exam 1 Flashcards
Operating
cash flows that directly relate to earning income (revenue and expenses)
Investing
cash flows related to the acquisition or sale of the company’s productive assets (assets related to the business)
Financing
cash flows directly related to the receipt of money from investors and creditors and payment of money to investors and creditors (not suppliers)
If people buy your stock; if you take out a loan from a bank
balance sheet
A = L + SE
income statement
revenue - expenses = net income
Statement of retained earnings
Beginning retained earnings + net income - net loss - dividends = ending retained earnings
Statement of cash flows
+/- cash flow from operating activities
+/- cash flow from investing activities
+/- cash flow from financing activities
= net change (increase or decrease) in cash
Current Assets
assets that a company expects to be converted to cash within one year or one operating cycle, whichever is longer
Listed in order of liquidity
Long Term Investments
Stocks and bonds held for long-term investment ( > one year)
Property, plant, and equipment and / or land NOT currently used in operations of the business (purchased and held for investment only)
Long-term notes receivable
Property, Plant, and Equipment (PP&E)
(or fixed assets) assets used in operations of the business
Ex: land, buildings, equipment, machinery, etc.
Items usually have long useful lives
- accumulated depreciation
depreciation
spread the cost of purchasing the asset over the number of years the company expects to use the asset
- Cost is called depreciation expense and goes with other expenses on the I/S
accumulated depreciation
running total of the amount of depreciation expense
Intangible Assets
assets which have no physical substance and represent long-lived exclusive rights or privileges
- some are amortized
amortization
spread the cost of the asset over the number of years the company expects to use the asset
- Some intangibles will be used “forever” - these are NOT amortized
accumulated amortization
running total of the amount of amortization expense
current liabilities
obligations that are expected to be paid within one year or one operating cycle, whichever is longer
long-term liabilities
obligations that are expected to be paid after one year
stockholder’s equity
Common stock: investments of assets into the business by stockholders
Retained earnings: income retained for future use in the business
earnings per share
measures net income earned on each share of common stock
Net income - Preferred Dividends / Weighted average common shares outstanding
earnings per share is a measure of _____
profitability
Debt-to-assets ratio
measures the proportion of the business that is financed by creditors (rather than stockholders)
The higher the percentage of debt financing, the riskier the business
Lower is better
Total liabilities /Total Assets
Debt-to-assets ratio is a measure of ______
solvency
DEA
↑ Debit, ↓ Credit
LER
↓ Debit, ↑ Credit
General rules for accrual basis
Revenue is recognized when earned
Expenses are recognized when incurred
Revenue Recognition Principle
revenue is recognized when it is earned without regard to when payment (cash) is received
Expense Recognition Principle
expenses are the cost of the goods and services used up in the process of earning revenue
Matching principle
revenue earned should be matched (offset) with the expenses incurred in the same period
“Let the expenses follow the revenues”
Interest expense
$ borrowed X interest rate X # months / 12
Depreciation expense
(cost - salvage) / useful life
Closing entries
- at the end of the year you must “move” (close) the balances in all Income Statement accounts (revenues, expenses, gains, or losses) and the Dividend account into Retained Earnings
- Means that the income statement (temporary) accounts start the next year with $0 balances (zero out income statement accounts at the end of each period)
- Do NOT close any of the Balance Sheet (these are permanent accounts)
