Chapter 2 Flashcards
Asset
An asset is a resource on or controlled by a company and expected to provide the company with future economic benefits.
Companies acquire assets to yield a return for their shareholders. Assets are expected to produce revenues either e.g Inventory that is sold or indirectly E. G. A manufacturing plant that produces inventories for sale. To create shareholder value, assets must yield resources that are in excess of the cost of the funds utilized to acquire the assets.
Two characteristics of an asset
1)It must be owned or controlled by the company. 2)It must possess probable future benefits that can be measured in monetary units.
Liquidity
Refers to the ease of converting non-cash assets into cash.
Current assets
The most liquid assets are called current assets
Example
Cash and cash equivalents: currency, bank deposits, certificates of deposit, and other cash equivalents.
Marketable securities: short term investments that can be quickly sold to raise cash.
Accounts receivable: amounts due to the company from customers arising from the past sale of products or services on credit.
Inventory: goods purchased or produced for sale to consumers, and supplies used in operating activities.
Prepaid expenses: cost paid in advance for rent, insurance, or other services.
Non-current assets
Long-term assets.
Examples:
Long-term financial investments.
Property, plant, and equipment(PPE).
Intangible and other assets - Includes patents, trademarks, franchise rights, goodwill, and other items that provide future benefits, but do not possess physical substance.
Historical cost
Historical cost a reliable because the acquisition cost, the amount of cash paid to purchase I said, can be objectively determined and accurately measured. The disadvantage of historical cost that some assets can be significantly under valued on the balance sheet. For example, the land in Anaheim California, on which Disneyland was built, was purchased for a mere fraction of its current fair value.
Liabilities
A liability is a probable future economic sacrifice resulting from a current or past event. The economic sacrifice can be a future cash payment to a creditor, or it can be an obligation to deliver goods or services to a customer at a future date.Represent the firms obligations for borrowed funds from lenders or bond investors, as well as obligations to pay suppliers, employees, tax authorities, and other parties. These obligations can be interest-bearing or non-interest-bearing.
Equity
Equity represents capital that has been invested by the shareholders, either directly via the purchase of stock, or indirectly in the form of earnings that are reinvested in the business and not paid out as dividends.
A liability must be reported in the balance sheet when each of the following three conditions are met
1) The future sacrifice is probable.
2) The amount of obligation is known or can be reasonably estimated.
3) The transaction or event that caused the application has occurred.
Current liabilities
Liability on the balance sheet are listed according to maturity. Obligations that are due within one year or within one operating cycle are called current liabilities.
Examples
Accounts payable, amount owed to suppliers for goods and services purchased on credit.
Accrued liabilities, Obligations for expenses that have been recorded but not yet paid.
Short term borrowings: short term debt payable to banks or other creditors.
Deferred/unearned revenue’s: an obligation created when the company excepts payment in advance for goods or services it will deliver in the future.
Current maturities of long-term debt: the current portion of long-term debt that is due to be paid within one year.
Non-current liabilities
Our obligations to be paid after one year
Examples
Long-term debt: amount borrowed from creditors that are scheduled to be repaid more than one year in the future.
Other long-term liabilities: various obligations, such as warranty and deferred compensation liabilities and long-term tax liability, that will be satisfied at least a year in the future.
Stockholders equity
Equity reflects capital provided by the shareholders of the company. It is often referred to as residual interest. That is, stockholders have a claim on any assets that are not needed to meet the companies obligations to creditors.
Contributed capital
Common stock, additional paid in capital, treasury stock. Is the net funding that a company has received from issuing and requiring its equity shares.
Earned capital
Retained earnings, and accumulated other comprehensive income or loss. Earn capital is the cumulative net income and losses retained by the company not paid out to shareholders as dividends.
Retained earnings
The accumulated earnings that have not been distributed to stockholders as dividends
