Kimmel, Financial Accounting Chapter 2

Fair Value Principle

Assets and Liabilities should be reported at fair value

Historical Cost Principle

Companies record assets at their cost

What equation do you need to measure Solvency?

Debt to total Assets Ratio

Earnings per Share Equation

EPS = Net Income - Preferred Dividends/Weighted-average Common shares outstanding during the year

What equation(s) do you need to measure Profitability?

Earnings per share equation

Economic Entity Assumption

Every Economic entity can be separately identified and accounted for

Timeliness

In order for accounting information to be relevant, it must be timely

Materiality

If an item is large enough to likely influence the decision of an investor or creditor

Verifiability

Independent observers use the same method and get the same results

Faithful Representation

Information that is complete, neutral, and free of error.

Working Capital Equation

WC = Current Assets - Current Liabilities

Free Cash Flow Equation

Net Cash Provided by Operating Activities - Capital Expenditures - Cash Dividends

Earnings Available to Common stockholders Equation

Net Income - Preferred Dividends

Monetary Unit Assumption

Only things expressed as money are included in accounting record

Understandability

Presented in a clear concise fashion

Periodicity Assumption

The life of a business can be divided into separate time periods and there will be useful reports covering those periods

Relevance

The quality of information and if it would make a difference

Debt to Assets Ratio Equation

Total Liabilities/ Total Assets

Comparability

When different companies use the same accounting principles

Cost Constraint

Whether companies should be required to provide a certain type of information

What equation(s) do you need to measure Liquidity?

Working Capital and Current Ratio Equation(s)

Full Disclosure Principle

requires that companies disclose every event that would make a difference to financial statement users

Going Concern Assumption

the business will remain in operation for the foreseeable future