Financial Statements - Summary Flashcards
measures the performance of the firm for the period. It is dated for the entire period (e.g., for the year ended December 31, 20xX).
The income statement
is prepared by applying the all-inclusive approach. That is, almost all revenues, expenses, gains, and losses are shown and are included in the calculation of net income.
The income statement
A major exception that isn’t included in the income statement is _______.
prior period adjustments, which are the effects of corrections of errors affecting prior year net income.
are shown on the Statement of Retained Earnings as adjustments to the beginning balance of retained earnings in the year the error is discovered.
prior period adjustments
There are other items that would appear to be income items but are not reflected in net income. These include ____ and are included in _____ which is now a required disclosure.
unrealized gains and losses on investments in securities available-for-sale, certain pension cost adjustments, and foreign currency translation adjustments.
comprehensive income
reports all non-owner changes in equity over a period of time—the same time period as the income statement. This statement is also dated for the year ended December 31, 20xX. includes net income (or loss)
The statement of comprehensive income
the items included in comprehensive income that are not part of net income. Those items include:
- Unrealized gains and losses on available-for-sale securities
- Adjustments in the calculation of the pension liability
- Foreign currency translation adjustments
- Deferrals of certain gains or losses on hedge accounting
discloses the resources of the firm at a point in time and is formally referred to as the Statement of Financial Position. It is dated as of a specific date (e.g., December 31, 20xX)
The balance sheet
A business enterprise discloses its economic resources (assets) and the manner of financing the acquisition of those resources (creditors, owners’ contributions, and prior year’s earnings) in
the balance sheet.
The presentation format for a balance sheet is typically one of two formats:
the account format or the report format.
the assets are shown on the left side of the page, and the liabilities and owners’ equity are shown on the right side. This format emphasizes the balance sheet equation: A = L + OE.
The account format
the most popular form, the three categories of accounts are listed from top to bottom, as in a report, with assets always shown first.
The report format
are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant, and equipment).
Assets, as shown in the balance sheet
are shown in order of maturity. Current liabilities are presented first and then it’s longer than a year long-term liabilities are presented.
Liabilities, as shown in the balance sheet
(also referred to as Shareholders’, Stockholders’, or Shareowners’ Equity) items are shown in order of permanence.
Owners’ equity, as shown in the balance sheet
is the period of time required to purchase or produce inventory, sell the inventory, and collect cash from the resulting receivables. For most firms, is significantly less than one year. For firms in some industries, such as construction, it’s longer than a year
The operating cycle of a firm
reflects the classification of assets and liabilities. The classification criteria used for each is indicated below and is affected by the firm’s operating cycle.
Balance sheet presentation
Assets that are in the form of cash, or will be converted into cash, or consumed within one year or the operating cycle of the business, whichever is longer.
Current Assets
Liabilities that are due in the upcoming year or in the operating cycle of the business, whichever is longer, and that will be met through the transfer of a current asset or the creation of another current liability. Both criteria must be met in order for a liability to be classified as
Current liabilities
Cash, accounts receivable, short-term investments, inventory, and prepaid assets are
Current Assets
Accounts payable, wages payable, income tax payable, unearned revenues, and warranty liability are
Current Liabilities
only the portion to be extinguished within one year of the balance sheet would be classified as current.
unearned revenues, and warranty liability
the current portion of ______ is classified as current; it is the amount of debt previously classified as long-term that is now due within one year of the balance sheet date.
Long term debt
These are defined by exclusion. All assets that do not meet the criteria necessary to be classified as current are classified as
long-term assets
all liabilities that do not meet the criteria necessary to be classified as current are classified as
long-term liabilities.
Long-term investments, plant assets, certain deferred charges, and intangible assets are
non-current assets
Notes and bonds payable and mortgages payable are
long-term liabilities
CPA Exam questions tend to emphasize sections of the balance sheet. For example, a question might focus on the property, plant, and equipment section of the balance sheet or on the long-term liability section of the balance sheet. As we cover the individual items presented on the balance sheet, these problems will be a primary focus.
The point here is that the meaning of the dollar amount of an item listed in the balance sheet depends on the account being measured.
PPE, Intangibles
Measured at Historical Cost and Depreciated/Amortized Historical Cost
Receivables
Measured at Net Realizable Value
Inventory
Measured at Lower of Cost or MArket
Investments in Marketable Securities
Measured at Market Value
Liabilities
Measured at Present Value
Owners’ Equity
Measured at Historical Value of Cash Inflows and Residual Valuation
presents the changes in the owners’ equity over a period of time—the same time period as the income statement. Like the income statement, this statement is dates for the year ended (e.g., December 31, 20xX).
The statement of stockholders’ equity (sometimes referred to as shareholders’ equity)
This statement presents the changes in contributed capital, additional paid-in capital, and retained earnings. These changes arise from the purchase and sale of shares of the entities stock, the changes in comprehensive income, and the payment of dividends.
Statement of Stockholders’ Equity
is the third of the three major financial statements required to be reported. It describes the major changes in cash by meaningful category. Like the income statement, it is dated for the entire period (e.g., for the year ended December 31, 20xX).
Statement of Cash Flows
The purpose of this statement is to explain the change in cash and cash equivalents that has occurred during the past accounting year.
Statement of Cash Flows
Cash equivalents are short-term investments that:
- Are convertible into a known and fixed amount of cash; and
- Have an original maturity to the purchaser of three months or less.
Example: A US treasury obligation purchased when there are three months or less remaining to maturity is a
cash equivalent
Investments in stocks are not ____ because they have no maturity value and are not convertible into a specific unchanging amount of cash.
cash equivalents
In reviewing the statement of cash flows, it is important to remember the articulation between the balance sheet and the statement of cash flows. If the statement of cash flows employs a pure cash definition of funds, the first asset listed on the balance sheet will be cash. If the statement of cash flows employs a broader definition of funds (cash and cash equivalents), the first asset listed on the balance sheet will be Cash and Cash Equivalents.
The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB
operating, investing, and financing.
operating, investing, and financing.
Those cash flows related to transactions that flow through the income statement.
Operating
Cash flows related to the acquisition and disposal of long-term assets and investments (other than cash equivalents and trading securities; these are operating).
Investing
Cash flows related to the liabilities and owners’ equity sections of the balance sheet.
Financing
cash inflows include receipts from customers and interest. Cash outflows include payments to suppliers, to employers, and to taxing authorities.
Operating
cash outflows include purchases of plant assets and investments. Cash inflows include proceeds from the sale of these items.
Investing
cash inflows include issuing debt and equity securities. Cash outflows include retirement of debt and equity securities, and dividend payments.
Financing
Which of the following defines equity as it relates to a business entity?
Net revenues
Total revenues less total expenses
Total assets and liabilities
Total assets less total liabilities
Total assets less total liabilities
How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord’s financial statements?
Current asset
Current liability
Long-term asset
Long-term liability
Current liability
Which of the following would be reported as an investing activity in a company’s statement of cash flows?
Collection of proceeds from a note payable.
Collection of a note receivable from a related party.
Collection of an overdue account receivable from a customer.
Collection of a tax refund from the government.
Collection of a note receivable from a related party.
