Chapter 2 - Financial Statements

Question 1

Classified Balance Sheet

Answer 1

Groups together similar assets and similar liabilities, using different classifications and sections to (1) identify if the company has enough assets to pay its debts and (2) the claims of short and long-term creditors on the company’s total assets.

Question 2

Current Assets

Answer 2

Assets that a company expects to convert to cash or use up within one year or its operating cycle. (example: accounts receivable)

Question 3

Operating Cycle

Answer 3

The average time required to go from cash to cash in producing revenue—to purchase inventory, sell it on account, and then collect cash from customers.

Question 4

List Current Assets in order of Liquidity

Answer 4

(1) cash, (2) investments, (3) receivables (accounts receivable, notes receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (insurance and supplies).

Question 5

Long Term Investments

Answer 5

(1) investments in stocks and bonds of other corporations that are held for more than one year, (2) long-term assets such as land or buildings that a company is not currently using in its operating activities, and (3) long-term notes receivable

Question 6

Property, Plant and Equipment

Answer 6

Assets with long useful lives that are currently used in operating the business such as land, buildings, equipment, delivery vehicles, and furniture.

Question 7

Depreciation

Answer 7

The allocation of the cost of an asset to a number of years

Question 8

Accumulated Depreciation

Answer 8

The total amount of depreciation that the company has expensed thus far in the asset’s life

Question 9

Intangible Assets

Answer 9

Assets that do not have physical substance and yet often are very valuable.

Question 10

Current Liabilities

Answer 10

Obligations that the company is to pay within the next year or operating cycle.

Question 11

Long Term Liabilities

Answer 11

Obligations that a company expects to pay after one year.

Question 12

Stockholders’ Equity

Answer 12

1. Common stock: Investments of assets into the business by the stockholders
2. Retained earnings: The income retained for use in the business

Question 13

Common Stock is also called…

Answer 13

Capital Stock

Question 14

Ratio Analysis

Answer 14

Expresses the relationship among selected items of financial statement data

Question 15

Profitability Ratios

Answer 15

Measure the operating success of a company for a given period of time.

Question 16

Liquidity Ratios

Answer 16

Measure short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Question 17

Solvency Ratios

Answer 17

Measure the ability of a company to survive over a long period of time.

Question 18

Liquidity

Answer 18

The ability to pay obligations expected to become due within the next year or operating cycle.

Question 19

Working Capital

Answer 19

A measure of liquidity which is the difference between the amounts of current assets and current liabilities

Question 20

Current Ratio

Answer 20

Current assets divided by current liabilities

Question 21

Solvency

Answer 21

A company’s ability to pay interest as it comes due and to repay the balance of a debt due at its maturity

Question 22

Debt to Asset Ratio

Answer 22

Calculated by dividing total liabilities (both current and long-term) by total assets and is a measure of Solvency

Question 23

Free Cash Flow

Answer 23

The net cash provided by operating activities after adjusting for capital expenditures and dividends paid