Chapter 3 Flashcards
The Balance Sheet & Financial Disclosures
Liquidity
The ability of a company to convert its assets to cash to pay its current liabilities
Long-Term Solvency
An assessment of whether a company will be able to pay all its liabilities, which includes long-term liabilities
Book Value
Assets minus liabilities as shown in the balance sheet
(usually not a direct measure of a company’s market value)
Operating Cycle
Period of time necessary to convert cash to raw materials, raw materials to finished product, the finished product to receivables, and then finally receivables back to cash
Cash Equivalents
short-term investments that have a maturity date no longer than three months from the date of purchase
Short-Term Investments
Investments not classified as cash equivalents that the company has the ability and intent to sell within one year (or operating cycle if longer)
Accounts Receivable
Amounts to be received from the sale of goods or services on account
Inventory
Goods awaiting sale (finished goods), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials). Goods acquired, manufactured, or in the process of being manufactured for sale
Long-Term Assets
Assets expected to be converted to cash or consumed in more than one year (or operating cycle)
(Includes: investments, property/plant/equipment, intangible assets, other long-term assets)
Property, Plant, and Equipment
Tangible, long-lived assets used in the operations of the business, such as land, buildings, equipment, machinery, furniture, and vehicles, as well as natural resources, such as mineral mines, timber tracts, and oil wells
Intangible Assets
Operational assets that lack physical substance and often involve an exclusive right to a company to provide a product or service; examples include patents, copyrights, franchises, and goodwill
Accounts Payable
Obligations to suppliers of merchandise or of services purchased on account
Notes Payable
Promissory notes that obligate the issuing corporation to repay a stated amount at or by a specified maturity date and to pay interest to the lender between the issue date and maturity
Deferred Revenues (Unearned Revenues)
Cash received from a customer for goods or services to be provided in a future period
Accrued Liabilities
Expenses already incurred but not yet paid (accrued expenses)
Current Maturities of Long-Term Debit
The portion of long-term notes, loans, mortgages, and bonds payable that is payable within the next year (or operating cycle, if longer), reported as a current liability
Subsequent Event
A significant development that takes place after the company’s fiscal year-end but before the financial statements are issued
Related-Party Transactions
Transactions with owners, management, families of owners or management, affiliated companies, and other parties that can significantly influence or be influenced by the company
Management’s Discussion and Analysis (MD&A)
Provides a biased but informed perspective of a company’s operations, liquidity, and capital resources.
Proxy Statement
Contains disclosures on compensation to directors and executives; sent to all shareholders each year
Unqualified (Auditor’s Report)
An auditor issues a unqualified (or “clean”) opinion when the auditor has undertaken professional care to ensure that the financial statements are presented in conformity with GAAP.
Unqualified with an Explanatory Paragraph (Auditor’s Report)
The auditor believes the financial statements are in conformity with GAAP but that other important information needs to be emphasized to financial statement users.
(Ex: lack of consistency, going concern, material misstatement)
Qualified Opinion (Auditor’s Report)
Adverse Opinion (Auditor’s Report)
When the auditor has specific knowledge that financial statements or disclosures are seriously misstated or misleading
Disclaimer (Auditor’s Report)
When the auditor is not able to gather sufficient information that financial statements are in conformity with GAAP
Comparative Financial Statements
Corresponding financial statements from the previous years accompanying the issued financial statements
Horizontal Analysis
Comparison by expressing each item as a percentage of that same item in the financial statements of another year (base amount) in order to more easily see year-to-year changes
Vertical Analysis
Expression of each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, but within the same year
Ratio Analysis
Comparison of accounting numbers to evaluate the performance and risk of a firm
Current Ratio
Current Assets / Current Liabilities
Acid-Test (Quick Ratio)
Quick Assets / Current Liabilities
Working Capital
Differences between current assets and current liabilitiesim
