Chapter 2

Debt to assets ratio

-A measure of solvency -Measures percentage of total financing provided by creditors rather than stockholders. -Higher the percentage of debt financing, riskier the company. -Example on 56

Long term liabilities

-AKA: long term debt -Obligations a company expects to pay after one year. -Examples include: bonds payable, mortgages payable, long term notes payable, lease liabilities, pension liabilities.

Solvency

-Company's ability to pay interest as it comes due and repay balance of a debt due at its maturity. -Long term creditors and stockholders are interested in this

Long term investments

-Investments in stocks and bonds of other corporation that are held for more than one year -Long term assets such as land or buildings that a company is not currently using in its operating activities -Long term notes receivable

Current liabilities

-The first section of liabilities and stockholders equity -They are obligations that company is to pay within next year or operating cycle, whichever is linger. -Examples include: accounts payable, salaries and wages payable, notes payable, income tax payable. -Another example is current maturities of long term obligations.

depreciation

A lessening in value

Liquidity

Ability to pay obligations expected to become due within next year or operating cycle.

Securities and Exchange Commission (SEC)

Agency of US government that oversees U.S. financial markets and accounting standard seeing bodies.

Consistency

Means that company uses same accounting principles and methods year to year

Solvency ratios

Measure ability of company to survive over long period of time

Profitability ratios

Measure income or operating success of company for a given period of time

Current ratio

Measure of liquidity Example on 55

Liquidity ratios

Measure short term ability of company to pay its maturing obligations and meet unexpected needs for cash

Earnings per share (EPS) description and formula

Measures net income earned on each share of common stock. Important to note that comparisons of EPS across companies are not meaningful because of variations in number of shares of outstanding stock. Example on 53

Free cash flow Description and formula

Net cash provided by operating activities after adjusting for capital expenditures and dividends paid.

Current maturities of long term obligations

Payments to be made within the next year on long term obligations

Ratio analysis

Relationship among selected items of financial statement data.

Full disclosure principle

Requires companies to disclose all circumstances and events that make different to financial statement users.

Monetary Unit Assumption

Requires that only things than can be expressed in money are included in accounting records. So customer satisfaction isn't in accounting records.

Comparability

Results when different companies use the same accounting principles

accumulated depreciation

Shows the total amount of depreciation that the company has expensed thus far in assets life. Book value

Goodwill

The value of all favorable attributes that relate to a company that are not attributable to any other specific asset.

Working capital

Working capital= current assets-current liabilities A measure of liquidity

What classification is unearned service revenue

current liabilities

How are current assets listed

in the order they expect to convert them into cash. Order listed on previous card.

Going concern assumption

Business will remain in operation for foreseeable future.

Stockholders Equity

Common stock and retained earnings.

Historical cost principle

Companies record assets at their cost. So if land purchased for $30,000 increases in value to $40,000. It continues to be reported at $30,000.

Cost constraint

Constraint that weighs cost companies will incur to provide info against benefit that financial statement users will gain from having info available.

Intracompany comparisons

Covers two years for the same company

Fair value principle

Assets and liabilities should be reported at fair value ( the price received to sell asset or settle liability.)

Current assets

Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. Examples include: (1) cash, (2) investments [short term], (3) receivables [accounts receivable], (4) inventories, (5) prepared expenses [insurance and supplies].

Intangible assets

Assets that do not have physical substance and are very valuable. Example goodwill, patents, copyrights, trademark, trade names.

Property, Plant, and Equipment

Assets with relatively long useful lives that are currently used in operating the business. Examples include: land, buildings, equipment, delivery, vehicles, furniture.

Industry average comparisons

Based on average ratios for particular industries

Intercompany comparisons

Based on comparisons with a competitor in the same industry

Weakness of current ratio

Does not take into account composition of current assets. So if cash balance declines and inventory increases, current ratio might not fully reflect reduction in liquidity.

A debt to assets ratio of 72% means what

Every dollar of assets was financed by 72 cents of debt.

Economic Entity Assumption

Every economic entity can be separately identified and accounted for. Important not to blur company transactions with personal transactions.

What does a current ratio of 1.41:1 mean

For every dollar of current liabilities, the company has $1.41 of current assets.

Classified balance sheet

Groups together similar assets and similar liabilities, using a number of standard classifications and sections. The classifications for assets: current assets...long term investments... property, plant, and equipment.... intangible assets The classifications for liabilities and stockholders equity: current liabilities, long term liabilities, stockholders equity

Info has quality of understandability

If it is presented in clear and concise fashion

Info is Verifiable if...

Independent observers, using same methods, obtain similar results

International Accounting Standards Board (IASB)

Issues standards called International Financial Reporting Standards (IFRS).

Public Company Accounting Oversight Board (PCAOB)

Job to determine auditing standards and review performance of auditing firms.

Periodicity Assumption

Life of a business can be divided into artificial time periods and useful reports covering those time periods can be used for business. Ex: all four business statements cover one year.

Financial Accounting Standards Board (FASB)

primary accounting standard setting body in U.S.

for accounting info to have relevance, it must be

timely