Cycle 2 Flashcards
Financial Statements
- The Balance Sheet, Income Statement, and Statement of Cash Flows are a
firm’s primary statements. - The 3 primary statements highlighted above plus the Statement of Owners’
Equity and the firm’s Note Disclosures are collectively referred to as the firm’s
“Financial Statements
Statement of Cash Flows
The Statement of Cash Flows shows the cash into and out of the firm, i.e. the
Cash account from the Ledger (or Balance Sheet).
3 Categories of Cash Flows
Operating cash flows, investing cash flows, and financing cash flows
Gains
Similar to revenues, but they are the result of peripheral activities that are not central and ongoing activities of the firm.
Losses
Mirror images of Gains. Similar to negative revenue, but they are the result of peripheral activities that are not central and ongoing activities of the firm.
Revenue Principle
Stipulates that one books (records, recognizes,
journalizes) revenue when it is earned and it is realized or realizable . By realizable , it means that the receivable will likely turn into cash. Also, it requires that a company recognize revenue (1) when the company transfers promised goods or services to customers (2) in the amount it expects to be entitled to receive.
Accrual Accounting
Revenues are recognized when goods and services are provided to customers (they are earned), and expenses are recognized in the same period as the revenues to which they relate (resources are used or debts are incurred to generate revenues), regardless of when cash is received or paid. Two principles, the Revenue principle and the Expense Principle, are the basis of Accrual Accounting.
Expense Principle
The Expense Recognition Principle (also called the matching principle) requires that costs incurred to generate revenues be recognized in the same period - matching costs with benefits.
Fair Value Accounting
- The purpose of Fair Value Accounting is to show current market values,
because they are deemed relevant even though they may not be very reliable
and go against general conservative accounting principles. - Fair Value Accounting is an accounting system that is “bolted on” to the Accrual Accounting system. It requires the recognition of unrealized losses and
unrealized gains for certain select assets and liabilities. - It is “non transactions based” since the gains and losses are from changes in value and not from transactions with independent parties.
Intangibles - Identifiable
- Patents [Amortizable
(definite life)] - Trademarks [Non
amortizable
(indefinite life)]
Intangibles - Non-Identifiable
Goodwill [Non amortizable
(indefinite life)]
Operating Cash Flow…
Create revenue, expenses, gains and losses.
Investing Cash Flow…
Relate to non-current assets
Financing Cash Flow…
Obtain cash from and pay cash to investors and creditors
Direct Cash Flow Statement
Reports all cash receipts and cash payments from operating activities (from the Ledger)
Indirect Cash Flow Statement
Reconciles from net income to cash provided by operating activities as reported in the Income Statement and Balance Sheet
Cash Flow from Operating Activities - Categories
“O+” or “O-“
+ Net Income
+ Depreciation / Amortization expense(s)
+ Loss on sale of long-term assets
- Gain on sale of long-term assets
- Increases in current assets other than cash
+ Decreases in current assets other than cash
+ Increases in current liabilities
- Decreases in current liabilities
= Net cash provided by operating activities
Cash Flow from Investing Activities - Categories
“I+” or “I-“
+ Sales of long-term assets
- Purchases of long-term assets
+ Collections on notes receivable
- Loans to others
= Net case provided by (used for) investing activities
Cash Flow from Financing Activities - Categories
“F+” or “F-“
+ Issuance of shares
- Purchase of treasury shares
+ Borrowing
- Payment of notes and bonds payable
- Payment of dividends
= Net cash provided by (used in) financing activities
Indirect Method: Preparing the Statement of Cash Flows (core components)
+ Net cash provided by operating activities
+ Net cash from investing activities
+ Net cash provided by financing activities
= Net increase in cash
Intangible
Intangible are assets that have special rights but not physical substance. Are composed of Identifiable and Non-Identifiable Intangibles
Goodwill
For accounting purposes, the excess of the purchase price of a acquired business over the fair value of the acquired business’s assets and liabilities.
= Total Amount Paid- (Fair value of target’s assets - Fair value of target’s liabilities.
• Why pay more than fair value? “Synergies”
Timing of financial statements: Point in time
• Balance Sheet
Timing of Financial Statements: Period of Time
• Income Statement
• Statement of Cash Flows
Amortization
Systematic and rational allocation of the acquisition cost of an intangible asset over its useful life.
Balance Sheet components
• Current Assets
• Non-Current Assets
• Total Assets
• Current Liabilities
• Non-Current Liabilities
• Total Liabilities
• Owner’s Equity
• Stock
• Retained Earnings
• Total Owners Equity
• Total Liabilities & Owners’ Equity
Retained Earnings
The amount of earnings (profits) reinvested in the business (and thus not distributed to stockholders in the form of dividends).
• Financing provided by operations is referred to as earned capital or retained earnings.
• Simply - The portion of profits (Net Profit) reinvested in the business is called Retained Earnings.
Income Statement components
• Sales
• COGS
• SG&A Expense
• Interest Expense
• Income Tax Expense
• Net Income
• Dividends
