ACCT.6351 Chapter 2
Quick Ratio =
(Cash + Marketable Securities + Accounts Receivables) / Current Liabilities
what financial statement is used to capture transactions and the effect on the four financial statements
(FSET) Use the financial statement effect template to capture the transaction and its effects on the four financial statements.
Stockholders' Equity
--Reflects financing provided from company's owners
Step 1: Analyze Transactions What are the three questions to ask during this step?
1(What accounts are affected by the transaction? Must affect at least two accounts to maintain equality 2)What is the direction and amount of each effect? Increase or decrease in Dollar amount 3) Classify the accounts as an asset, liability, equity, revenue, or expense?
What are the 3 main items the Statement of Stockholders' Equity has on it (pp.60 and 61)
1) The statement of stockholders' equity reconciles the beginning and ending balances of stockholders' equity accounts. 2) Contributed capital increase by the proceeds from the sale of stock. 3) Earned Capital increase by the net income reported in the income statement and decrease by the dividends to shareholders
Current Assets
A company expects to convert its current assets in to cash or use those in operation within the next year or within the next operating cycle whichever is longer.
Accounting Cycle
A sequence of activities to accumulate and report financial statements
What is a T-accounts and what side are the debits and credits on?
Accountants use a graphic representation of an account called a T-account. Debits are always on the left of the T-account and Credits are always on the right. One side of the T-account is used to record increases to the account and the other side is used to record decreases.
Historical Cost
Assets intended to be used are reported on the balance sheet at historical cost Advantage: Historical cost is reliable Disadvantage: Often significantly undervalued
Assets M2-21 Classify each item B for Balance Sheet I for Income Statement SE for stock holders Equity:
B
Cash M2-21 Classify each item B for Balance Sheet I for Income State,ment SE for stock holders Equity:
B
Liabilities M2-21 Classify each item B for Balance Sheet I for Income State,ment SE for stock holders Equity:
B
Equity M2-21 Classify each item B for Balance Sheet I for Income Statement SE for stock holders Equity:
B,SE
liquidity is listed on this financial statement and what order
Balance sheet lists assets in order of decreasing liquidity. The most liquid assets are called current assets.
Retained Earnings formula-
Beginning retained earnings + Net Income (or - Net Loss) - Dividends = Ending retained earnings.
Quick Ratio
Cash+ Short Term Securities+ accounts receivable/Current Liabilities
Contributed Capital =
Common Stock + Additional Paid-In Capital - Treasury Stock
Total stockholders' Equity =
Common Stock + Additional Paid-In Capital - Treasury Stock + Retained Earnings +/- Accumulated other comprehensive income or loss
Total stockholders' Equity =
Contributed Capital + Earned Capital
Net Working Capital =
Current Assets - Current Liabilities
Current Ratio =
Current Assets / Current Liabilities
Current Liabilities
Current maturities of long-term debt—principal portion of long-term debt that is due to be paid within one year.
What does DEAD COIL mean
Debit to increase Expenses Assets Dividends And Credit to increase Owners' Equity, Income (i.e., revenue) Liability
Expenses M2-21 Classify each item B for Balance Sheet I for Income Statement SE for stock holders Equity :
I
Revenue M2-21 Classify each item B for Balance Sheet I for Income Statement SE for stock holders Equity:
I
Income M2-21 Classify each item B for Balance Sheet I for Income State,ment SE for stock holders Equity: net
I,SE
What is Liquidity and how is it measured
Liquidity-Ability to pay debts when due The larger current assets are when compared to current liabilities, the more liquid a company is. Measured by Net working capital Current ratio Quick ratio
Non-Current Liabilities
Long-term debt includes bonds, mortgages, and other long-term loans.
Non-Current Liabilities
Long-term debt—amounts borrowed from creditors that are scheduled to be repaid more than one year in the future.
Earned Capital =
Net income-dividends Retained Earnings +/- Accumulated other comprehensive income or loss
Non-Current Liabilities-
Obligations due after one year
Current Liabilities-
Obligations that must be settled within one year or one operating cycle. Note: Listed according to which one will mature first.
Non-Current Liabilities
Other long-term liabilities— obligations, such as warranty and deferred compensation liabilities, long-term tax liabilities.
Noncurrent Assets
Property, plant, and equipment (PPE), net—land, buildings, and equipment. Long-term investments—investments the company does not intend to sell in the near future. Intangible and other assets—assets without physical substance (such patents, trademarks, franchise rights, and goodwill).
