Accounting 2021 Chapter 2 Notes The classified balance sheet helps people make comparisons between different years or categories Still presents a snapshot in time Current Assets that a company expects to convert to cash or use up within 1 YEAR or the operating cycle whichever is longer o Operating cycle average time it takes from the purchase of inventory sell it to customers and collect the cash from the sale o Common types cash investments receivables our company is owed money from other people or another company inventories prepaid expenses insurance o When making a balance sheet order the items by how quickly they expire or the liquidity of each Long Term Investments stocks and bonds land or buildings that a business plans to use in the future but is NOT currently using long term notes receivables more than a year PPE property plant and equipment long term usable land buildings vehicles furniture etc that are also currently IN use o Depreciation not land but just about everything else o Accumulated Depreciation total amount of depreciation expensed thus far in the asset s life o Book Value shows final addition of these values Intangible Assets Assets that do NOT have physical substance include goodwill patents copyrights and trademarks or trade names Current Liabilities obligations the company is to pay within the next year or operating cycle whichever is longer o Common examples accounts payable salaries and wages payable interest payable and income taxes payable o ALSO current maturities of long term obligations payments to be made within the next year on long term obligations i e rent and utility bills Long Term Liabilities obligations a company expects to pay after one year o Includes bonds payable mortgages payable long term notes payable lease liabilities and pension liabilities Stockholders Equity o Common stock investments of assets into the business by the stockholders o Retained Earnings income retained for use in business end of year s balance becomes next years starting balance o Beginning NI Dividends End Ratio Analysis expresses the relationship among selected items of financial statement data o Single ratio by itself is not useful what IS useful is comparing two ratios against each other different companies or years o 3 main categories of ratios Profitability Ratios income or operating success of a company for a given period of time Liquidity Ratios measures the short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash Solvency Ratios measures the ability of the company to survive over a long period of time Using the Income Statement EPS Earnings per share measures the net income earned on each share of common stock o Preferred shareholders get their dividends first and then everyone else gets theirs o EPS Net Income Preferred Dividends Average Common Shares Outstanding o Earnings per share does NOT mean the payout for stock holders it just refers to how much money the business has made on it Using the Statement of Stockholders Equity shows both components of equity common equity and retained earnings aka it s more comprehensive o Can show balances and year to year changes easily Using a Classified Balance Sheet o Liquidity the ability to pay obligations expected to become due within the next year or operating cycle liabilities o Working Capital the difference between the amounts of current assets and current o Liquidity Ratio measures the short term ability to pay maturing obligations and to meet unexpected needs for cash Current Ratio Current Assets Current Liabilities o Solvency the ability to pay interest as it comes due and to repay the balance of a debt due at its maturity Debts to Assets Ratio measures the percentage of total financing provided by creditors rather than stockholders DAR Total Liabilities Total Assets When is debt good o Using the Financial Statements cash provided by operating activities fails to take into account that a company must invest in new PP E and must maintain dividends at current levels to satisfy investors Free cash flow Cash provided by operations Capital expenditures Cash dividend o Financial Reporting Concepts The Standard Setting environment Generally accepted Accounting Principles GAAP is 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 SEC FASB IASB PCAOB o Qualities of Useful Info According to the FASB useful info should possess two fundamental qualities relevance and faithful representation Relevance accounting info has relevance if it would make a difference in a business decision aka this info has a predictable value and helps provide accurate expectations about the future and has confirmatory value Faithful Representation has 3 aspects 1 Complete 2 Neutral 3 Free from error Enhancing qualities Comparability Verifiable Understandability Consistency Timely o Assumptions in Financial Reporting Monetary Unit some things can t be measured in money like customer satisfaction Economic Entity that a business and its owner are separate Principles in Financial Reporting 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 Principles historical cost fair value full disclosure o
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