ACCT 2121 - Chapter 2: A Further Look at Financial Statements
For the following accounts, identify if they are current assets, non-current assets, current liabilities, non-current liabilities, or shareholders' equity: Accounts payable Accounts receivable Accumulated depreciation—buildings Bank indebtedness Bank loan payable (due in 6 months) Buildings Cash Common shares
- *Accounts payable:* Current liabilities - *Accounts receivable: * Current Assets - *Accumulated depreciation—buildings: * Non-current Assets - *Bank indebtedness: * Current Liabilities - *Bank loan payable (due in 6 months): *Current Liabilities - *Buildings: * Non-current Assets - *Cash: *Current Assets - *Common shares: * Shareholder Equity
For the following accounts, identify if they are current assets, non-current assets, current liabilities, non-current liabilities, or shareholders' equity: Deferred revenue Goodwill Income tax payable Interest payable Inventory Land Mortgage payable (due in 10 years)
- *Deferred revenue: * Current Liabilities - *Goodwill: * Non-current Assets - *Income tax payable: * Current Liabilities - *Interest payable: * Current Liabilities - *Inventory: * Current Asset - *Land: * Non-current Liabilities - *Mortgage payable (due in 10 years): * Non-current Liabilities
For the following accounts, identify if they are current assets, non-current assets, current liabilities, non-current liabilities, or shareholders' equity: Notes receivable (due in 3 months) Prepaid insurance Retained earnings Salaries payable Sales taxes payable Supplies Trading investments Vehicles
- *Notes receivable (due in 3 months): * Current Assets - *Prepaid insurance: * Current Assets - *Retained earnings: * Shareholders' equity - *Salaries payable: * Current Liabilities - *Sales taxes payable: * Current Liabilities - *Supplies: * Current Assets - *Trading investments: * Current Assets - *Vehicles: * Non-current Assets
Define Conceptual Framework
- A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting statements
Define Basic earnings per share
- A measure of profitability showing the income earned by each common share
Define Debt to Total Assets
- A measure of solvency showing the percentage of total financing that is provided by lenders and other creditors
Define the Fair Value Basis of Accounting
- A method of accounting under which assets are recognized on the statement of financial position at their fair values
Define Price-Earnings Ratio
- A profitability measure of the ratio of the market price of each common share to the earnings per share
Define Bank indebtedness
- A short-term loan, such as an operating line of credit, pre-arranged with a bank to cover cash shortfalls
Define Goodwill
- An asset that results from the acquisition of another company when the price paid to acquire the company is higher that the fair value of the purchased company's net identifiable assets
Define comparability as it relates to conceptual framework.
- An enhancing qualitative characteristic of useful information that enables users to identify and understand similarities in, and differences among, items
Define Timelessness as it relates to conceptual framework.
- An enhancing qualitative characteristic of useful information that means information is available to decision makers in time to be capable of influencing their decisions
Define verifiability as it relates to conceptual framework.
- An enhancing qualitative characteristic of useful information that means that different knowledgeable and independent users could reach a consensus that the information is faithfully represented
Define Understandability as it relates to conceptual framework.
- An enhancing qualitative characteristic of useful information that means that information is clearly and concisely classified, characterized, and presented
Define Fair value
- An estimate of the price a company would pay to purchase an asset or settle a liability today with arms'-length parties under normal business conditions
Generally what are the 3 components of a Classified Statement of Financial Position?
- Assets - Liabilities - Shareholder's Equity
Define Current Assets
- Assets expected to be converted to cash, sold or used in the business within one year of the financial statement date or one operating cycle, whichever is longer- Assets expected to be converted to cash, sold or used in the business within one year of the financial statement date or one operating cycle, whichever is longer
Define non-current assets
- Assets not expected to be converted to cash, sold, or used in the business within one year of the financial statement date or one operating cycle
What are the 5 components included as current liabilities in a Classified Statement of Financial Position?
- Bank indebtedness - Accounts payable - Deferred revenue - Notes payable - Current portion of long-term debt
What is included as a non-current liability in a Classified Statement of Financial Position?
- Bank loan payable
Define Industry average comparisons
- Based on comparisons to average ratios for the industry that a company operates in
Define Intercompany comparisons
- Based on comparisons with a competitor in the same industry
What are 2 sources of information about a company's profitability?
- Basic earnings per share (EPS) - Price-Earnings (P-E) ratio
How is depreciation calculated by companies?
- By systematically assigning a portion of the asset's cost to depreciation expense each year
What are 6 accounts included as current assets in a Classified Statement of Financial Position?
