Powerpoint 2 Flashcards
Basic accounting equation Reversed
Assets - Liabilities = Equity
Current Assets
Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is first
Listedin the order in which they are expected to be converted to cash
Operating cycle
The average time it takes from the purchase of inventory to the collection of cash from consumers
Long-term investments
Investments in stocks and bonds of other companies that are held for more than one year
Investments in long-term assets such as land or building not currently being used in operating activities
Property, Plant, and Equipment
Long useful lives
Currently used in operations
Depreciation occurs
Depreciation
Allocating the cost of assets to a number of years
Accumulated depreciation
The total amount of depreciation expensed thus far in the asset’s life
Intangible assets
Assets that do not have physical substance
ex. trademark, goodwill, patent, copyright
Current liablities
Obligations the company is to pay within the coming year
Usually lists notes payable first, followed by accounts payable
Other items follow in order of magnitude
Long-term liabilities
Obligations a company expects to pay after one year
Stockholder’s Equity
Comprised of common stock and retained earnings
Common stock
investments of assets into the businesss by the stockholers
Retained earnings
income retained for use in business
Ration analysis
An analysis of the relationship between elements of financial statement data that helps to better understand the economic condition of the economy
ex. intracompany, industry-average, intercompany
Intracompany comparisons
two year comparisons of the same company
Industry-average comparisons
average ratios for particular industries
Intercompany comparisons
Comparison with a competitor in the same industry
Profitability ratios
Measure the income or operating success of a company for a given period of time
ex. EPS
Liquidity ratios
Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
ex. current ratio, working capital
Solvency ratios
Measure the ability of the company to survive over a long period of time
ex. Debt to total assets ratio
Income statement use
Reports how successful a company is at generating profit from its sales
reports amount earned (revenue) and the cost incurred (expenses)
Net income shows what
What we have earned after sales and paying off expenses
Earings Per Share (EPS)
Profitability ratio that measures the net income earne on each share of common stock
*earnings available to common stock holders
Comparrisons can calculate the relative earnings performance from the perspective of a stockholder
Net income - Preferred Stock Dividends
Average Common Shares Outstanding
Stockholder’s Equity use
retained earnings and common stock
reports all changes in stockholders equity accounts
ex. buyback/issue/sell
Liquidity
the company’s ability to pay obligations expected to become due within the next year or operating cycle
seen on balance sheet
Solvency
the company’ ability to pay interest as it comes due and to repay the balance of debt at its maturity
seen on balance sheet
Working Capital
WC = Current Assets - Current liabilities
Positive means there is a greater likelihood the company will pay its liabilities
NEgative means a company might not be able to pay its short term debt and might go bankrupt
is a liquidity ratio
Current ratio
Current assets
current liabilities
The higher the current ratio, the more capable the company is of paying its obligations
.97:1
for every 1 dollar of current liabilities, it has 97 cents of assets
ex. of a liquidity ratio
Debt to total assets ratio
Total liabilities
Total assets
measures the % of financing provided by creditors rather than stockholders
the higher the %, the riskier the company
71% - every dollar of asset was financed by 71 cents of debt
Generally Accepted Accounting Principles (GAAP)
A set of standards and rules for reporting financial info set by standard-setting bodies
Securities and Exchanges Commision (SEC)
The agency of the U.S government that oversees the financial markets and accounting standard setting bodies
Financial Account Standards Board (FASB)
Primary standard setting bodies in the United States
International Accounting Standards Board (IASB)
The international equivelant of FASB
International Financial Reporting Standard (IFRS)
SEt of standards and rules adopted by most international countries, for reporting financial information by public companies.
FASB and IASB have been working together to minimize the differences in their standards
convergence is under way
Public Company Accounting Oversight Board (PCAOB)
Created as a result of SOX to determine auditing standards and to review the performance of audit firms
Accounting principles
set of standards and rules that are recognized as a general guide for financial reporting
Primary objective of financial reporting
To provide financial info that is useful to investors and creditors for making decisions about providing capital
Relevance
Accounting info is considered relevant if it makes a difference in a business decision by:
- Helping provide accurate expectations about the future (predictive value)
- Confirming and correcting prior expectations (confirmatory value)
Faithful representation
Means that info accurately depicts what really happened by:
- ensuring that nothing important has been omitted (complete)
- making sure that the information is not biased towards one position or another (neutral)
5 enhancing qualities
Comparability
Consistency
Verifiability
Timeliness
Understandability
Comparability
When different companies use the same accounting principles allowing investors to compare them
Consistency
When a company uses the same accounting principles and methods from year to year
Verifiability
When financial info users are able to prove that the info is free from error
Timeliness
When financial info is available to it’s users before it loses capacity to influence their decisions
Understandability
When financial info is presented in a clear and concise fashion so that reasonably informed users can interpret and comprehend the meaning of the information provided
How does a company choose when to end a fiscal year?
Chooses a down time to end the fiscal year because it requires a lot of resources to provide financial reports
Assumptions in Financial Reporting
Monetary unit
Economic entity
Periodicity
Going concern
Accrual-Basis
Monetary unit
Requires that only those things that can be expressed in money are included in the accounting records
Economic entity
States that every economic entity can be seperately identified and accounted for
ex. keep personal finances off company books
Periodicity
States that the life ofa business can be divided into artificial time periods
Going Concern
The business will remain in operation for the foreseeable future
Accrual-Basis
Transactions are recoreded in the periods in which the events occur
ex. if you work in september and get paid in october, needs to be recorded in september
Cost principle
“historical principle”
Dictates that companies record assets at their costs
more faitful representation
Fair value principle
Indicates that assets and liabilities should be reported at fair value (predicted current value)
More relevant
Full disclosure principle
Requires that companies disclose all circumstances and events that would make a difference to financial statement users
Materiality Constraint
An item is material when its size makes it likely to influence the decision of an investor or creditor, required adherence to GAAP.
Immaterial if it does not make a difference
Cost constraint
Accounting standard-setters weigh the cost that companies will incur to provide the information against the benefit that financial statement users will gain from it
