Quiz 2 Flashcards
Classified Balance Sheet
Items with common characteristics are placed together in a “group” or classification
Current assets
assets that a company expects to be converted to cash within one year or one operating cycle, whichever is longer
- listed in order of liquidity
liquidity
the order in which the company expects to convert them into cash
long-term investments
- Stocks and bonds held for long-term investment ( > one year)
- Property, plant, and equipment and / or land NOT currently used in operations of the business (purchased and held for investment only)
- Long-term notes receivable
Property, Plant, and Equipment (PP&E)
assets used in operations of the business
- Ex: land, buildings, equipment, machinery, etc.
- assets are depreciated
- includes accumulated depreciation
depreciation
spread the cost of purchasing the asset over the number of years the company expects to use the asset
- Cost is called depreciation expense and goes with other expenses on the I/S
accumulated depreciation
running total of the amount of depreciation expense
intangible assets
assets which have no physical substance and represent long-lived exclusive rights or privileges
- some are amortized
- includes accumulated amortization
amortization
spread the cost of the asset over the number of years the company expects to use the asset
- Annual cost = amortization expense
- Some intangibles will be used “forever” - these are NOT amortized
accumulated amortization
running total of the amount of amortization expense
current liabilities
obligations that are expected to be paid within one year or one operating cycle, whichever is longer
long-term liabilities
obligations that are expected to be paid after one year
- Ex: long-term notes payable, mortgages payable, bonds payable
Stockholders equity
- Common stock: investments of assets into the business by stockholders
- Retained earnings: income retained for future use in the business
intracompany comparisons
examining the same ratio over time (prior year vs. current year) to assess whether the company’s condition is improving or deteriorating
industry-average comparisons
compare one company’s ratios to the average ratio for other companies in the same industry
intercompany comparisons
compare one company’s ratios to the ratios of a direct competitor
earnings per share
measures net income earned on each share of common stock
- measure of PROFITABILITY
working capital
current assets - current liabilities
- Measures the amount of current assets that would remain if all current liabilities are paid
- Higher is better
- measure of LIQUIDITY
current ratio
current assets / current liabilities
- A standardized measure of liquidity
- Current ratio of 1.0 or greater is generally required to be “liquid”
- Higher is better
debt-to-assets ratio
measures the proportion of the business that is financed by creditors (rather than stockholders)
- The higher the percentage of debt financing, the riskier the business
- Lower is better
- measure of SOLVENCY
Free cash flow ratio
operating cash flow - capital expenditures
financial reporting
describes all the financial info presented by a company (financial statements and additional disclosures)
Basic objective is to provide info that is:
- Useful to those making investment and credit decisions
- Useful in assessing future cash flows
- Useful in understanding the enterprise’s resources, claims to resources, and changes in them
Generally Accepted Accounting Principles (GAAP)
guidance used by US companies to determine how to appropriately record and disclose accounting events
- FASB sets standards
Securities and Exchange Commission (SEC)
responsible to establishing and enforcing accounting and auditing policy to enhance the transparency and relevancy of financial reporting
Public Company Accounting Oversight Board (PCAOB)
oversees audits of publicly traded companies in the US
qualities of useful accounting info
- relevance (materiality)
- faithful representation
relevance
the info has relevance if it would make a difference in a business decision
materiality
aspect of relevance where a material item has ability to influence a decision maker
faithful representation
information accurately depicts what really happened
Must be complete, neutral, and free from error
comparability
when different companies use the same accounting principles
consistency
company uses the same accounting principles from period to period
verifiable
independent users would obtain the same results
timely
info is available to decision makers on a timely basis
understandability
info is presented in a clear and concise manner
monetary unit assumption
only transactions expressed in terms of money (dollars) is included in accounting records
economic entity assumption
assumes economic events can be identified with a particular unit of accountability
- Requires economic activities of an entity to be kept separate from those of its owner
periodicity assumption
business can be divided into artificial time periods
going concern assumption
assumes the business will be in operation for the foreseeable future
historical cost principle
most assets and liabilities to be recorded at its original cost (a reliable estimate if fair value is not available)
fair value principle
some info is more useful than historical cost for certain types of assets and liabilities.
- Fair value = the price to sell as asset or the amount to settle a liability
full disclosure principle
requires that companies disclose all events and circumstances that would make a difference to financial statement users
