ACCT 200 Lecture 2 Outline of Last Lecture II Forms of Business Organization III Users and Uses of Financial Information IV Business Activities V Communicating with Users Outline of Current Lecture VI The Classified Balance Sheet VII Financial Reporting Concepts Current Lecture Chapter 2 A Further Look at Financial Statements The 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 assets o Liability current long term o 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 Cash o Investment o A R ST N R o Inventories cash by selling o Prepaid expenses Ex Investment Companies list current asset accounts in the order expected to change into cash liquidity These 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 money Property 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 far Intangible Assets Assets that cannot be seen or touched Includes patents copyrights and trademarks Current Liabilities Obligations the company is to pay within the next year or operating cycle whichever is longer Common Examples o Accounts payable salaries wage payable notes payable interest payable income tax payable Also included as current liabilities are current maturities of long term obligations o Payments to be made within the next year of obligations Long Term Liabilities Obligations a company expects to pay after one year Includes bonds payable mortgages payable long term notes payable lease liabilities and pension liabilities Stockholders Equity Common Stock investments of assets into the business by the stockholders Retained Earnings income retained for use in the business Do It Practice Match each of the items to its proper balance sheet classification Current 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 Concepts The Standard Setting Environment Generally 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 purposes Standard 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 Information According to the FASB useful information should possess two fundamental qualities relevance and faithful representation Relevance o Makes a difference in a business decision o Predictive value o Confirmatory value o Materiality Company specific aspect of relevance When info size makes it likely to influence the decision of an investor or creditor Faithful Representation o Information accurately depicts what really happened o Information must be Complete nothing is omitted Neutral no bias Free from error accurate Enhancing 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 timely Assumptions 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 future Measurement 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 would make a difference to financial statement users Cost 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 available