Financial Statements Flashcards
Real accounts =
Real accounts are the accounts that end up on the balance sheet and maintain a cumulative balance over time. For example, Green Mountain Coffee’s real accounts include cash, accounts receivable, inventory, and long term debt
All asset liability and owner’s equity accounts are real accounts, also sometimes referred to as stock measures.
Nominal Accounts =
Nominal Accounts are those that reflect activity only of a specific accounting period. For instance, interest expense would only look at the interest expense of that period only. All revenue and expense accounts fall into this category, also known as flow measures.
The balance sheet shows
a company’s financial position as of a specific date. It provides a snapshot of the business at a specific point in time, such as December 31. The balance sheet shows all of the asset, liability, and owners’ equity accounts as of that specific date.
Under US GAAP, the balance sheet presents accounts in the following order:
current assets, non-current assets, current liabilities, non-current liabilities, and owners’ equity. Within each asset and liability group, items are presented in order of liquidity, with the most liquid (those that can be most easily and quickly converted to cash) first.
Under IFRS, the balance sheet is generally presented with
the least liquid items first, and in the following order: non-current assets, current assets, owners’ equity, non-current liabilities, and current liabilities.
The income statement shows
a company’s financial performance over a period of time. It shows all revenue and expense accounts for a given period of time, such as for the year ending December 31, 2014. Using trial balances from any two points in time, a business can create an income statement that will tell the financial story of the activities for that period.
At the end of each accounting period, the balance of all nominal accounts are
transferred to retained earnings (part of owners’ equity, a real account), so their balances start back at zero at the beginning of each accounting period.
Suppose your company issued a 20 year bond to raise additional capital. As you are preparing the balance sheet at the end of 2013, you see that the bond will come due in June of 2014. In which section of the balance sheet does the bond belong?
The correct answer is current liabilities.
Because the bond will come due in less than a year, the amount owed is considered a current liability.
In the US, the accounts are listed in the order of
how quickly and easily they can be converted to cash. This is known as liquidity. More liquid items are listed first and the remaining items are listed in order of decreasing liquidity.
Under international standards, or IFRS, the items are presented in
the reverse order to GAAP; the least liquid items go first and additional items are listed in order of increasing liquidity.
Gross Profit
Revenue - COGS = Gross Profit
For the year 2012, suppose Cardullo’s Gourmet Shoppe had revenues of $1,100,000. Their income statement shows that Gross Profit was $500,000 and Other Expenses were $350,000.
What was Cardullo’s Cost of Goods Sold (COGS)?
Revenue - COGS = Gross Profit
Since we know Revenues were $1,100,000 and Gross Profit was $500,000, COGS must be $600,000. Other expenses is not needed in this calculation.
Operating expenses are
costs that the business incurs to run its normal operations.
Operating Income
the income before taxes and interest.
Above the Line, Below the Line =
The “line” generally refers to gross profit. Above that line on the income statement, typically, are sales and COGS (cost of goods sold) or COS (cost of sales or cost of services). Below the line are operating expenses, interest, and taxes.