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ACG Chapter 2
Terms in this set (52)
Classified Balance Sheet
Groups together similar assets and liabilities using a number of standard classifications and sections.
are assets that a company expects to convert to cash or use up within one year
whichever is longer
On a classified balance sheet, the Assets include
Current assets, long term investments, property plant and equipment, and intangible assets
On a classified balance sheet, the liabilities include
current, long term, and stockholders equity
Receivables go under ______
Intangible assets include
Payables are under ______
Liabilities + Stockholders equity
the average time required to go from cash to cash in producing revenue—to purchase inventory, sell it on account, and then collect cash from customers
Current assets include
cash, investments (such as short-term U.S. government securities), receivables (accounts receivable, notes receivable, and interest receivable), inventories, and prepaid expenses (insurance and supplies)
Companies list current assets in the order of which
they expect to convert them to cash
A companies current assets are important to view
whether they can pay off short term debt
Long term investments include
investments in stocks and bonds of other corporations that are held for more than one year, long-term assets such as land or buildings that a company is not currently using in its operating activities, and long-term notes receivable
Property, plant, and equipment
with relatively long useful lives that are currently operating. Ex. land, buildings, equipment, delivery vehicles, and furniture (
-sometimes called fixed assets or plant assets
the allocation of the cost of an asset to a number of years
is the total amount of depreciation that the company has expensed thus far in the assets life
Goodwill, patents, copyrights, trademarks, trade names that give the company exclusive right of use for a specific amount of time
obligations the company is willing to pay within the operating cycle or year, whichever is longer.
Goes first within the liability and equity section
-includes accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable
-includes current maturities of long-term obligations—payments to be made within the next year on long-term obligations.
Long term liabilities
obligations the company expects to pay
-includes bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities
The two parts of stockholders equity
common and retained earnings
measure the income or operating success of a company for a given amount of time
measure short term ability to pay its maturing obligations and to meet unexpected needs for cash
measure the ability of the company to survive over a long period of time
covering two years for the same company
Industry average comparisons
based on average ratios for particular industries
based on comparisons with a competitor in the same industry
Earnings per share
measures the net income earned on each share of common stock *Net income - preferred dividends / average number of common shares outstanding during the year
Current Assets - current liabilities
When current assets exceed current liabilities, working capital is
positive ; greater likelihood that the company will pay its liabilities
Current assets/current liabilities
What does the ratio actually mean?
Best Buy's 2011 current ratio of 1.21:1 means that for every dollar of current liabilities, Best Buy has $1.21 of current assets.
One potential weakness of the current ratio is
it does not take into account the composition of the current assets.
Debt to assets ratio
total liabilities/ total assets
-It measures the percentage of total financing provided by creditors rather than stockholders.
The higher the percentage of total liabilities (debt) to total assets,
the greater the risk that the company may be unable to pay its debts as they come due
Free Cash flows
Net cash provided by operating activities - capital expenditures - cash dividends
its considered relevant if it has predictive value (it helps provide accurate expectations of the future) has confirmatory value (confirms or corrects prior expectations)
when its size makes it likely to influence the decision of an investor or creditor
the informations accurately depicted what happens.
-it has to be complete, neutral, and free of error
when different companies use the same accounting principles
a company uses the same accounting principles and methods from year to year
independent observers, using the same methods, obtain similar results
it must be available to decision-makers before it loses its capacity to influence decisions
if it is presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning.
Monetary Unit Assumption
only those things that can be expressed in money are included in the accounting records
economic entity assumption
states that every economic entity can be separately identified and accounted for. In order to assess a company's performance and financial position accurately, it is important to not blur company transactions with personal transactions (especially those of its managers) or transactions of other companies.
states 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.
going concern assumption
states that the business will remain in operation for the foreseeable future. Of course, many businesses do fail, but in general, it is reasonable to assume that the business will continue operating.
Historical cost principle
(or cost principle) dictates that companies record assets at their cost.
-For example, if land that was purchased for $30,000 increases in value to $40,000, it continues to be reported at $30,000.
Fair Value principle
indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
-relevance and faithfulness
Most assets must follow the historical cost principle because market values may not be representationally faithful. Only in situations where assets are actively traded, such as investment securities, is the fair value principle applied.
Full disclosure principle
requires that companies disclose all circumstances and events that would make a difference to financial statement users. If an important item cannot reasonably be reported directly in one of the four types of financial statements, then it should be discussed in notes that accompany the statements.
weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.
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