Chapter 2 Flashcards
What are the four primary financial statements?
Balance sheet (assets and liabilities) Income statement (revenue and expenses) Statement of changes in shareholders equity Statement of cash flows
What is the accounting equation?
Assets-liabilities=shareholders’ equity
Assets = liabilities+ shareholders’ equity
What does the balance sheet reflect?
A company’s shareholders equity for a specific point in time. (assets, liabilities, owners equity)
What is the main purpose of financial statements?
To communicate information about financial status?
What are current assets?
Assets that will generally be used in a year. (Expected to be sold or converted to cash within normal operating cycle)
Provide examples of current assets.
Cash, inventory, accounts receivable, supplies, marketable securities
Assets-liabilities =
Shareholders equity.
Buildings and equipment are reported at?
Original cost with an allowance for depreciation.
Why doesn’t shareholders equity represent net worth of a company?
Many assets are reported at historical cost.
What is calculated on the income statement?
Net income or loss.
What does the income statement reflect?
Profitability over time.
Where, besides the income statement, is net income reported?
Statement of changes in owners’ equity and statement of cash flows.
What is revenue ?
Gross income generated from the sale of products or services.
What does revenue not include!?
Gains from the sale of equipment.
What does gross profit represent?
Net income from the sale of products. Sales - cost of goods sold
What does operating income represent?
Gross profit - general operating expenses
What does net income represent?
Operating income + additional income (including investment income) - other expenses
What does comprehensive income represent?
Net income, plus items not required to be reported on the income statement. (Unrealized gains and losses on securities, gains and losses in foreign translation, changes in minimum pension liability)
Does FASB require reporting of comprehensive income?
Yes
What are the components of shareholders equity?
Paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock
The total amount invested by the shareholders in the corporation; includes par value and additional amounts contributed by owners.
Paid-in capital
Cumulative profits/losses of a company - dividends paid to shareholders
Retained earnings
Paid-in capital is the total amount invested by shareholders. What are the two components to paid-in capital?
Par value
Additional amount contributed by shareholders
What are retained earnings?
Cumulative profit or losses of a company, reduced by any dividends paid out to shareholders.
How does repurchasing stock (treasury stock) affect a company’s finances?
Cost of the stock is deducted from shareholders equity
Cash is reduced since it was used to pay for the stock.
What does the statement of cash flows accomplish?
Reconciles the beginning and ending cash. It helps determine the ability to meet obligations.
What are the sections of the statement of cash flows?
cash flows from operating activities (begins with net income)
Items not affecting cash flow (depreciation, increase or decrease in payables/receivables)
Cash flows from investing activities
Cash flows from financing activities
What does the statement of cash flows do?
Reconciles the beginning and ending cash of the corporation. It determines ability to meet obligations.
What are the sections of statement of cash flows?
Cash flows from operating activities
Items not affecting cash flow (depreciation, increase or decrease in payables/receivables
Cash flows from investing activities
Cash flows from financing activities
An insurer’s balance sheet is dominated by ____ and ______ investment assets.
Debt / equity
What are assets listed uniquely on insurers’ balance sheets?
Premium receivables
Reinsurance recoverables
Deferred policy acquisition costs
List liabilities unique to insurers. (Balance sheet)
Unpaid losses and lae
Unearned premium reserves
Shareholders equity (includes comprehensive income)
What are the two primary revenues for an insurer? (On income statement)
Investment income
Premium income
What are the primary expenses of an insurer? (On income statement)
Losses
Lae
Policy acquisition costs
Why might an insurer’s statement of comprehensive income be large?
Unrealized capital gains and losses may be significant.
This section explains and amplifies financial statement information. It talks about the nature of operations; lists long-term debt; summarizes significant accounting policies; reports information by business segment; contains a summary of loss contingencies
Notes to financial statements
What information might a summary of loss contingencies contain?
Product warranty obligations
Current or pending legal action
Hold-harmless agreements
Risk to property by casualty
How often is 10K filed?
Annually
What does 10K contain?
Items not in annual report; bylaws and legal documents.
How often is 10Q filed?
First three quarters.
What does 10Q contain?
Unaudited financial statements
Listing of material events during the quarter
When is 8-K filed?
Whenever a major event occurs.
What are the required sections of the annual report?
Financial statements and notes
Report of management (signed by chairman and CEO)
Report of auditors
Management discussion and analysis of operations (explains operating results
Selected data
What are optional sections of the annual report?
Letter to shareholders
Corporate message
Financial highlight
List of board of directors and management
Other corporate information, such as contact information
What do financial statements not measure?
