General Purpose Financial Statements Flashcards
What is the Balance Sheet
The Balance Sheet is a statement of financial position as of a specific date. It reports economic resources and obligations as of a specific date.
What is the main premise of the Balance Sheet
Assets = Liabilities + Shareholders’ Equity
Assets are what is owned
Liabilities are what is owned
Shareholders’ Equity is the ownership stake in the company.
What is the order of items on the Balance Sheet
From top to bottom:
Current Assets Long Term Assets Short Term Liabilities Long Term Liabilities Shareholders' Equity
Note: Assets are presented in order of liquidity (cash at the top)
Current Assets are assets expected to be used up within one (1) year.
Current Liabilities are liabilities expected to be resolved within one (1) year. They are presented in order of maturity, usually starting with accounts payable.
What are three (3) common ratios used to analyze a balance sheet
Current Ratio
Quick Ratio
Debt to Equity Ratio
What is the formula for the Current Ratio
Current Assets ÷ Current Liabilities
Used to evaluate whether the company has enough short term resources to cover their short term liabilitis.
Want to see a minimum ratio of 1 (one)
What is the formula for the Quick Ratio
(Current Assets minus Inventory)÷Current Liabilities
This a variation on the Current Ratio without Inventory
What is the formula for the Debt to Equity Ratio
Total Liabilities ÷ Shareholders’ Equity
How are goods out on consignment treated in the Balance Sheet
They should be included in the company’s inventory at their cost
How is money collected in advance for a product treated in the Balance Sheet
The money collected in advance for a product will go in the liabilities section as deferred revenue. The transaction has created a liability to provide goods or services to the customer who has now paid in advance.
How are Gift cards and gift certificates treated in the Balance Sheet
They are deferred revenue until they are either used and become revenue, or of they expire, they become revenue when they expire.
How is a multiple step income statement organized
Sales - COGS = Gross Income - Selling, General & Administrative Expenses - Depreciation = Operating Income \+/- Misc. Revenue/Gains/Expenses/Losses (interest income, misc. expenses) = Income Before Tax - Income Tax Expense = Income From Continuing Operations \+/- Income From Disconnected Operations = Net Income
Notr: Discontinued Operations are presented net of tax
Note: “Results of Operations” are presented on one line, and the gain or loss on the “disposal of the business segment” is reported on a separate line.
What is the formula for COGS
Beginning Inventory \+ Purchases = Merchandise Available For Sale - Ending Inventory = COGS
How does a Single Step Income Statement differ from a Multiple Step Income Statement
The Single Step Income Statement is very simplified. It just lumps revenues and gains together, and then expenses and losses together, netting the two leaving Net Income.
How is Amortization of a discount on a note payable presented in the Income Statement
It is an interest expense. It is a contra liability on the Balance Sheet, and as it is amortized it is recognized on the Income Statement.
Common ratios to analyze the Income Statement
Gross Margin
Profit Margin
Earnings Per Share
