Unit 1: Financial Statements Flashcards
Summarizes financial condition of business at a point in time
Balance Sheet/Net Worth Statement
Summarizes financial transactions over a period of time.
Income Statement
Anything of value
Asset
Any debt or financial obligation
Any debt or financial obligation
Total Assets - Total Liabilities = ________
Owner Equity
Measure liabilities of business relative to amount of owner equity invested. Shows the ability to pay off all liabilities if all assets were sold→ The measure to the degree to which assets are greater than liabilities
Solvency
measures ability of business to meet financial obligations as they come without disruption of normal operation of business, short-run concept.
Liquidity
A characteristic of something being not able to be transformed to cash easily
Illiquid
Items that can be sold without disrupting future production activities
Liquid Assets
Must be separated from other assets on a balance sheet
Current Assets
Any asset that is NOT current
Noncurrent Assets
Must be separated from all other liabilities for the balance sheet to follow basic accounting principles.
Current Liabilities
All obligations that do NOT have to paid in full within the next year
Noncurrent Liabilities
Represents the amount of money left for the owner of the business if the assets were sold and all liabilities paid as of that date. The current investment or equity in business
Owner Equity
Less liquid than current assets, with a life between 1-10 years. Machinery, equipment, perennial crops, and breeding livestock
Intermediate Assets
Least liquid, greater life than 10 year: land and buildings
Fixed Assets
Debt obligations where repayment of principal occurs over a period of more than 1 year and up to 10.
Intermediate Liabilities
Repayment period is 10+ years
Long Term Liabilities
Value of asset based on current market price
Market Value
Items that have been PURCHASED can be valued at their original cost of purchasing
Cost Value
Equal to the accumulated costs of producing the item but should NOT include profits or opportunity costs associated with production
Farm Production Cost
A method of accounting for the loss in value of certain durable assets over their expected years of use in business
Cost-less-accumulated depreciation
Items valued at the lower of the cost or market method
Lower of Cost or Market Value
cautions against placing too high a value on any asset
Conservatism
stresses using the same methods over time, allows you to compare
Consistency
Values assets using the cost, cost-less depreciation, or farm production cost methods
Cost Basis
Valued at market value less estimated selling costs.
Market Basis
Contributed Capital, Retained Earnings, Valuation
The 3 sources of owner equity
This is the value of any personal cash or property the owner used to start the business and any that might have been contributed since that time
Contributed capital
Any before-tax net farm income not used for family living, income taxes, or withdrawals for other purposes of business remain in the business.
Retained Earnings
The ratio measures the amount of current assets relative to current liabilitie
Current Ratio
The difference between current assets and current liabilities
Indicates margin of safety for liquidity measured in dollars
Working Capital
Measures what part of total assets is owed to lenders
Debt/Asset Ratio
Measures what part of total assets is financed by the owner’s equity capital.
Equity/Asset Ratio
A ratio that compares the proportion of financing provided by lenders with that provided by the business owner
Debt/Equity Ratio
