Genral purpose Financial Statements Flashcards
Purpose of Balance Sheet
Reports economic resources and obligations as of a specific date.
Assets = Liabilities + Shareholders’ Equity
Order of Items on Balance Sheet
Current Assets Long Term Assets Short term liabilities Long Term liabilities Shareholders’s equity
Presented in order of liquidity (cash at the top)
Current Assets
Assets expected to be used up within one year.
Examples: Cash Inventory Prepaid expenses Accounts Receivable Short term investments
Examples of long-term assets
Property, Plant, and equipment
Investments
Goodwill
Patents
Current liabilities
Liabilities expected to be resolved within one year. Presented in order of maturity, usually starting with accounts payable.
Examples: Accounts payable Short term debt Bonds or dividends payable within the next year Income tax payable Accrued expenses Deferred revenue
Examples of long-term liabilities
Notes payable
Capital lease obligations
Bonds payable (non-current)
Balance Sheet shows what a company has as of what
A certain date, usually December 31.
Current Ratio
Used to evaluate current assets compared to current liabilities. Does the company have enough short term resources to cover their short-term liabilities. You want to see a ratio of at least 1 to show that the company has more current assets than current liabilities.
= Current assets/current liabilities
Quick ratio
More telling version of the current ratio, with inventory taken out of the equation.
= (Current Assets - Inventory)/ Current Liabilities
Debt to equity ratio
The ratio of what is owed to what is owned
= Total Liabilities/Shareholders’ Equity
Goods that are out on consignment should be included…
In the company’s inventory at their cost.
Money collected in advance for a product will go where
Liabilities section as deferred revenue. The transactions has created a “liability” to provide goods or services to the customer who has now paid in advance.
Gift Cards/gift certificates go where?
Deferred revenue until they are either used and become revenue, or if they expire, they become revenue when they expire.
Income statement
Revenues and expenses are from direct business activities, and gains or losses result from non-business activities such as a manufacturing company selling old equipment.
How is an income statement organized
Show a company’s activities for the year with the end result being net income.
Sales -COGS Gross Income -Selling, General & admin 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 discontinued operations Net income
Multiple Step Income Statement vs Single Step Income Statement
Single step income statement is very simplified and just lumps revenues and gains together and then expenses and losses together, netting the two leaving net income
Multiple step income statement breaks things out so that investors can see gross profit, operating income, and then non-operating revenue/gains/losses separate from operating income, which all together is income from continuing operations. The last item is income from discontinued operations-if there is any- and then finally net income.
Amortization of a discount on a note payable is what?
Interest expense (it is a contra liability on the balance sheet and as it’s amortized it’s recognized on the income statement as an interest expense).
Gross Margin
Gross Profit/net sales
Measures the percentage of sales available for expenses and profit after subtracting COGS.
Profit Margin
Net Income/Net Sales
Measures the percentage of sales that becomes profit.
Earnings per share
Net income/weighted avg # of common shares outstanding.
Measures net income on a per share basis
Statement of comprehensive income
Shows a total picture of all operating income, gains & losses.
Net income + other comprehensive income = Comprehensive Income
Other comprehensive income items
Unrealized gains or losses on AFS securities
Unrecognized gains or losses from pension costs
Foreign currency translation adjustments
Unrealized gains or losses from certain derivative transactions
Comprehensive income presentation (two ways)
In combination with the income statement: Other comprehensive income would be added just below ‘net income’.
Or as a separate statement: You’d have the income statement and a separate statement of comprehensive income. The separate statement starts with net income and then reports other comprehensive income.
Reclassification Adjustments
“Accumulated other comprehensive income” (AOCI) is reported in the shareholders’ equity section of the balance sheet. The OCI items are accumulated there until the gain is realized (such as an AFS security actually being sold), and then will be reclassified through net income and the AOCI is reduced by that amount, otherwise these gains would be counted twice. These reclassification adjustments are reported in the notes to the financial statements.
Statement of changes in equity
Shows changes during the year for the following items:
Common stock Preferred stock Additional paid-in-capital Retained earnings Treasury stock AOCI
Can either be part of the footnotes or as a separate statement. Public companies show 3 years of comparative owners’ equity on their statement of changes in equity.
Statement of cash flows
Show changes in cash during the period
Users want to know about a company’s ability to generate and control cash in order to assess the company’s ability to meet its obligations.
Three types of cash flows on a cash flow statement
Operating
Investing
Financing
Operating cash flow
Changes in cash resulting from business operations
Cash received from customers
Dividend income
Interest income/expense
Cash paid for business expenses
Investing cash flow
Changes in cash resulting from investing activities
Purchase/sale of investments or long term assets Making loans (getting a loan would be financing)
Financing cash flow
Changes in cash resulting from financing activities
Issuing and selling company stock Purchasing treasury stock Getting a loan (also making payments on a loan) Paying dividends Issuing bonds
IFRS rules with regards to interest and dividends
Interest and dividends paid can be classified as either an operating or a financing activity
Interest and dividends received received can be classified as either operating or investing.
Non-cash activities
Transactions that are significant but don’t affect cash, and so would not be part of the statement of cash flows. An example would be converting debt into stock. These would be reported in the notes to the financials or in a separate schedule.
Difference in the Direct vs Indirect method of Cash Flow Statement
The only real difference in the two methods deals with the operating activities section: in the direct method, each line is a “direct” statement showing cash paid or received such as “cash paid to customers” or “cash paid to suppliers”. On an indirect statement, operating activities starts with net income and works backwards to “cash provided by operating activities”, and several non-cash items such as depreciation expense or gain/loss on sale of equipment.
Managements’ discussion and analysis
Required part for publicly held companies, it discusses operations, liquidity, and capital resources.
Significant Accounting Policies
There needs to be disclosures on significant accounting policies and how they are applied. Some of the items should be included if applicable:
A company’s revenue recognition policies
How a company determines what investments are cash equivalents
How a company priced their inventory
Methods for amortizing intangibles
Other Disclosures
During times of price stability, a disclosure is required discussing the effects of the instability on the company’s business.
Related party transactions: Any significant related party information would be discussed in the notes.
Concentration of credit risk
If a business and most of its customers/suppliers all operate in the same industry, then a concentration of credit risk needs to be disclosed in the notes.
Contingent Liabilities
Possible liabilities that are not both probable and can be reasonably estimated (if it was both it would be on the balance sheet) would be discussed in the notes instead of being accrued on the balance sheet.
