chapter two notes Flashcards
what are the qualitative characteristics of useful information?
understandability relevance comparability consistency faithful representation materiality conservatism
“u r close. can faith move circles?”
understandability
information should be compressible to those who are willing to spend the time to understand it
relevance
information makes a difference in decision making
faithful representation
complete, neutral, free from error
comparability
BETWEEN COMPANIES similar methods have been applied (ex: GAAP)
consistency
BETWEEN PERIODS within the same company
materiality
the size of the transaction makes a difference in how it gets recorded
conservatism
never want to overstate assets/revenues or understate liabilities/expenses
objectives and qualitative characteristics of financial reporting are now ____ _____ for IASB and FASB.
the same
classified balance sheet
what obligations will be due and what resources will be available to meet those obligations
current assets
could be converted into cash, sold, or used up during a current period (12 months)
what is the order that current assets should be reported?
- cash
- marketable securities
- accounts receivables
- inventory
- prepaid expenses
ORDER OF LIQUIDITY
“cash means an income proved”
long term investments
investments in stocks and bonds of other companies to be held for more than one year
plant, property and equipment (fixed assets)
acquired for use in business rather than resale to customers
what are some PPE accounts?
- land
- buildings
- equipment, vehicles, furniture
- (-)accumulated depreciation
intangible assets
- patent (sell)
- copyright (artistic)
- trademark/tradename
- franchise/license (area)
- goodwill
goodwill
when a company pays more than fair value of the assets of another company to purchase it
what is the order of assets recorded in a classified balance sheet?
- current assets
- long term investments
- fixed assets
- intangible assets
current liabilities
requires the use of current assets to settle within the next 12 months
what order to you record current liabilities?
- accounts payable
- accrued expenses
- unearned revenue
- short term note payable
ORDER OF MATURITY
“accountants are usually short”
long term liabilities
notes payable, bond payable, mortgage payable
stockholder’s equity
claimed of owners against the net assets of the firm
common stock and retained earnings
what is one of the uses of the balance sheet?
to measure/analyze liquidity
working capital
helps to measure liquidity
CURRENT ASSETS-CURRENT LIABILITIES
current ratio
useful to compare liquidity among companies
CURRENT ASSETS/CURRENT LIABILITIES
what are the limitations of the balance sheet?
historical cost vs fair market value
only a number is recorded
what is the order of a multi-step income statement?
revenues - cost of goods sold =gross profit - operating expenses =income from operations \+ gains/interest revenue - losses/interest expense =net income
gross profit
revenues-cost of goods sold
income from operations
gross profit-operating expenses
net income
income from operations+gains-losses+interest revenue-interest expense
what are some of the uses of income statement?
to analyze profitability
gross profit ratio
gross profit/sales
profit margin (return on sales)
net income/sales
what is the purpose of the statement of retained earnings?
shoes how net income and dividends causes change in a company’s financial position during a period of time
what is the formula for ending retained earnings when there are NO changes in a company’s stock during the period?
beginning retained earnings
+net income
-dividends
=ending retained earnings
what is the purpose of the statement of stockholder’s equity?
shows how net income, dividends, and changes in stock causes change in a company’s financial position during a period of time
what is the formula for ending retained earnings when there ARE changes in a company’s stock during the period?
beginning stockholder’s equity
+new stock (change in stock)
+net income (change in re)
-dividends
what are the elements of annual reports?
- letter from president or chairman of the board of directors
- description of products
- financial section
- independent auditor’s report
what is the order of the financial section of the annual report?
- management report
- financial statements
- notes to financial statements (footnotes)
what is the majority of the annual report?
footnotes (everything that isn’t in the financial statements, but is relevant to decision makers)
FULL DISCLOSURE
unqualified opinion
what everyone hopes for, attests that financial statements are fair in accordance to GAAP
qualified opinion
for the most part they are following GAAP
