Chapters 1-4 Flashcards
Going Concern Assumption
Rationale for why plant assets are not reported at liquidation value.
Economic entity assumption
Indicates that personal and business recording should be separately maintained
Monetary Unit Assumption
Only those things that can be expressed in money are included in the accounting records
Periodicity Assumption
Company can divide its economic activities into artificial time periods (monthly, quarterly, yearly)
Historical cost principle
GAAP requirement that companies account for and report most assets and liabilities on the basis of acquisition price
Revenue Recognition Principle
Principle prescribing that revenue is recognized when it’s earned
Expense Recognition Principle
Also known as matching, expenses should be recognized in the same period that the related revenues are recognized
Full disclosure principle
Ensures all relevant financial information is reported
Cost-Benefit relationship
The cost of providing the info against the benefits that can be derived from using it
Materiality constraint
Immaterial items need not be given a strict accounting treatment
Industry practices constraint
States that peculiar nature of some industries and business require departure from what normally be considered good accounting practice
Conservatism constraint
Dictates that in matters of doubt and uncertainty that the accountant should choose the safest option
Fair Value
Assets and liabilities should be reported at fair value
Cost constraint
Weigh the cost that companies will incur to provide the information against the benefit that the financial statement users will gain from having information available.
Debt to assets ratio
Total Liabilities divided by total assets
Current ratio equation
Current assets divided by current liabilities
Free cash flow
Cash provided by operations-Cash Exp.-Cash Div
Three types of ratios
Profitability
Liquidity
Solvency
Liquidity
Ability to pay obligations due in the next year/cycle
Working capital equation
Ca-CL
Define solvency
Ability to survive long term
What is included on the income statement?
Revenue
Expenses
Net income
R-i=Ni
Retained Earnings Statement
“For the month ended”
Beg. RE
Add: NI
Minus: Dividends
End RE
Balance sheet
Exact date
Assets
Total assets
Liabilities and SE Liabilities Total Liabilities SE Total SE Total SE and liability (Should equal assets)
Statement of Cash flows
Cash flows from operating activities
Cash flows from
Classified Balance Sheet
Assets
CA LTInvestments PPE (Minus depreciation) Intangible assets and goodwill
Liabilities
Current liabilities
LTLiabilities
SE
What accounts are natural debits
Assets
Dividends
Expenses
Basic accounting equation
Assets=Liabilites+SE
What makes up SE in debits and credits
Common stock RE Dividends Revenues Expenses
Earnings per share equation
Net income - preferred dividends divided by weighted average common shares outstanding
Solvency
Ability to pay interest as it comes due and to repay the balance of a debt due at its maturity
Liquidity
Ability to pay obligations expected to become due short term
