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 ____