Chapter 2: Financial Statements Flashcards
transaction
economic interchanges between entities that are accounted for and reflected in financial statements [summarized in accounts]
account
record in which transactions affecting individual assets, liabilities, stockholders’ equity, revenues, and expenses are recorded [summarized in financial statements]
4 requirements for a financial statement
- financial position (balance sheet) 2. earnings (income statement) 3. cash flows (statement of cash flows) 4. investments (statement of changes in stockholders’ equity)
3 principle forms of business organization
proprietorship, partnership, corporation
proprietorship
activity conducted by an individual
partnership
a group of proprietors who have banded together (LLP)
corporation
formed by having a charter and bylaws and registered by the appropriate office in 1 of the 50 states
stockholder
owner of a corporation
stock
evidence of ownership in a corporation
fiscal year
annual period used for reporting to owners
balance sheet
list of assets, liabilities, stockholders’ equity a a point in time (snapshot of financial position)
accounting equation (balance sheet equation)
assets = liabilities + stockholders’ equity
balance sheet: assets
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions/events (amount of resources controlled/owned by the entity)
balance sheet: liabilities
probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future (amount owed to other entities)
balance sheet: stockholders’ equity
ownership right of the stockholders of the entity in the assets that remain after liabilities (net assets (assets - liabilities)) (referred to as net worth, net assets, owners’ equity)
balance sheet: cash
cash on hand/in bank
balance sheet: accounts receivable
amounts due from customers
balance sheet: merchandise inventory
cost of merchandise acquired but not yet sold
balance sheet: equipment
cost of equipment purchased and used (display cases, racks, shelving, etc. (not the building)
balance sheet: accumulated depreciation
portion of the cost of equipment that is estimated to have been used up in the process of operating the business
balance sheet: depreciation in accounting
process of spreading the cost of an asset over its useful life to the entity (Not to recognize economic loss in value)
balance sheet: other accrued liabilities
amounts owed to various creditors
balance sheet: short-term debt
Amounts borrowed that will be repaid within one year of the balance sheet date
balance sheet: long-term debt
Amounts borrowed from banks or other creditors that will not be repaid within one year from the balance sheet date
balance sheet: accounts receivable
Amounts due to suppliers
balance sheet: current assets
cash and other assets likely to be converted into cash or used to benefit the entity within a year
balance sheet: current liabilities
liabilities likely to be paid with cash within one year of balance sheet date
income statement (profit and loss statement)
The financial statement that summarizes the entity’s revenues, expenses, gains, and losses for a period of time and thereby reports the entity’s results of operations for that period of time. (Did the entity operate at a profit for the fiscal year?); link between balance sheets at the beginning and end of the year
income statement: gains
Increases in net assets from incidental transactions that are not revenues or investments by owners
income statement: losses
Decreases in net assets from incidental transactions that are not expenses or distributions to owners
income statement: net sales/revenue
amount of sales of merchandise to customers less cancelations, returns, etc.
income statement: net income
profit for the period (revenue - expenses)
income statement: cost of goods sold
cost of merchandise sold
income statement: gross profit
net sales - cost of goods (max “cushion”)
income statement: income from operations
The difference between gross profit and operating expenses. Also referred to as operating income
income statement: selling, general, admin expenses
operating expenses of entity
income statement: interest expense
cost of using borrowed funds
income statement: income tax
shown after all other items
stockholders equity statement
The amount invested in the entity by the stockholders
par value
An arbitrary value assigned to a share of stock when the corporation is organized. Sometimes used to refer to the stated value or face amount of a security.
retained earnings
Cumulative net income that has not been distributed to the owners/stockholders of a corporation as dividends
common stock
number of shares authorized by corporations charter, number issued, number held by stockholders
dividends
distributions of earnings that have been made to stockholders reducing retained earnings
statement of cash flows purpose
to identify sources and uses of cash during the year
cash flow statement: depreciation expense
The expense recognized in a fiscal period for the depreciation of an asset. Added back to net income because it doesn’t require the use of cash
cash flow statement: cash flows from investing activities
cash used to purchase long-lived assets
comparative statements
financial statements for previous year included as supplementary info in current year
income statement: net income —> balance sheet: stockholders’ equity
net income affects retained earnings which is a component of stockholders’ equity
3 alternate names for income statement
statement of earnings, P&L statement, statement of operations
paid-in capital
total amount invested in the entity by the owners (common stock + additional paid-in capital
concepts related to entire model
account equation (A=L+SE), accounting entity (identified and accounted for), going concern (will continue to operate)
