more than one accounting period.
Non-current assets
Assets that are not expected to be converted into cash, sold or used up within one year of the company’s financial statement date.
Long-term investments
NON-CURRENT ASSETS
Investments in:
-debt securities, intended to be held for many years to earn interest;
-equity securities of other companies, held to generate investment revenue, or for strategic reasons.
Property, plant & equipment
NON-CURRENT ASSETS: Tangible assets, such as land, buildings, and equipment, with relatively long useful lives that are being used to operate the business.
Usually listed in order of permanency on financial statements.
Depreciation
Contra asset account
Account that is offset against (reduces) another related asset account on the statement of financial position.
Examples: Allowance for doubtful accounts; Accumulated depreciation.
Intangible assets
NON-CURRENT ASSETS: Assets of a long-lived nature that do not have physical substance, but represent a privilege or a right granted to, or held by, a company.
Amortization
Examples: Patents, copyrights, franchises, trademarks, trade names, and licences
Current liabilities
Obligations that will be paid or settled within one year of the company’s financial statement date.
Bank indebtedness
CURRENT LIABILITY:
Short-term loan, such as an operating line of credit, pre-arranged with a bank to cover cash shortfalls.
Accounts payable
CURRENT LIABILITIES: Amounts owed to suppliers for purchases made on credit (on account).
Unearned revenue
CURRENT LIABILITY:
Cash received when a customer pays in advance of being provided with a service or product. It is received before revenue is earned, and is recorded as a liability until it is earned.
Notes payable
CURRENT LIABILITIES:
Amounts owed to suppliers, banks, or others, that are normally interest-bearing and supported by a written promise to repay.
Current maturities of long-term debt
CURRENT LIABILITIES: The portion of a non-current/long-term loan that is repayable within the current year.
Non-current liabilities
Obligations that are not expected to be paid, nor settled, within one year of the company’s financial statement date.
Liquidity ratios
Measures of a company’s short-term ability to pay its maturing obligations (usually current liabilities) and to meet unexpected needs for cash.
Working capital, current, receivables turnover, average collection period, inventory turnover and days in inventory are all liquidity ratios.
Working capital
A measure of liquidity used to evaluate a company’s short-term debt-paying ability.
Working Capital = Current Assets - Current Liabilities
Current ratio
A measure of liquidity used to evaluate a company’s short-term debt-paying ability.
Current Ratio = Current Assets / Current Liabilities
**Useful for comparing different-sized companies
Solvency ratios
Measures of a company’s ability to survive over a long period of time, by having enough assets to settle its liabilities as they fall due.
Example: Debt-to-total-assets ratio
