Quiz 2 Flashcards
Balance Sheet
summarizes what a business owns (assets), what it owes (liabilities) and the owner’s residual interest (equity) at a specific moment of time
Purpose of the Balance Sheet
to assess liquidity, solvency and capital structure for stakeholders to evaluate and strategize
Current Assets (Gross Working Capital)
expected to be converted to cash within a year
ex: cash, accounts receivable, inventory, marketable securities, prepaid expenses
Non-Current Assets
longer-term use; over a year; impact liquidity and operational efficiency
ex:
Fixed – property, plant, & equipment
Other long term – patents, goodwill, long-term investments
Net working capital
Compares assets that should convert to cash to debt that must be paid, all in the next 12 month
Net working capital = current assets - current liabilities
Sources of Cash
-decrease in an asset (ex: selling inventories)
-increase in a liability or equity (ex: selling stock)
Uses of Cash
-increase in an asset (ex: buying inventories)
-decrease in a liability (ex: paying off a loan)
Liquidity
the firms ability to quickly convert an asset into cash without reducing its selling price to meet its financial commitments as they come due
Valuation of Assets
Farmers - current market valuation (tracking collateral valuation & current wealth)
Accountants - cost-basis valuation (consistency & tracking contributions to growth in net worth)
Other ag valuation problems:
-growing crops & livestock production
-raised breeding stock
-capital financial leases
Current Liabilities
financial obligations expected to be repaid within 12 month
ex:
*Accounts payable - credit extended to the firm
*Accrued expenses - expenses incurred but not yet paid
*Short term notes - amounts borrowed from lenders
Non-current Liabilities
financial obligations expected due beyond 12 month (long-term)
Classification of Equity
Shareholders’ investment in the firm
*Contributed capital - the capital contributed by owners
*Retained earning - the accumulated earnings that have been retained or reinvested in the firm
*Paid in Capital - money received above par value from the sale of common stock
Balance Sheet - Assets
Cash
Marketable securities
Accounts Receivable
Inventories
Other Current Assets
=Total Current Assets
Property, Plant, and Equipment (Gross)
-Accumulated Depreciation
Other long-term assets
=Total long-term assets
=Total assets
Balance Sheet - Liabilities & Equity
Accounts Payable
Accrued and other current
Current portion of long-term debt
=Total current liabilities
Long-term debt
Other long-term liabilities
=Total long-term liabilities
=Total liabilities
Preferred stock
Common stock
Paid-in capital in excess of common stock
Retained earnings
Less:
-Accumulated other comprehensive loans
-Treasury stock
=Total stockholders’ equity
=Total liabilities and equity
Income Statement
summary of the revenue and expenditures (operating results) of the business over a specified period, culminating in net income
Revenues - Expenses = net income
Income Statement Purpose
insight into operational performance over time, highlighting revenue generating capabilities & cost management effectiveness to assess overall profitability
Cash Accounting
revenue reported in year cash is received & expenses report when cash paid out (IRS tax advantage)
Accrual Accounting
revenue reported in year earned, whether cash is received, & expenses reported in year incurred, even if cash not paid out
Why does profits ≠ cash flows?
-sales revenue includes cash and credit sales
-some inventory is financed by credit
-depreciation is a non-cash expense (cash flow = profits + depreciation)
Income Statement
Total Revenue
Cost of Goods Sold (COGS)
Gross Profit
Operating expenses
(administrative, general,
depreciation, selling)
Operating Profit
Interest expense (cost of
borrowing money)
Other income
Net profit before taxes (Taxable income)
Taxes
Net profit after taxes (net income)
Preferred stock dividends
Earnings available for common stockholders
Statement of Owner Equity
details the changes in equity during a financial period, reflecting contributions, withdrawals & retained earnings attributable to the owner
Purpose of the Statement of Owner Equity
reveals the impact of profits on ownership equity, helping stakeholders assess how to retained profits are utilized for growth, reinvestment, or distributions
Statement of Cash Flows
summary of cash inflows and outflows over a specified period - indicated the ability of the firm to generate cash
categorized by:
-operating activities (day to day)
-investment activities
-financing activities
