SPEAH-350 Chp 12

What is the primary difference between current assets and the remainder of the assets listed on the balance sheet? (ask)

Current Assets focus on short term assets that can be quickly liquidated whereas Long-term investments and property Equipment (fixed assets) deal with more long-term assets.

What is debt ratio, and what does it measure?

Debt ratio (debt-to-assets ratio): A ratio that measures the proportion of debt (versus equity) financing. Debt ratio = Total debt (liabilities) / total assets It measures the how much of each dollar was financed by debt and equity.

What is the relationship between the equity account on the balance sheet and earnings (net income) reported on the income statement? (ASK**)

Equity account on the balance sheet = total assets- liabilities Earnings (net income) on the income statement: Net income measures the total profitability of the business. After liabilities have been paid using the net income the amount left is equity.????

What is equity (Net Assets)?

Equity represents the value of a business that remains when the value of its liabilities is subtracted from asset value. (Equity represents the non-liability claims against a business's assets. Net assets is the term used to designate equity on an NFP org's balance sheet

What is a financial asset and what is a real asset?

Financial asset: a security such as a stock or bond that gives the holder a claim against the issuing business's cash flows. Real asset: Property and equipment such as land, buildings, and machines used to create a business's cash flows.

What is fund accounting?? and when do we use it? [ON FINAL]

Fund accounting: Involves the separation of balance sheet accounts into separate funds by designated purpose. - Fund accounting is necessary when people have donated funds and designated a specific purpose.

What is the most important piece of information reported on the statement of cash flows?

the net cash from operations line because it is the best indicator of financial well-being of the company

Briefly explain the three major sections on the statement of cash flows.

1. Cash flows from operating activities: Focuses on the sources and uses of cash tied to operations 2. Cash Flows from investing activities: Contains cash flows related to investments in both fixed assets and securities used as alternatives to cash 3. Cash flows from financing activities

Is there a significant difference in the economic content of balance sheets created by investor-owned and not for profit healthcare organizations?

No, with the exception of further breakdown into unrestricted and restricted accounts balance sheets of organizations that use fund accounting have the same economic content as those prepared by businesses that do not use fund accounting

What are the three major categories of asset accounts?

1. Current Assets: Include Cash and other assets that are expected to be converted into cash within one accounting period (often one year) 2. Long-term Investments: Account represents investments in long-term financial assets. 3. Property and Equipment (Fixed Assets): Highly illiquid (cannot be bought and sold) and are used over relatively long periods.

What are the two primary interrelationships between the balance sheet and the income statement?

1. The annual depreciation expense shown on the income statement accumulates on the balance sheet in the accumulated depreciation account. 2. All earnings from the income statement that are reinvested in the business accumulate on the balance sheet in the equity account

What are the three major sections of a balance sheet?

1. Total assets 2. Total Liabilities 3. Equity **all three of these features must balance as shown in the basic accounting equation.

What three things does the income statement contain information about and what does it not?

DOES contain: 1. Revenues 2. Expenses 3. Profitability Does NOT: Data related to what assets a business owns or how those assets are financed.

Use an example to explain the logic behind accruals

Accruals are monies owed to various parties such as to employees, for services rendered. An example is that a staff earns wages and benefits on a daily basis but employees are paid every two weeks and when an obligation to pay wages extends into the next accounting period an accrual is created on the balance sheet. This is done in accordance with accrual accounting to give a more accurate representation of the financial status of the business.

What is accumulated depreciation, and how does it tie into the income statement?

Accumulated depreciation: The total amount of depreciation expensed over time against the fixed assets listed on the balance sheet. It ties into the income statement because Numerically the amounts of depreciation expense are reported on the income statement each year and are accumulated over time to create the accumulated depreciation amount on the balance sheet.

What is an asset?

Assets are the resources (in dollar terms) owned by the organization. Assets are listed by maturity (order of when assets are expected to be converted into cash). Current assets are expected to be converted into cash during the next accounting period. (often one year)

What is the basic accounting equation, and what information does it provide?

Basic accounting equation: The relationship between balance sheet accounts that requires the balance sheet to balance. Total assets = Total Liabilities + Equity This equation reinforces concepts that equity represent an ownership (residual) claim against the total assets of the business and that equity can be negative.

What are some of the accounts that would be classified as current liabilities?

Current liabilities: A payment obligation of a business that is due in the next accounting period, often one year. Accounts classified as current liabilities are: - Notes Payable: A business. short-term debt, often bank loans - Accounts payable: Monies owed to vendors for purchased supplies - Accrued expenses (accruals): Monies owed to various parties such as to employees, for services rendered. Also includes interest owed to lenders and tax obligations

What are liabilities?

Liabilities represent the payment obligations of a business. Such as money owed to lenders for financing debt capital, money owed to suppliers, and money owed to employees and tax authorities.

What is the difference between notes payable and long-term debt?

Notes payable: The balance sheet name typically used for a business's short-term debt, often bank loans Long-term debt: Debt financing that has a maturity greater than one accounting period. **Short term debt has a maturity of less than a year while long-term debt has a maturity of greater than one year. Short-term debt typically takes the form of a bank loan and is used to finance temporary asset needs whereas long term debt lists any debt owed to banks and other creditors, such as bondholders an dis typically used to finance larger projects.

What type of a healthcare organization is most likely to use fund accounting??

Only applicable to NFP's because contributions to investor owned companies are not tax deductible thus few contributions are made to investor owned healthcare organizations

Explain how ratio analysis can be used to help interpret balance sheet data.

Ratio analysis can be used to analyze the liabilities to asset ratio otherwise known as debt ratio

How does the statement of cash flows differ from the income statement?

The income statement revenues follow accrual accounting guidelines but the statement of cash flows follows cash accounting guidelines. The statement of cash flows focuses on the actual movements of cash into and out of a business, while the income statement centers on the obligations that create those cash flows Unlike the bottom line of the income statement the change in cash line has limited value in assessing an organizations financial condition because it can be manipulated by investing and financing activities ***In summary the income statement focuses on accounting profitability, while the statement fo cash flows follows the movement of cash - such as where did the money come from, and how did the organization use it. Major concern for income statement is profitability while the major concern for statement of cash flows is cash viability.

What is the purpose of the balance sheet?

To report the financial position of a business at a single point in time. Balance sheet reports the assets of an org and how those assets are financed.

What is the primary purpose of the current asset account?

To support the operations of the organization. Business's try to minimize the amounts of these accounts because of the low (or zero) return earned on current assets.