Chapter 3 Quiz

Proxy statement, what info does it provide?

Discloses on compensation to directors and executives

distinguish between property, plant, and equipment and intangible assets

Property, plant, and equipment includes land, buildings, equipment, machinery, etc. they are all things you can see and feel, and they generate revenue now. Intangible assets are things that have no physical substance, they are used to generated future revenue.

Retained Earnings

Represents the accumulated net income reported by a company since its inception minus all dividends paid to shareholders.

Current Ratio

current assets / current liabilities

Debt to Equity Ratio

total liabilities / total shareholders equity The extent of reliance on creditors, rather than owners, in providing resources.

Subsequent Event

A significant development that occurs after a companies fiscal year-end but beofre the finanicial statements are issued or available to be issued.

List the typical liabilities catergories included in current liabilities

Accounts Payable, Notes Payable, Deffered Revenues, Accrued Liabilities, and Current Maturities of Long-Term Debt.

List the typical asset catergories included in current assets

Cash and cash equivalents, Short-Term Investments, Accounts Receivable, Inventories, and Prepaid Expenses.

Explain the difference between investments in equity securities classified as current assets versus those classified as long term assets

For short-term investments the company is willing to sell those securities within the next 12 months or operating cycle. Long-term investments are those that the company doesn't intend to sell within the first 12 months or operating cycles.

times interest earned ratio

Income before subtracting interest expense and income taxes / interest expense Indicates the margin of safety provided to creditors

Define Current Assets

Items that can or will be converted to cash within one year or the operating cycle whichever is longer.

Paid-in-Capital

The amount that shareholders have invested in the company, most often when the company issues stock.

Unqualified with explanatory paragraph

The auditor believe the financial statements are in comformity with GAAP but the auditor feels that other information needs to be emphasized to financial statement users. These situations include, lack of consistency, going concern, and emphasis of matter.

Describe the common characteristics of assets classified as plant property and equipment and identify some assets included in this classification

The common characteristics are that they are tangible, long-lived, and used in the operations of the business. They are generally the primary revenue generating assets of the business.

Unqualified Opinion

The financial position, reults of the operations, and cash flows are presented fairly within the statements are in conformity with U.S. GAAP

Describe what is meant by an operating cycle

The period of time from the initial outlay of cash for the purchase of inventory until the time the company collects cash from a customer from the sale of inventory.

describe the purpose of the balance sheet

The purpose of the balance sheet, also known as the statement of financial position, is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement that reports events occurring during a period of time, the balance sheet is a statement that presents an organized array of assets, liabilities, and shareholders' equity at a point in time. It is a freeze-frame or snapshot picture of financial position at the end of a particular day marking the end of an accounting period.

Disclosure notes are an integral part of the information provided in financial statements. In what ways are the notes critical to understanding the financial statements and to evaluating the firm's performance and financial health?

They provide information not directly related to any specific item in the statements. They must include specific notes such as a summary of significant accounting policies, descriptions of subsequent events, and related third-party transactions. Provide an explanation that contributes to investors' and creditors' understanding of the results of operations, financial position, and cash flows of the company.

A summary of the company's significant accounting principles is a required disclosure. why is this disclosure important to external financial statement users?

This discloses what accounting method that the company uses for example; FIFO or LIFO, or using accelerated or straight-line depreciation methods.

Where can we find authoritative guidance for balance sheet presentation under IFRS?

Under IFRS in "Cash Flow Statements" International Accounting Standard No. 7, IASB.

Disclaimer of Opinion

When the auditor is not able to gather sufficient information that financial statements are in confomity with GAAP

Adverse Opinion

a report issued when the auditor believes the financial statements are so materially misstated or misleading as a whole that they do not present fairly the entity's financial position or the results of its operations and cash flows in conformity with GAAP

Working Capital

current assets - current liabilities, a way to measure a company's ability to satisfy its short-term obligations.

Define current liabilities

liabilities that will be settled within one year or the operating cycle whichever is longer

Acid-test ratio (quick ratio)

quick assets / current liabilities (cash, short-term investments, and accountts receviable) More stringent indication of a company's ability to pay its current obligations.

Qualified Opinion

when either the audit process has been limited or there has been a departure from GAAP, but neither is of sufficient seriousness to invalidate the financial statements as a whole