- Cash - Trading investments - Accounts receivable - Inventory - Supplies - Prepaid expenses
What are 4 qualitative characteristics of a conceptual framework that enhances the usefulness of information?
- Comparability - Verifiability - Timelessness - Understandability
Define Intracompany comparisons
- Comparisons covering two or more periods for the same company
To provide faithful representation of financials, the information must have what 3 characteristics?
- Complete (nothing important was omitted) - Neutral (not biased toward one position or another) - Free from material error (it provides an accurate description and no errors were made in the process used to determine it)
What term is used interchangeably with historical cost
- Cost
Generally, what are the 2 components of assets within a Classified Statement of Financial Position?
- Current assets - Non-current assets
What are 2 other terms use for fair value
- Current value - Current cost
Generally, what are 2 types of common multi-year investments?
- Debt securities - Equity securities
What is the primary source of information about a company's solvency?
- Debt to total assets
In what way is the Going Concern Assumption essential to financial statements? Explain.
- Essential to the way we record items - If we assume the company is a going concern then reporting assets as non-current makes sense, but if we were to assume the company would be shutting down and selling all of its assets everything would be classified as current
Define ratio analysis
- Expresses the relationships between selected items of financial statement data
T/F We can amortize goodwill
- False - Goodwill has an indefinite life
What are the 2 measurement bases covered in this course?
- Historical cost - Fair value
How are current assets typically listed in a Classified Statement of Financial Position?
- In order of liquidity (reverse order of liquidity is also possible)
How are Property, Plant, and Equipment typically listed on a Classified Statement of Financial Position?
- In order of permanency
What is an example of Goodwill for a company?
- Increased value to a business due to its reputation
Define Materiality as it relates to financial information
- Information is considered material if its omission of misstatement could influence the decisions of users.
What are the 3 ratio classifications (aka comparisons) used in Accounting?
- Intracompany comparisons - Intercompany comparisons - Industry average comparisons
What does Price-Earnings (P-E) ratio reflect?
- It reflects investors' beliefs about a company's future income potential
What are 4 examples of types of debt securities?
- Loans - Notes - Bonds - Mortgages
Non-current assets are also known as what?
- Long-term assets
What are the 6 components included as non-current assets in a Classified Statement of Financial Position?
- Long-term investments - Property - Plant - Equipment - Intangible assets - Goodwill
Define Historical Cost Basis of Accounting
- Measurement basis that states that assets and liabilities should be recorded at their cost at the time of acquisition
Define Data analytics
- Process of analyzing data to find patterns and correlations, trends, and other valuable insights to enhance decision-making
What are the 2 fundamental qualities of the conceptual framework?
- Relevance - Faithful representation
What 2 things are included as Shareholder's equity in a Classified Statement of Financial Position?
- Share capital - Retained earnings
What is the primary example of a type of equity security?
- Shares of other companies
What do Liquidity Ratios measure?
- Short-term ability of the company to pay its maturing obligations, usually its current liabilities, and to meet unexpected needs for cash
What are the 3 primary types of relationship ratios used to analyze financial statements?
- Solvency - Profitability - Liquidity
What do Solvency Ratios measure?
- The ability of the company to survive over a long period of time
Define the Going Concern Assumption
- The assumption that the business will remain in operation for the foreseeable future
Define operating cycle
- The average time it takes to go from cash to cash in producing revenue
What do Profitability Ratios measure?
- The income or operating success of a company for a given time period
Define Depreciation
- The process of allocating of the cost of a depreciable asset over its estimated useful life
Define Amortization
- The systematic allocation of the amortizable cost of a finite-life intangible asset over the shorter of the asset's legal or useful life (basically depreciation for intangible assets)
What are the 2 groups that companies divide intangible assets into?
- Those with finite useful lives - Those with indefinite useful lives
T/F Goodwill is reported separately from other intangible assets
- True
Define a cost constraint
- When the cost of preparing financial information outweighs the value of that information to users (the benefits of financial reporting information should justify the costs of providing and using it
What are 2 methods of measuring liquidity?
- Working Capital - Current Ratio
What are 3 characteristics that contribute to relevance as it relates to conceptual framework?
- has predictive value and helps provide accurate expectations about the future - has confirmatory value (confirms or corrects prior expectations) - Materiality (company-specific)
How is Current Ratio calculated?
Current Ratio = Current Assets / Current Liabilities
How is the Debt to Total Assets calculated?
Total liabilities / Total Assets
T/F There is a cost associated with ensuring that financial statements have an appropriate degree of qualitative characteristics
True
How is Working Capital calculated?
current assets - current liabilities
How is the Basic Earnings per Share calculated?
net income / weighted average common shares outstanding
