Chapter 2-Accounting Equation Flashcards
Asset
Is a resource controlled by the entity as a result of past events, from which future economic benefit is expected.
Liability/liabilities
Are a present obligation of the entity as a result of past events, the settlement of which is expected to result in an outflow of economic benefit.
Owner’s equity
Is the residual interest in the assets of the entity after liabilities have been deducted.
Equities
Are the claims on the assets of the firm, consisting of both liabilities and the owner’s equity.
What is the accounting equation?
Assets = Liabilities + Owner’s equity
Balance sheet
Is an accounting report that details a firm’s financial position at a particular point in time by reporting its assets, liabilities and owner’s equity.
Classifying/classification
Grouping together items that have some common characteristics.
Current asset vs Non-current asset
Current assets are a resource controlled by the entity as a result of past events, from which future economic benefit is expected within 12 months or less.
Non-current asset are a resource controlled by the entity as a result of past events, from which future economic benefit is expected after 12 months period.
Current liability vs Non-current liability
Current liability is a present obligation of the firm due to past events, the settlement of which is expected to result in an outflow of future economic benefit within 12 months or less.
Non-current liability is a present obligation the firm as a result of past events, the settlement of which is expected to result in an outflow of economic benefit after the 12 month period.
Indicator
A measure that expresses profitability, liquidity and stability in terms of the relationship between two different elements of performance.
Liquidity
The ability of the business to meet its short-term debts as they fall due.
Working Capital Ratio(WCR)
A liquidity indicator which compares a firm’s current assets and current liabilities to determine whether the business has sufficient economic resources to cover its present obligation.
WCR Formula
WCR = Current Assets
——————
Current Liabilities
Stability
The ability of the business to meet its debts and continue its operations in the long term.
Debt Ratio(def) and DR Formula
Debt Ratio measures the proportion of the firm’s assets that are funded with external sources
DR= Total Liabilities
————— X 100
Total Assets
