Accounting 2000 Chapter 2 Class Notes 1 Identify the sections of a classified balance sheet 2 Identify and compute ratios for analyzing a company s profitability 3 Explain the relationship between a retained earnings statement and a statement of stockholders equity 4 Identify and compute ratios for analyzing a company s liquidity and solvency using a balance sheet 5 Use the statement of cash flows to evaluate solvency 6 Explain the meaning of generally accepted accounting principles 7 Discuss financial reporting concepts The Classified Balance Sheet Reports the assets liabilities and equity at a specific point in time Groups together similar assets and similar liabilities using standard classifications Assets Current Assets Long term Investments Property Plant Equipment Intangible Assets Liabilities and Stockholders Equity Current Liabilities Long term Liabilities Stock holders Equity 1 Accounting 2000 Chapter 2 Class Notes 2 Accounting 2000 Chapter 2 Class Notes Current Assets Assets that a company expects to convert to cash or use up within one year or the operating cycle whichever is longer Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers For most businesses the cycle is less than a year so a one year cutoff is used Current assets are listed in the order in which convert to cash liquidity Example Tiger Company has the following assets at 12 31 12 Prepare a proper current assets section 40 000 Land 8 000 Cash Buildings 106 000 Short term investments 10 000 Long term investments 25 000 Accumulated Depreciation 15 000 6 000 Accounts Receivable 23 000 Equipment 6 800 Inventory 500 Prepaid Insurance 700 Supplies Patents 5 000 Tiger Company MEMORIZE THIS SHIT Balance Sheet 12 31 12 Assets Current Assets Cash Short term investments Accounts Receivable Inventory Prepaid insurance Supplies Total Current Assets 3 8 000 10 000 6 000 6 800 500 700 32 000 Accounting 2000 Chapter 2 Class Notes Investments Investments in stocks bonds of other companies that are held for more than one year Investments in long term assets such as land or buildings not currently being used in operating activities Tiger Company Balance Sheet 12 31 12 Assets Investments Long term investments 25 000 Property Plant and Equipment Property plant and equipment assets are assets with long useful life that are currently used in operating the business Examples Land Buildings Equipment Vehicles They are also called plant assets fixed assets or PPE A process known as depreciation is used to allocate the cost of these assets to a number of years 4 Accounting 2000 Chapter 2 Class Notes The accumulated depreciation account shows the total of depreciation that a company has taken so far on it s assets On the balance sheet the assets that are depreciated are shown at cost less accumulated depreciation Tiger Company Balance Sheet 12 31 12 Assets Property Plant and Equipment Land Buildings Equipment Less accumulated depreciation Total PPE 40 000 never depre 106 000 23 000 15 000 154 000 Intangibles Assets that do not have a physical substance yet are often valuable Examples Patents Goodwill copyrights trademarks franchises Tiger Company 5 Accounting 2000 Chapter 2 Class Notes Balance Sheet 12 31 12 5 000 Assets Intangibles Patents Other Assets Current Liabilites Current liabilities are obligations that the company is to pay within the coming year or operating cycle whichever is longer Examples Accounts Payable short term notes payable interest payable salaries payable unearned revenues current portion of long term debt mortgages Usual order is notes payable accounts payable and then others in order of magnitude Long Term Liabilities one year Obligations that a company expects to pay after Stockholders Equity Stockholders Equity consist of two parts Common Stock and Retained Earnings 6 Accounting 2000 Chapter 2 Class Notes Real World Example A look at a Target Corporation Balance Sheet Exercise 2 6 Texas Instruments Inc Balance Sheet 12 31 09 Current Assets Cash Equivalents 1 182 Short term investments 1 743 Accounts Receivable 1 277 Inventory 1 202 Prepaid expenses 164 Other current Assets 546 6 114 Total Current Assets Long term investments 637 Property plant equipment 7 Accounting 2000 Chapter 2 Class Notes Ratio Analysis Ratio Analysis expresses the relationship among selected items of financial statement data A ratio expresses the mathematical relationship between one quantity and another 3 types of Ratios Purpose Type Profitability Measure the income or operating success of a company for a Examples EPS 8 Liquidity Working Capital Accounting 2000 Chapter 2 Class Notes given period of time Measure the short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash the company to survive over a long period of time Current Ratio Solvency Measure the ability of Debt to Total Assets 9 Accounting 2000 Chapter 2 Class Notes Let s Work Target s Ratios EPS Net Income Preferred Dividends 0 Average Common Shares Outstanding Note all amounts in millions 2011 2010 2 929 01 679 1 4 31 2 920 0 723 6 4 03 Favorable Unfavorable Trend favorable Working Capital Current Assets Current Liabilities Favorable 2011 Unfavorable Trend Unfavorable 17 213 10 070 2010 10 449 14 286 2 162 7 143 Current Ratio Current Assets Current Liabilities 2011 16 449 14 289 1 15 2010 1 71 17 213 10 070 Favorable Unfavorable Trend unfavorable Debt to Total Assets Ratio Total Liabilities Total Assets 2011 2010 114287 16522 46 630 66 10 070 18 148 43 705 64 6 10 Favorable Unfavorable Trend unfavorable The Standard Setting Environment Accounting 2000 Chapter 2 Class Notes Generally Accepted Accounting Principles 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 Agency of the US govt that oversees the US financial markets and accounting standards selling bodies Financial Accounting Standards Board FASB Primary accounting standard selling body in the US Private organization issues US accounting standards International Accounting Standards Board IASB Issues standards IFRS for countries oversees Public Company Accounting Oversight Board PCAOB Issues auditing standards reviews performance of audit firms According to the FASB useful information should possess two