Presentation in a classified balance sheet that lists assets by sections on the left side and liabilities and stockholders' equity by sections on the right side. (p. 225).
An account that increases either an asset, liability, or owners' equity account. An example is Premium on Bonds Payable, which, when added to the Bonds Payable account, describes the total bond liability of the company. (p. 241).
Available for sale investments
Debt or equity securities not classified as held to maturity or trading securities. Companies report available for sale securities at fair value, but do not report changes in fair value as part of net income until after they sell the security. Interest on available for sale securities is recorded when earned. Unrealized holding gains and losses on available for sale securities are recognized as other comprehensive income and as a separate component of stockholders' equity. (p. 218).
Financial statement that shows the financial condition of a company at the end of a period by reporting its assets, liabilities, and stockholders' equity (p. 214).
cash debt coverage ratio
Measure of solvency that indicates a company's ability to repay its liabilities from cash generated from operations (without having to liquidate productive assets). Computed as the ratio of cash provided by operating activities to total debt, as represented by average total liabilities. (p. 234).
Material events with an uncertain future. The uncertainty can involve a possible gain (gain contingency) or possible loss (loss contingency) that will ultimately be resolved when one or more future events occur or fail to occur. Typical gain contingencies are tax operating loss carryforwards or company litigation against another party. Typical loss contingencies relate to litigation, environmental issues, possible tax assessments, or government investigations. (p. 236).
An account that reduces either an asset, liability, or owners' equity account. Examples include Accumulated Depreciation for Equipment and Discount on Bonds Payable. Use of contra accounts enables readers of financial statements to see the original cost of the asset, liability, or owners' equity account as well as the changes in the account to date. (p. 241).
Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. Companies present current assets in the balance sheet in order of liquidity. (p. 217).
current cash debt coverage ratio
Measure of liquidity that indicates a company's ability to pay its short term debts. Computed as cash provided by operating activities divided by average current liabilities. (p. 233).
The obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. This concept includes payables resulting from the acquisition of goods and services; (2) collections received in advance for the delivery of goods or performance of services; and (3) other liabilities whose liquidation will take place within the operating cycle. (p. 222).
The ability of a company to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. A company's liquidity and solvency affect its financial flexibility. (p. 215).
Assets consisting of cash, accounts receivable, an ownership interest, or a contractual right to receive or obligation to deliver cash or another financial instrument. (p. 238).
Cash flow activities that include (1) obtaining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders and paying them dividends. (p. 229).
free cash flow
Measure of the cash remaining from operating activities after adjusting for capital expenditures and dividends paid. Some analysts prefer free cash flow to the measure of cash provided by operating activities because free cash flow takes into account the outflows needed to maintain current operations. (p. 234).
Held to maturity investments
Debt securities that a company has the positive intent and ability to hold to maturity. (p. 218).
Assets that lack physical substance and that are not financial instruments. Intangible assets derive their value from the rights and privileges granted to the company using them. They are normally classified as long term assets. Companies write off (amortize) limited life intangible assets over their useful lives, and they periodically assess indefinite life intangibles (including goodwill) for impairment. (p. 222).
Cash flow activities that include (1) purchasing and disposing of investments and productive long lived assets using cash, and (2) lending money and collecting the loans. (p. 229).
The amount of time that is expected for an asset to be realized or otherwise converted into cash or until a liability has to be paid. In general, the greater a company's liquidity, the lower its risk of failure. (p. 214).
Long term investments
Investments that companies expect to hold for many years. Examples are: (1) investments in securities, such as bonds or common stock; (2) investments in tangible fixed assets not currently used in operations, such as land held for speculation; (3) investments set aside in special funds, such as a pension fund; and (4) investments in nonconsolidated subsidiaries. Companies usually present long term investments on the balance sheet just below current assets. (p. 220).
Long term liabilities
Obligations that a company expects to pay at some date beyond the normal operating cycle. Examples are bonds payable, notes payable, some deferred income tax amounts, lease obligations, and pension obligations. Also referred to as long term debt. Companies provide a great deal of supplementary disclosure for long term liabilities because they often are subject to covenants and restrictions for the protection of lenders. (p. 224).
Cash flow activities include the cash effects of transactions that create revenues and expenses, and thus enter into the determination of net income. (p. 228).
owners' (stockholders') equity
The ownership claim on a company's total assets. The owners' equity section of the corporate balance sheet consists of capital stock, additional paid in capital, and retained earnings. The ownership accounts (stockholders' equity) in a corporation differ considerably from ownership accounts in a partnership or proprietorship. Partners show separately their permanent capital accounts and the balance in their temporary accounts (drawing accounts). Proprietors ordinarily use a single capital account that handles all of the owner's equity transactions. (p. 225).
property, plant, and equipment
Assets of a durable nature used in the regular operations of the business. These assets consist of physical property (such as land, buildings, machinery) and wasting resources (timberland, minerals). With the exception of land, a company either depreciates (e.g., buildings) or depletes (e.g., oil reserves) these assets. (p. 221).
Presentation in a classified balance sheet that lists liabilities and stockholders' equity directly below assets on the same page. (p. 226).
An appropriation of retained earnings. Also called appropriated earnings. (p. 242).
The ability of a company to pay its debts as they mature. A company with a high level of long term debt relative to assets has lower solvency than a similar company with a low level of long term debt. (p. 215).
statement of cash flows
A basic financial statement that provides information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period, in a format that reconciles the beginning and ending cash balances. (p. 227).
Debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences. (p. 218).
The excess of total current assets over total current liabilities; represents the net amount of a company's relatively liquid resources. Also called net working capital. (p. 223).
Measures of how effectively a company is using its assets. Common activity ratios are receivables turnover, inventory turnover, and asset turnover. (p. 244).
Measures of the degree of protection for long term creditors and investors. Common coverage ratios are debt to total assets, times interest earned, the cash debt coverage ratio, and book value per share. (p. 244).
Measures of a company's short-run ability to pay its maturing obligations. Common liquidity ratios are the current ratio, the quick or acid test ratio, and the current cash debt coverage ratio. (p. 244).
Measures of the degree of success or failure of a given company or division for a given period of time. Common profitability ratios are profit margin on sales, rate of return on assets, rate of return on common stock equity, earnings per share, the price earnings ratio, and the payout ratio. (p. 244).
An evaluation of the relationship among selected financial statement data, expressed in terms of either a percentage, a rate, or a simple proportion. (p. 244).