Topic 2: Overview of the Financial Statements Flashcards
Accounting Equation
Assets=Liabilities + Owners Equity
Assets
Firms economic resources; probable future economic benefits obtained or controlled by a particular entity as a result of transactions or events.
Balance Sheet
Statement of financial position; shows financial resources the company owns or controls and the claims on those resources.
Book value
Assets cost minus assets accumulated depreciation.
Comparability
Information that’s more useful when it can be related to a benchmark or standard.
Conservatism
Persuasive factor in accounting;
when in doubt, recognize all losses but don’t recognize any gains
Consistency
Once you adopt an accounting principle, continue to follow it in future accounting periods.
Earnings Per Share (EPS)
Tells the owner of one share of stock what they really want to know.
Entity Concept
The idea that personal financial activity is kept separate from business financial activity.
Expenses
Amount of assets consumed from the performance of business operations and thus are the opposite of revenue.
External audit
Audit conducted by external (independent) qualified accountants
Financing activities
Where cash is obtained, or repaid to, owners and creditors
Gains
Money made in activities outside the normal business of the company
Going concern assumption
Allows readers of financial statements to assume that the company will continue on long enough for to carry out objectives and commitments
Historical cost convention
Values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition
Income Statement
A company’s financial performance for a specified period of time.
Investing Activities
Purchase & sale of land, buildings, and equipment. Also include buying and selling stocks of other companies
Liabilities
Future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events.
Liquidity
The ease with which the item can be turned into cash
Losses
Money lost on activities outside of the normal business of a company.
Materiality
The question of whether an item is large enough to make any difference to anyone.
Net Assets
Total assets minus total liabilities
Net income
The difference between revenue and expenses; positive
If revenue exceeds expenses= net income; if expenses exceeds revenue= net loss
Net Loss
Difference between revenue and expenses; negative
Notes to Financial Statements
Provide additional information pertaining to a company’s operations and financial position.
Operating activities
Producing and selling goods and services and thus compromise on the day to day business of a company.
Owners equity
Portion of the assets that the owners of the organization can really call their own.
Paid-in Capital
The value of the assets given in exchange for shares of stock.
Relevance
Qualitative characteristic; information that is timely, useful, has predictive value, and is going to make a difference to a decision maker.
Reliability
Qualitative characteristic; information is verifiable, objective (not subjective) and you can depend on it.
Retained Earnings
Represent the portion of stockholders equity that has not been paid to the owners as dividends
Revenue
The amount of assets created through the performance of business operations.
Statement of Cash Flows
Individual cash flow items that are classified according to three main activities:
1. Operating
2. Investing
3. Financing
Stockholders equity
Capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings
Time Period Concept
Business should report the financial results of its activities over a standard time period, which is usually monthly, quarterly, or annually
Treasury Stock
Shows as a subtraction in the stockholders equity section of the balance sheet