Qualitative assets such as business reputation, strength of management team, product brand
What is a main weakness of financial statements?
They reflect any assets at historical cost instead of current value.
This occurs when a company is purchased at a price that exceeds the value of its tangible assets
Goodwill
What are non-current assets?
Will be used in more than a year.
What is a benefit of a reduction in goodwill?
Tax deduction; therefore improved cash flow.
Provide examples of non-current assets
Property, Plant, Equipment (less depreciation), intangible assets, goodwill
Provide examples of current liabilities
accounts payable, wages payable, taxes payable, short-term debt
What is the formula to calculate the cost of goods sold?
Beginning inventory + additions to inventory = amount that could have been sold - ending inventory
Order of income statement calculations
Sales - cost of goods sold = gross profit
Gross profit - general operating expenses = operating income
Operating income + other income and expenses = net income before taxes
Subtract taxes to get net income
How does the statement of changes in shareholders equity flow?
Shareholders equity = Paid-in Capital (raised from stock) \+ Retained earnings (this is net income less dividends paid) \+ Accumulated other comprehensive income - treasury stock
What is the statement of cash flows used for?
Identify sources and uses of cash. It determines and organization’s ability to generate positive future cash flows, its ability to meet its financial obligations, and its need for additional financing.
How does the statement of cash flows flow?
Cash at end of year
Cash flows from operating activities (net income)
+-
Items not affecting cash (depreciation, increase/decrease in accounts receivable, increase/decrease in inventories and supplies, increase/decrease in payables, cash from (used for) operating activities)
+-
Cash flows from financing activities (proceeds from issuance of debt, proceeds from issuance of common stock, disposition (purchase) of treasury stock, dividends paid to shareholders, cash from (used for) financing activities)
=
Increase (decrease) in cash
+
Cash, beginning of year
What are the three goals for the md&a?
1) provide a narrative explanation that enables users to view the company from management perspective.
2) improve overall financial disclosure and provide the context within which financial statements should be analyzed.
3) provide information about the quality and potential variability of the company’s income and cash flow that addresses the likelihood that past performance indicates future performance.
What are considered current assets on the balance sheet?
Cash, inventory,
Accounts receivable, marketable securities
How are non current assets valued on the balance sheet?
Historical cost less depreciation
What are considered liabilities?
Accounts payable, short-term debt, current position of long-term debt. Long-term bites payable (
Non current liability)
What is usually the largest asset on an insurer’s balance sheet?
Financial investments
What are the unique categories of assets to an insurer?
Premium receivables
Reinsurance recoverables
Deferred policy acquisition costs
What are the unique categories of liabilities to an insurer?
Unpaid losses
Lae
Unearned premium
What is included in the notes to financial statements?
Description of operations
Summary of significant accounting policies and changes to accounting policies
A detailed list of long-term debt
A summary of loss contingencies and other commitments (leases/rentals)
A report of selected information by business segment
Any other explanations that management deems necessary to help the user understand the financial statements.
What does the 10k contain?
Bylaws, legal documents
What does the 10q contain?
Unaudited financial statements
MD&A
List of material events which occurred
When does 8K get filed.
Within four business days of triggering event.
What are required sections of annual reports?
Financial statements and notes Auditors report Report of management Md&a Selected financial data
What info is not required in annual report but usually included?
Financial highlights
Letter to shareholders
Corporate message
Names of board of directors and management
Corporate information such as date of annual meeting; stock trading information; contact information for investor relations, media relations, and company news.
What is the report of management.
Report to users signed by chairman and cfo . Management acknowledges responsibility for the quality and integrity of statements and accuracy and effectiveness of internal controls over financial reporting. Says they were reviewed by independent accounting firm.
When are expenses reported under cost of goods sold?
After inventory items are sold.
Where does net income appear?
Income statement, statement of changes in owners equity, statement of cash flows
How would an equipment purchase be reported?
As an asset on balance sheet and statement of cash flows
What is vertical analysis?
Use of common-size statements to highlight basic relationships among items wishing a single set of financial statements.
How is vertical analysis done?
Look for unusual percentages in common size statements eighth excessively large or small values compared to competitors or to a benchmark.
What is trend analysis?
Analysis that identifies patterns in past losses and then projects these into the future.
What is ratio analysis?
A financial analysis tool used to study the financial condition of an account; two or more data items from accounting records of a company are related to one another and the result is compared to results for prior accounting periods for similar businesses.
What are common sized statements?
A financial statement in which amounts are reported as a percentage of a base figure.
