Chapter 2 - GAAP Financial Statements Flashcards
A document that quantitatively represents an organization’s financial activities or status
Financial Statement
The classification, analysis, and determination of the appropriate method of reporting the effects of the bookkeeping records in an organization’s financial statements
Accounting
What are the four primary financial statements?
Balance sheet, income statement, statement of changes in the shareholder’s equity, and statement of cash flows
The financial statement that reports the assets, liabilities, and owners’ equity of an organization as of a specific date. Indicates the financial position (strength) of an organization.
Balance Sheet
The difference between assets and liabilities in a for-profit business
Shareholder’s equity (a.k.a. Owners’ equity, net worth, or book value)
A balance sheet asset classification that includes cash and other assets that are expected to be sold, converted into cash, or exchanged within the business’s normal operating cycle (usually one year)
Current assets
The difference between the price paid for an acquired organization and the book value if the acquiring organization pays more than the book value for the acquired organization
Goodwill
A balance sheet liability classification that includes obligations whose payments are reasonably expected to require the use of cash or the creation of other current liabilities within one year
Current liabilities
The cumulative net income that an organization has retained, after payment of dividends, for reinvestment in the organization’s operations
Retained earnings
Provides stakeholders with information regarding the profitability of an organization over a given period of time.
Income statement
The inflow of assets, usually cash or accounts receivable, resulting from the sale of products or the rendering of services
Revenue
Measured by the assets relinquished or consumed in the process of delivering goods or rendering services to customers
Expenses
Sales minus the cost of goods sold on the income statement.
Gross Profit
Gross profit expressed as a percentage of gross sales (gross profit divided by gross sales)
Gross Margin (or Gross Profit Margin)
An income statement value that reflects income that results from the normal operations of the business during the period covered by the statement; calculated as the gross profit less selling, general, and administrative expenses.
Operating income
Revenue minus expenses plus gains minus losses minus taxes
Net Income
A measure of income that goes beyond that reported on the income statement by including items such as unrealized gains and losses
Comprehensive income
The financial statement that explains any changes that have occurred in the organization’s capital accounts during a specific period
Statement of changes in shareholder’s equity
What are the four major components of shareholders’ equity?
Paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock
The total amount invested in an organization by the owners. Calculated as the par value of the stock issued plus any additional over the par value.
Paid-In Capital
A corporate stock issued as fully paid to a stockholder and subsequently reacquired by the corporation to use for business purposes.
Treasury stock
The financial statement that summarizes the cash effects of an organization’s operating, investing, and financing activities during a specific period
Statement of cash flows
What are the three sections of the statement of cash flows?
Operating activities, Investing activities, and Financing activities
An accounting method that spreads out the expense of a purchase over the life expectancy of the item
Depreciation expense
Contain additional details that are disclosed to explain or amplify the information presented in the financial statements.
Notes to the Financial Statements
An existing condition, situation or set of circumstances involving uncertainty as to a gain or a loss to a company.
Contingency
Form required to be filed annually with the SEC by publicly traded companies. Similar to their annual report except that it contains more-detailed information about the company’s business, finances, and management. Also includes info such as company bylaws and other legal documents.
Form 10-K
An abbreviated version of the 10-K report that publicly traded companies must file quarterly. Includes unaudited financial statements, Management Discussion & Analysis for the quarter, and a list of material events that have occurred within the company for the past 3 months
Form 10-Q
The “current report” that publicly traded companies must file within four days of a major event to announce it to shareholders.
Form 8-K
A formal report on the company’s performance for the stated year
Annual report
A report to the users of the financial statements signed by the chairman of the board and the chief financial officer in which the company’s management acknowledges its responsibility for the quality and integrity of the company’s financial statements.
Report of Management
Report used to explain the company’s operating results and condition. It should also provide insight into the opportunities, challenges, and risks faced by the company as well as the actions being taken to address them.
Management Discussion & Analysis of Results (MD&A)
The provision of sufficient detail regarding transactions to enable a prudent investor to understand the economic effect of those transactions on the company’s financial statements.
Transparency
What are two significant limitations of financial statements?
- They do not measure the economic value of qualitative assets
- They do not give the current fair (market) value of all the organization’s assets and liabilities
Intangible items an organization develops such as its marketplace reputation, brand recognition, management team strength, or productive workforce. Not currently measured by financial statements.
Qualitative assets
