ACCT 200 Lecture 2 Outline of Last Lecture II. Forms of Business OrganizationIII. Users and Uses of Financial InformationIV. Business ActivitiesV. Communicating with UsersOutline of Current Lecture VI. The Classified Balance SheetVII. Financial Reporting ConceptsCurrent LectureChapter 2: A Further Look at Financial StatementsThe Classified Balance Sheet- It is a snapshot at a point in time and groups similar assets and liabilities- Classifications:o Asset: current, long term investment, intangible assetso Liability: current, long termo Stockholders equity (SE): stock, retained earnings- Equation: A = L + SE (subgroups to each)Current Assets:- Assets to be changed into cash within 1 year (anything over 1 year is considered long term)- Common types of current assets:o Casho Investmento A/R , ST, N/Ro Inventories (cash by selling)o Prepaid expenses Ex. Investment*Companies list current asset accounts in the order expected to change into cash = liquidityThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Long- Term Investments- 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- Long term notes receivable- Investments used to make moneyProperty, Plant, and Equipment- Long useful lives- Currently used in operations- Includes land, buildings, equipment, furniture- Deprecation- allocating cost of asset of a number of years- Accumulated deprecation- rolling balance of deprecation total amount expensed so farIntangible Assets- Assets that cannot be seen or touched- Includes patents, copyrights, and trademarksCurrent Liabilities- Obligations the company is to pay within the next year or operating cycle, whichever is longer- Common Exampleso Accounts payable, salaries, wage payable, notes payable, interest payable, income tax payable- Also included as current liabilities are current maturities of long term obligationso Payments to be made within the next year of obligationsLong Term Liabilities- Obligations a company expects to pay after one year- Includes bonds payable, mortgages payable, long term notes payable, lease liabilities, and pension liabilitiesStockholders Equity- Common Stock- investments of assets into the business by the stockholders- Retained Earnings- income retained for use in the businessDo It! PracticeMatch each of the items to its proper balance sheet classificationCurrent Assets (CA) Current Liabilities ( CL)Long-term Investments (LTI) Long- term Liabilities (LTL)Property, Plant, and Equipment (PPE) Stockholders’ Equity (SE)Intangible Assets (IA)1. Salaries and wages payable (CL)2. Service revenue (N/A)3. Interest payable (CL)4. Goodwill (IA)5. Depreciation expense (N/A)6. Mortgage payable (LTL)7. Investment in real estate (LTI)8. Equipment (PPE)9. Accumulated deprecation PPE)10. Debt investments (CA)11. Retained earnings (SE)12. Unearned service revenue (CL)Financial Reporting ConceptsThe Standard- Setting EnvironmentGenerally Accepted Accounting Principals (GAAP)- a set of rules and practices, having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purposesStandard- setting bodies determine these guidelines:- Securities and exchange commission (SEC)o Regulates financial markets and publically traded companies- Financial accounting stands board (FASB)- International accounting standards board (IASB)- Public company accounting oversight board (PCAOB)Qualities of Useful InformationAccording to the FASB, useful information should possess two fundamental qualities, relevance and faithful representation- Relevanceo Makes a difference in a business decisiono Predictive valueo Confirmatory valueo Materiality Company-specific aspect of relevance When info size makes it likely to influence the decision of an investor or creditor- Faithful Representationo Information accurately depicts what really happenedo Information must be Complete- nothing is omitted Neutral- no bias Free from error- accurateEnhancing Qualities- Comparability results when different companies use the same accounting principles- Information is verifiable if independent observes, using the same methods, obtain similar results- Information has the quality of understandability if it is presented in a clear and concise fashion- Consistency means that a company uses the same accounting principles and methods from year to year- For accounting information to have relevance, it must be timelyAssumptions in Financial Reporting- Monetary Unit- requires that only those things that can be expressed in money are included in the accounting records- Economic Entity- states that every economic entity can be separately identified and accounted for- Periodicity- states that the life of a business can be divided into artificial time periods- Going concern- the business will remain in operation for the foreseeable futureMeasurement Principals- Historical cost- or cost principal, dictates that companies record assets at their cost- Fair value- indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)- Full disclosure- requires that companies disclose all circumstances and events that wouldmake a difference to financial statement usersCost Constraint- Accounting standard-setters weigh the cost that companies will incur to provide the information against the benefit that financial statements users will gain from having the information