Session 2 Flashcards
Accrual Accounting
Recognition of revenue when earned and the matching of expenses when incurred
Transaction Analysis
The process of identifying impacts of transactions and events on the balance sheet, income statement, or both.
Deferred (unearned) revenue
A liability representing revenues received in advance.
Asset
Economic resources of an entity that are owned, will provide future benefits, and can be reliably measured.
What certain resources are expensed as incurred due to difficulty in measuring?
Internal R&D and advertising. Internally developed trade marks.
How are assets reported?
Listed in order of liquidity.
Current asset
Assets that can be converted to cash within a year.
Noncurrent asset
(long-term assets) cannot be easily converted to cash within a year.
How are liabilities reported?
Listed in order of maturity.
Liabilities
The obligations or debts that an entity must pay in money or services at some time in the future because of past transactions or events.
Current liabilities
Come due in less than a year
Noncurrent (long term) liabilities
Come due after a year
Net Working Capital
Current Assets - Current Liabilities
Liquidity
How much cash a company has, how much is expected, and how much it can raise with short-term notice.
Current Ratio
Current Assets / Current Liabilities
Working Capital Ratio
Net Sales / Average Working Capital
Tactics for more efficient use of working capital
Increase trade credit to minimize the cash invested in inventories
Reduce inventory levels by improved production systems and management
Decrease accounts receivable by better collection procedures
Equity consists of:
Contributed Capital
Earned Capital (includes accounts besides retained earnings)
Contributed capital makeup
Preferred stock
+ Paid in capital
- Treasury stock
= Contributed capital
What is the relationship between par value and the market value of stock?
There is no relationship. Par value is just a legal value only.
Shares of stock make up
Authorized - in articles of incorporation
Issued - sold to public in one time or another
- Treasury Shares
= Outstanding Shares
Accumulated Other Comprehensive Income
All changes in stockholder’s equity excluding investments by owner’s and distributions to owners (dividends)
Example: Available for sale securities
Available-for-sale securities
Investments in securities that management intends to hold for capital gains and dividend income, although it may sall them if the price is right.
Retained Earnings equation
Beginning retained earnings
+ Net income
- Dividends
= Ending Retained Earnings