Balance sheet (pp. 44-49)
Reports company's financial position at a point in time :Divided into three sections - Assets, liabilities, and stockholders' Equity Assets = Liabilities + Stockholders' Equity
Income Statement (PP. 53-56)
Reports on a company's performance over a period of time Reports revenues and expenses
Liabilities
Represent borrowed funds. Balance sheet lists liabilities in order of maturity. Amounts are reported as liabilities on the balance sheet when three conditions are met: A future sacrifice is probable The amount of the obligation is known or can be reasonably estimated. The transaction or event that caused the obligation has occurred
Expenses
Result from decreases in net assets Caused by the company's revenue-generating activities Cost of products and services sold Operating costs Nonoperating costs
Revenues
Result from increases in net assets Caused by the company's operating activities
Earned Capital =
Retained Earnings +/- Accumulated other comprehensive income or loss. Net Income for the period is added to the companies retained earnings, which is part of stock holders equity.
Dividends M2-21 Classify each item B for Balance Sheet I for Income Statement SE for stock holders Equity :
SE
Stock Issuance M2-21 Classify each item B for Balance Sheet I for Income Statement SE for stock holders Equity :
SE
structure of income statement
Sales revenue or service revenue Less: Cost of Sales Gross Profit Less: Operating Expense (Examples: selling, salary, depreciation, rent, utility, R&D expenses) Operating Income Add: Nonoperating revenues (Examples: interest revenue, gain on sale of PPE, investments) Less: Nonoperating expenses (Examples: interest expense, loss on sale of PPE, investments) Income before income tax Less Income Tax Net Income
What are the 5 Steps in the accounting cycle § Steps performed daily, monthly, quarterly, or end of fiscal year; not all at the same time
Step 1: Analyze (Chapter 2) Step 2: Record (Chapter 2) Step 3: Adjust (Chapter 3) Step 4: Report (Chapter 3) Step 5: Close (Chapter 3)
What is the second step in the accounting cycle?
Step 2: Record in Journal and summarize in t-accounts § Journal Entries o Increases and decreases are described as debits and credits. o Double-entry accounting requires that debits equal credits. o Every transaction will have at least one debit and one credit o While recording a transaction in a journal, record debit first and then credit. Use journal entries to record the transactions (mnemonic: DEAD COIL) Debit to increase Expenses Assets Dividends And Credit to increase Owners' Equity, Income (i.e., revenue) Liability
Operating cycle is
The time between paying cash for goods or employee services rendered and receiving cash from the customers
Current Liabilities
Unearned revenues—obligations created when the company accepts payment in advance for goods or services it will deliver in the future.
Accumulated other comprehensive income or loss—
accumulated changes in equity that are not reported in the income statement
Accounts receivable—
amounts due to the company from customers arising from the sale of products and services on credit
Additional paid-in capital—
amounts received from the primary owners in addition to the par value or stated value of the common stock APIC = 200 * ($100 - $1) = $19,800
Prepaid expenses—
costs paid in advance for rent, insurance, advertising, and other services.
Cash and cash equivalents—
currency, bank deposits, and investments with an original maturity of 90 days or less (called cash equivalents).
Net Working Capital
current assets - current liabilities
Inventories—
goods purchased or produced for sale to customers.
Marketable securities—
marketable securities and other investments the company expects to dispose of in the short run.
•Expense recognition (matching) principle—
recognize expenses when incurred. Companies recognize an expense when it is incurred, even if no cash is paid.
Revenue recognition principle—
recognize revenues for goods and services provided to customers at an amount expected to be received. Recognizing revenues does not necessarily imply the receipt of cash. Revenue is recognized when the company has done what it is obligated to do under the sales contract.
Treasury stock—
the amount paid to reacquire the company's own common stock 6/30 company repurchased 50 stocks at 120$ each. Treasury Stock 50 * 120 = $6000
Stockholders' Equity Common stock—
the capital received from the primary owners of the company. Stock at Par value (Par Value is not Market Value) EX 1/1 Company sold 200 stocks at the market price of $100. Par value of the stock is $1. Common stock 200 * $1 = 200$
Assets
• Expected to produce economic benefits in the form of revenues.• An asset must possess two characteristics a. It must be owned b.It must confer expected future economic benefits that result from a past transaction or event
