-
Classified Balance Sheet
- A balance sheet that contains a number of standard classifications
- and sections.
-
Current Assets
- Cash and other resources that companies reasonably expect to convert to
- cash or use up within one year or the operating cycle, whichever is
- longer.
- (Companies list current assets in the order in which they expect to
- convert them into cash).
-
Operating Cycle
- The average time required to go from cash to cash in producing revenues—to purchase inventory, sell it on account, and then collect cash from
- customers.
-
Long-term Investments
- Generally, (1) investments in stocks and bonds of other corporations
- that companies hold for more than one year, and (2) long-term assets,
- such as land and buildings, not currently being used in the company's
- operations.
- (Long-term investments are often referred to simply as investments.)
-
Property, plant, and equipment.
- Assets with relatively long useful lives that companies use in operating
- the business and are not intended for resale.
- (Property, plant, and equipment is sometimes called fixed assets or
- plant assets.)
-
Depreciation...
- is the practice of allocating the cost of assets to a number of years.
- Companies do this by systematically assigning a portion of an asset's
- cost as an expense each year (rather than expensing the full purchase
- price in the year of purchase). The assets that the company depreciates
- are reported on the balance sheet at cost less accumulated depreciation.
- The accumulated depreciation account shows the total amount of depreciation that the company has
- expensed thus far in the asset's life.
-
Intangible Assets
Assets that do not have physical substance.
(Sometimes intangible assets are reported under a broader heading called “Other assets.”)
- One common intangible is goodwill. Others include patents, copyrights,
- and trademarks or trade names that give the company exclusive right of use for a specified
- period of time.
-
Current Liabilities
- Obligations that a company reasonably expects to pay within the next
- year or operating cycle, whichever is longer.
- Common examples are accounts payable, wages payable, bank loans payable,
- interest payable, and taxes payable. Also included as current
- liabilities are current maturities of long-term obligations—payments to
- be made within the next year on long-term obligations.
-
Long-Term Liabilities
Obligations that a company expects to pay after one year.
- Liabilities in this category include bonds payable, mortgages payable,
- long-term notes payable, lease liabilities, and pension liabilities.
-
Stockholder's Equity consists of two parts: ____ and ____.
commong stock and retained earnings.
- Companies record as common stock the investments of assets into the business by the stockholders. They
- record as retained earnings the income retained for use in the business. These two parts, combined, make
- up stockholders' equity on the balance sheet.
Stockholder's net claim on total assets.
-
Ratio Analysis
- A technique for evaluating financial statements that expresses the
- relationship among selected financial statement data.
- The relationship is expressed in terms of either a percentage, a
- rate, or a simple proportion.
-
Ratio
- An expression of the mathematical relationship between one quantity
- and another; may be expressed as a percentage, a rate, or a proportion.
- To illustrate, Best Buy has current assets
- of $9,081 million and current liabilities of $6,301 million. We can
- determine a relationship between these accounts by dividing current
- assets by current liabilities, to get 1.44. The alternative means of
- expression are:
- Percentage: Current assets are 144% of current liabilities.
- Rate: Current assets are 1.44 times as great as current liabilities.
- Proportion:The relationship of current assets to current liabilities is 1.44:1.
-
For analysis of the primary financial statements, we classify ratios as
follows.... _____ ,_______, ________.
Profitibility Ratios: Measure the income or operating success for a company for a given period of time.
Liquidity Ratios: Measure short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
Solvency Ratios: Measure the ability of a campany to survive over a long period of time.
-
(Profitibility Ratio) EPS (Earnings Per Share; Earnings/Share)
A measure of the net income earned on each share of common stock;
- We compute EPS by dividing net income
- by the average number of common shares
- outstanding during the year.
- EPS= Net Income - Preferred Stock Dividends
- Average Common Shares Outstanding
-
Statement of Stockholder's Equity
- A financial statement that presents the factors that caused
- stockholders' equity to change during the period, including those that
- caused retained earnings to change.
-
Liquidity
- The ability of a company to pay obligations that are expected to become
- due within the next year or operating cycle.
- (You would look closely at the relationship of its current assets to
- current liabilities.)
-
One measure of liquidity is _____ _____, which is the difference between the amounts of current
assets and current liabilities:
working capital
Working Capital= Current Assets - Current Liabilities
- When current assets exceed current liabilities, working capital is
- positive. When this occurs, there is greater likelihood that the company
- will pay its liabilities. When working capital is negative, a company
- might not be able to pay short-term creditors, and the company might
- ultimately be forced into bankruptcy.
-
Current Ratio (Liquidity Ratio)
- A measure used to evaluate a company's liquidity and short-term
- debt-paying ability; computed as current assets divided by current
- liabilities.
Current Assets/Current Liabilities
-
Solvency
- The ability of a company to pay interest as it comes due and to repay
- the balance of debt at its maturity.
-
The ____ __ ____ _____ ____ is one source of information about long-term
debt-paying ability.
debt to total assets ratio
- Measures the percentage of total financing provided by creditors;
- computed as total debt divided by total assets.
total debt / total assets
- Some users evaluate solvency using a ratio of liabilities divided by
- stockholders' equity. The higher this “debt to equity” ratio, the lower
- is a company's solvency.
-
statement of cash flows
- provides financial information about the sources and uses of a
- company's cash.
-
To aid in the analysis of cash, the statement of cash flows reports the
cash effects of a company's ____, ____, ____?
Operating activities, investing activities, and financing activities.
-
Free Cash Flow
- Cash remaining from operating activities after adjusting for capital
- expenditures and dividends paid.
free cash flow = cash provided by operations - capital expenditures* - cash dividends
* example: on property, plant, and equipment.
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Relevance
The quality of information that indicates the information makes a difference in a (business) decision.
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Reliability
The quality of information that gives assurance that it is free of error (verifiable), is factual (faithful representation), and is neutral.
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Comparability
The ability to compare the accounting information of differe.mpanies because they use the same accounting principles.
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Consistency
Use of the same accounting principles and methods from year to year within a company.
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Monetary Unit Assumption
An assumption that requires that only those things that can be can be expressed in money be included in the accounting records.
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Economic entity Assumption
An assumption that every economic entity can be separately identified and accounted for.
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Time period assumption
An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.
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Going concern assumption
The assumption that the company will continue in operation for the foreseeable future.
-
Cost principle
An accounting principle that states that companies should record assets at their cost (what they purchased them for).
- For example, if Best Buy were to purchase some land for $30,000, the
- company would initially report it on the balance sheet at $30,000. But
- what would Best Buy do if, by the end of the next year, the land had
- increased in value to $40,000? Under the cost principle the company
- would continue to report the land at $30,000.
-
Full disclosure principle
Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.
-
Materiality
The constraint determining whether an item is large enough to influence the decision of an investor or creditor.
- To illustrate, assume that Best Buy made a $100 error in recording
- revenue. Best Buy's total revenue is almost $36 billion; thus a $100
- error is not material.
-
Conservatism
The approach of choosing an accounting method, when alternatives exist, that will least likely overstate assets and net income.
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