Chapter 2: A Further Look at Financial Statements
industry-average comparisons
based on average ratios for particular industries
intercompany comparisons
based on comparisons with a competitor in the same industry
Understandability
Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.
timely
Information that is available to decision-makers before it loses its capacity to influence decisions.
no
Is the FASB a government body?
stockholders equity
The owners' claim to assets.
measurement principles: historical cost and fair value; full disclosure
What key principles does the FASB rely on the develop accounting standards?
cost; accumulated depreciation
___ - ____ ___ is reported on the balance sheet
greater
a positive working capital indicates a ____ likelihood for paying liabilities
relationship; one quantity
a ratio expressed the mathematical _____ between ___ ___ and another
U.S generally accepted accounting principles (GAAP)
a set of rules and practices that the accounting profession recognizes as the authoritative guidance for financial reporting
profitability
ability to provide financial rewards sufficient to attract and retain financing
depreciation expense
amount of the cost allocated to one accounting period
materiality
an item is material when its size makes it likely to influence the decision of an investor or creditor
no
are earnings per share comparisons across companies meaningful?
current assets
assets that are expected to be converted to cash or used up in the business within one year or one operating cycle (whichever is longer)
long term investments
assets that can be converted into cash, but whose conversion is not expected within one year
intangible assets
assets that have no physical substance; are non current; generally give business an exclusive right
property plant and equipment
assets with relatively long useful lives that are currently used in operating the business
operating cycle
average time required to go from cash to cash in producing revenue- buy inventory, sell it, and collect the cash from its customers
examples of long term liabilities
bonds payable, mortgage payable, long term notes payable, lease liabilities, and pension liabilities
relative earnings; share
by comparing earnings per share of a single company over time, one can evaluate its ____ ___ performance on a per ___ basis
yes
can an operating period be longer than a year?
relevance
capable of making a difference in a decision
examples of current assets
cash, short term investments, receivables, inventories, and prepaid expenses
enhancing qualities of useful information
comparability, consistency, verifiability, timeliness, understandability
components of representation
completeness, neutrality, free from material error
confirmatory value
confirms or corrects prior expectations
standard setting environment
consistent rules for how financial information should be recorded, classified, and summarized so it can be used
intracompany comparisons
covering two years for the same company
working capital equation
current assets - current liabilities
current ratio equation
current assets / current liabilities
solvency
debt to assets ratio is a ___ measure
cost constraint
determining whether the cost that companies will incur to provide the information will outweigh the benefit that financial statement users will gain from having the information available
net income; share; common
earnings per share measures the ___ ___ earned on each ___ of ___ stock
land, buildings, machinery, equipment, furniture
examples of PPE
ratio analysis
expresses the relationship among selected items of financial statement data
examples of intangible assets
goodwill, patents, copyrights, trademarks, and trade names
1;1
greater that _:_ is desirable for current ratio
classified balance sheet
grouping similar assets and liabilities together using standard classifications and sections
predictive value
helps provide accurate expectations about the future
measurement principles
historical cost and fair values principles
at historical cost with cost over useful life allocated in process called depreciation
how are PPE recorded on the CBS?
liquidity order
in what order are current assets listed on the classified balance sheet?
current assets, long term investments, PPE, intangible assets
in what order are the assets listed on the classified balance sheet?
retained earnings
income retained for use in the business
verifiable
information that is proven to be free from error
common stock
investments into the business by the stockholders
asset
is a long term investment an asset or liability?
higher
is higher or lower "better" with earnings per share?
higher
is higher or lower working capital better?
yes
is the SEC a government body?
free from material error
keep in mind that we have many estimates in accounting, so amounts may not be perfect
examples of long term investments
long term assets not currently used in company's operation (land, buildings), and investments in stocks and bonds of other corporations
single amount; debt
many companies report long term debt mature after one year as a ___ ___ in the balance sheet and show the details of the ___ in notes that accompany the financial statements
working capital
measure of short term ability to pay obligations
current ratio
measure of short term ability to pay obligations that is more dependable indicator of liquidity in comparison with working capital
profitability ratios
measure the operating success of a company for a given period of time
debt to assets ratio
measures the percentage of assets finance by creditors
current assets + long term assets = current liabilities + long term liabilities + stockholder's equity
more detailed accounting equation
earnings per share
net income - preferred dividends / weighted average common shares outstanding
common examples of current liabilities
notes payable, accounts payable, wages payable, interest payable, taxes payable, unearned revenue, and current maturities of long term obligations
completeness
nothing important has been omitted
long term liabilities
obligations not expected to be paid within a year
current liabilities
obligations that are paid within the coming year or operating cycle whichever is longer
monetary unit assumption
only transactions that can be expressed in terms of money can be included in the accounting records
fixed asset or plant assets
other terms for PEE
Securities and Exchange Commission (SEC) role
oversees U.S. financial markets and the setting of accounting standards
components of relevance
predictive value, confirmatory value, materiality
financial accounting standards board (FASB) role
primary accounting standard setting body
effectiveness
profitability is frequently used as a test of management's _____
assets
property plant and equipment fits under what category on a classified balance sheet?
performance
ratios shed light on a company's ____
Neutrality
reporting is unbiased (a company cannot select information to favor one set of interested parties over another)
Historical Cost Principle
requires certain assets to be recorded and reported at original cost, because that amount is verifiable
full disclosure principle
requires that all circumstances and events that would make a different to financial statement users should be disclosed
fair value principle
requires that some assets and liabilities should be reported at the price received to sell an asset or settle a liability
current assets, long term assets, current liabilities, long term liabilities, and stockholder's equity
standard classifications of a classified balance sheet
SEC and FASB
the 2 standard setting organizations are what?
standard setting
the GAAP is formulated by ___ ___ organizations
higher
the ___ the percent of debt financing, the riskier the company
solvency
the ability of a company to survive over a long period of time
liquidity
the ease with which an asset can be converted into cash
faithful representation
the numbers and descriptions match what really existed or happened
depreciation
the practice of allocating costs of assets to a number of years
accumulated depreciations
the total amount of depreciation that has been expensed since the asset was placed in service
relevance; faithful representation
to be useful information should posses two qualities; ___ and ____ ____
debt to assets ratio equation
total debt (including current and long term liabilities) / total assets
don't; recorded
transactions such as ordering, bidding, and hiring ___ meet the monetary unit assumption and are not ____
liquidity; solvency
using a classified balance sheet can provide users with info about the firms ___ and ___
whether company has enough assets to pay debts, and any claims creditors have on the ST and LT assets
what 2 things does the groupings of a classified balance sheet help determine?
cash
what is always listed as the first current asset?
common stock and retained earnings
what two parts does stockholder's equity consist of in a classified balance sheet?
Consistency
when a company uses the same accounting principles and methods from year to year
cost; benefit
when developing accounting rules and disclosure requirements, standard setters weight the ___ against the )))
Comparability
when different companies use the same accounting principles
from the SEC
where does the FASB get their authority?
full purchase price of asset will be used longer than just a year
why is historical cost/ depreciation used?
notes payable; accounts payable; magnitude
within the current liabilities section, companies usually list ___ __ first, followed by ___ ___, and then the remaining items in descending order of their ____