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balance sheet

"the statement of financial position;" reports the assets, liabilities, and SE of a business entrprise at a specific date


describes the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid


refers to the ability of a company to pay its debts as they mature

financial flexibility

measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities

limitations of the balance sheet:

1. most assets and liabilities are reported at historical cost
2. companies use judgments and estimates to determine many of the items reported in the balance sheet
3. the balance sheet necessarily omits many items that are of financial value but that a company cannot record objectively


when balance sheets group together similar items to arrive at significant subtotals

companies should separately report:

1. assets that differ in their type or expected function in the company's central operations or other activities
2. assets and liabilities with different implications for the company' financial flexibility
3. assets and liabilities with different general liquidity characteristics


probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events


probably 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


residual interest in the assets of an entity that remains after deducting its liabilities

current assets

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; presented in the balance sheet in order or liquidity

cash equivalents

short-term highly liquid investments that will mature within three months or less

held to maturity securities

debt securities that a company has the positive intent and ability to hold to maturity

trading securities

debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences; should be reported as current assets at fair value

available for sale securities

debt and equity securities not classified as held-to-maturity or trading securities; should be reported at fair value

long term investments:

1. investments in securities, such as bonds, common, stock, or long-term notes
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 sinking fund, pension fund, or plant expansion fund; this includes the cash surrender value of life insurance
4. investments in nonconsolidated subsidiaries or affiliated companies

property, plant, and equipment

tangible long-lived assets used in the regular operations of the business

intangible assets

lack physical substance and are not financial instruments; goodwill, copyrights, franchises, patents, trade names, trademarks, and customer lists

current liabilities

the obligations that a company reasonable expects to liquidate either through the use of current assets or the creation of other current liabilities

working capital

the excess of total current assets over total current liabilities; represents the net amount of a company's relatively liquid resources

long term liabilities

obligations that a company does not reasonably expect to liquidate within the normal operating cycle

owners' equity:

1. capital stock
2. additional paid in capital
3. retained earnings

capital stock

the par or stated value of the shares issued

additional paid in capital

the excess of amounts paid in over the par or stated value

retained earnings

the corporation's undistributed earnings

unappropriated retained earnings

the amount that is usually available for dividend distribution

restricted retained earnings

restricted by bond indentures or other loan agreements


material events that have an uncertain outcome

accounting policies

explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation methods, investments in subsidiaries, etc.

contractual situations

explanations of certain restrictions or covenants attached to specific assets or, more likely, to liabilities

fair values

disclosures of fair values, particularly for financial instruments

the statement of cash flows report:

1. the cash effects of operations during a period
2. investing transactions
3. financing transactions
4. the net increase or decrease in cash during the period

operating activities

involve the cash effects of transactions that enter into the determination of net income

investing activities

include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment

financing activities

involve liability and owners' equity items; include (a) obtaining resources from owners and providing them with a return on their investment, and (b) borrowing money from creditors and repaying the amounts borrowed

steps of preparing the statement of cash flows:

1. determine the cash provided by or used in operating activities
2. determine the cash provided by or used in investing and financing activities
3. determine the change in cash during the period
4. reconcile the change in cash with the beginning and the ending cash balances

significant noncash activities:

1. issuance of common stock to purchase assets
2. conversion of bonds into common stock
3. issuance of debt to purchase assets
4. exchanges of long-lived assets

current cash debt coverage ratio

indicates whether the company can pay off its current liabilities from its operations in a given year;
= (net cash provided by operating activities)
/(average current liabilities)

cash debt coverage ratio

provides information on financial flexibility, indicating a company's ability to repay its liabilities from net cash provided by operating activities;
= (net cash provided by operating activities)
/(average total liabilities)

free cash flow

the amount of discretionary cash flow a company has;
= (net cash provided by operating activities)
- (capital expenditures)
- (dividends)

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