Chap 1. Personal NotesInvesting Activities- the purchase of resources the company needs to operate are investments and the resources themselves are called assets.- there are multiple kinds of assetsOperating Activities- revenues increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business.- account receivable – right for a company to expect payment for a product or service it has provided that is unpaid for.- expenses – the cost of producing assets (salaries, rents, utilities)- accounts payable – refers to the obligations to pay for the liabilities arising from expenses such as outstanding amounts owed to banks, salespersons, and government. Communication with Users- to show how successful your business performed during a period of time, you report its revenues and expenses in an income statement.Income Statement: Revenues – Expenses = Net Income- to indicate how much previous income was paid to yourself and owners of the business, and how muchwas retained to allow for future growth, you present a retained earnings statementRetained Earnings: Beginning RE + Net income – Dividends = Ending RE- to show what your company owns and what it owes, you prepare a balance sheetBalance Sheet: Assets = Liabilities + Stockholders’ Equity- to show where your business obtained cash during a time period and how it was used, you present a statement of cash flows.Statement of Cash Flows: Cash Flows from Operating Activities + Cash Flows from Investing Activities +Cash Flows from Financing Activities + Cash at beginning of period = Cash at end of period.Other Elements of an Annual Report – Publicly traded U.S. companies must provide shareholders with an annual report. The report includes the financial statements used in this chapter and other important information. 1.) Management Discussion and Analysis – MD&A section presents management’s views on the company’s ability to pay near term obligations, its ability to fund operations and expansion, and its results of operations. 2.) Notes to the Financial Statements – Clarify financial statements, and provide additional detail. Information in the notes might include: descriptions of the significant accounting policies and methods used in preparing the statements, explanations of uncertainties and contingencies, and various statistics and details too voluminous to be included in the statements.3.) Auditor’s Report – a report prepared by an independent outside auditor. It states the auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and theirconformance with generally accepted accounting principles.Chapter 2 – Personal NotesClassified Balance Sheet – a balance sheet that groups together similar assets and similar liabilities.Classifications of CPS:Assets: Liabilities and Stockholders’ Equity1.) Currents Assets 1.) Current Liabilities2.) Long-term Assets 2.) Long-term Liabilities3.) Property, plant, equipment 3.) Stockholders’ Equity4.) Intangible assetsCurrent Assets – assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer.Operating Cycle – average time required to purchase inventory, sell it on account, and then collect cash from customers – that is, to go from cash to cash. Current AssetsCash and cash equivalentsShort-term investmentsAccounts Receivable (receivables)InventoriesPrepaid expenses (insurance and supplies)Long Term Investments- generally (1) investments in stocks and bonds of another company that are held for more than1 year. (2) long-term assets such as land or buildings that a company is not currently using in its operating activities. (3) long-term notes receivable.Property, Plant, and Equipment- assets with relatively long useful lives that are currently used in operating the business.ex. Land, buildings, equipment, delivery vehicles, furnitureDepreciation – the allocation of the cost of an asset to a number of years.Intangible Assets – sometimes called “other assets”- assets that have no physical substance but that have value.ex. Goodwill, patents, copyrights, trademarks or trade names that give the company exclusive right of use for a specified period of time. Current Liabilities – obligations that a company is to pay within a year or operating cycle, whichever is longer.ex. Accounts payable, salaries and wages, notes payable, interest payable, and income taxes payable.* also included are current maturities of long-term obligationsLong-term Liabilities – obligations that a company expects to pay after one year.ex. Bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.Using The Financial StatementsRatio analysis – expresses the relationship among selected items of financial statement data.1. Profitability ratios – measures the income or operating success of a company for a given period of time. 2. Liquidity ratios – measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.3. Solvency ratios – measures the ability of the company to survive over a long period of time. Intracompany comparison – covering 2 years for the same companyIndustry-average comparisons – based on average ratios for particular industriesIntercompany comparisons –based on comparisons with a competitor in the same industry.Earnings Per Share (EPS) –measures the net income earned on each share of common stock.EPS = Net income – preferred dividends avg. # of shares outstanding per annum- A higher measure suggests improved performance, although the values should not be compared across companies.Liquidity –company’s ability to pay obligations expected to become due within the next year or operating cycle. - of interest to a bank debating on giving a loan or a company selling goods to them on credit. “Can they pay us back on time?”Working Capital –measure of liquidity calculated as: Current Assets – Current LiabilitiesCurrent Ratio –a liquidity ratio calculated as Current Assets/Current Liabilities- more dependable than working capital as a measure of liquidity. - One potential weakness of the current ratio is that it does not take into account the composition of assets.- Higher ratio suggests favorable liquiditySolvency – the ability of a company to pay interest as it
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