Accounting - Chapter 2
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26 terms
Terms | Definitions |
|---|---|
 Financial Statements |  |
| Balance Sheet: Assets | Assets: Future economic benefits obtained or controlled by a particular entity as a result of past transactions or events |
| Balance Sheet: Liabilities | Liabilities: Future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events |
| Balance Sheet: Equity | Equity: Residual interest in the assets of an entity that remains after deducting its liabilities. The equity is the ownership interest. |
| The Classified Balance Sheet... | Presents a snapshot of a company's financial position at a point in time. |
| Current Assets | Assets that a company expects to convert to cash (within a year or operating cycle) whichever is longer |
| Operating Cycle | The average time it takes to go from cash to cash in producing revenue-to-purchase materials, manufacture products, sell an account, and collect cash from customers. For most businesses, this cycle takes less than one year. (Companies usually list current asset accounts in the order they expect to convert them into cash) |
| Long-Term investments | Stocks & bonds of other companies. Long-term assets: land, buildings (that a company is NOT using currently for operating activities) |
| Property, Plant, Equipment | Fixed assets, long useful lives, used currently in operations |
| Depreciation | Cost of assets to a number of years, assigning a portion of an asset's cost as an expense each year (as opposed to expensing the full purchase price the year of purchase) |
| Accumulated Depreciation | Total amount of depreciation expensed thus far in the asset's life. |
| Intangible Assets | Assets that do not have physical substance yet often are very valuable (goodwill, patents, intellectual property rights) |
| Current Liabilities | Obligations the company is to pay within the coming year or operating cycle, whichever is longer. Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude. |
| Current Liabilities Picture |  |
| Long-Term Liabilities | Obligations a company expects to pay AFTER one year. (Bonds payable, mortgage payable, long-term notes payable, lease liabilities) The portion of long-term liabilities that is paid within the coming year is classified as 'current liabilities'. |
| Stockholders' Equity | Common Stock - Investments of assets into business by the stockholders Retained Earnings - Income retained for use in the business |
| Using the Financial Statements |  |
| Illustration | Earnings per share (EPS) - Measures the net income earned on each share of common stock |
| Statement of Stockholders' Equity | For reporting changes in stockholders' equity accounts, rather than a retained earnings statement. |
| Liquidity | Short term ability to pay obligations expected to become due within the next year or operating cycle |
| Working Capital | When positive, there is a greater likelihood that the company will pay its liabilities. When negative, the company may be forced into bankruptcy. |
| Liquidity Ratios | The short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. |
| Solvency | Ability to pay interest as it comes due and to repay the balance of a debt due at its maturity. They also measure the ability of the company to survive over a long period of time. |
| Debt to total assets radio | Measures the percentage of total financing provided by creditors rather than stockholders. The higher the radio, the greater the risk that the company may be unable to pay debt when due. |
| The Standard-Setting Environment | Generally Accepted Accounting Principles - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes. |
| Standard-Setting Bodies | > Securities and Exchange Commission (SEC) > Financial Accounting Standards Board (FASB) > International Accounting Standards Board (IASB) |
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