Principles of Accounting - D074: UNIT 3

Which statement best characterizes the elements and purposes of a balance sheet?

A balance sheet portrays the financial condition of a company at a point in time.

classified balance sheet

A balance sheet that distinguishes between current and long-term assets

What is the purpose of a classified balance sheet?

A classified balance sheet distinguishes between current and long-term assets.

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

What is a statement of cash flows?

A report of the operating, investing, and financing cash flows of a company over a period of time

What is an income statement?

A report of the revenues and expenses of a company during a period

Which statement best characterizes the elements and purposes of a statement of retained earnings?

A statement of retained earnings portrays the accumulated profits or losses of a company at a point in time.

Accounts Payable

Amount owed as a result of the purchase of goods and services on credit

Unearned Revenue

Amount owed in services or products (not money) to a customer who paid in advance

Mortgage Payable

Amount owed relating to the purchase of property

Taxes Payable

Amount owed to federal and state governments resulting from the application of tax laws

Accounts Receivable

Amounts owed to a company that sold goods or services to a customer on credit

How often is the Form 10-K filed?

Annually

Accounting equation

Assets = Liabilities + Owners' Equity

What information should be included on the balance sheet?

Assets and liabilities

Why do the notes to the financial statements contain a summary of significant accounting policies?

Because accounting involves making assumptions, estimates, and judgments

Why do the notes to the financial statements contain additional information about summary totals?

Because one summary number in the financial statements represents literally thousands of individual items

Which of these activities is an investing activity?

Buying buildings

How is a common-size income statement created?

By dividing all income statement amounts for a given year by sales for that year

Which resource or tool is used to identify unique companies in the SEC's 10-K filing database?

Central Index Key (CIK) The Central Index Key (CIK) is a unique identifying number for each company in the SEC's EDGAR system.

Which types of companies can be compared using vertical analysis?

Companies that provide the same types of goods or services

Notes to the Financial Statements

Contain additional information not included in the financial statements themselves Explain the company's accounting assumptions and practices Provide details of financial statement summary numbers and additional disclosure about complex events Report supplementary information required by the SEC or the FASB

What is the definition of vertical analysis of financial statements?

Displaying each line item as a percentage of another for comparison to other companies in the industry

dividends

Earnings that are not retained in the business

Retained Earnings

Earnings that are retained in the business

What is the definition of financial statement analysis?

Examining both the relationships among financial statement numbers and the trends in those numbers over time

How does vertical financial statement analysis inform your understanding of a company's performance?

It tells you what questions you need to be asking about a company's performance.

What is a gain?

Making money from an activity outside the normal activities of a business

Why does the balance sheet not reflect the current value or worth of a company?

Many assets are recorded at cost, and some economic assets are not recorded at all

recognition

One way to report financial information is to include the estimates and judgments in the financial statements

How often is the Form 10-Q filed?

Quarterly

Which item would be classified in the owners' equity section of the balance sheet?

Retained earnings

Summary of Significant Accounting Policies

Revenue recognition inventory methods depreciation methods use of estimates

gross profit

Sales - COGS

Using the data above from Kamila's financial statements, how would Kamila calculate gross profit?

Sales − cost of goods sold − operating expenses

Which of these activities is an operating activity?

Selling goods

Disclosure of Information Not Recognized

Status of legal proceedings subsequent events

Financial statement notes fall into four general categories:

Summary of significant accounting policies Additional information about the summary totals found in the financial statements Disclosure of important information that is not recognized in the financial statements Supplementary information required by (FASB)(SEC)

What is the Securities and Exchange Commission (SEC)?

The U.S. government agency charged with regulating financial markets and ensuring the availability of reliable financial information

Capital Stock

The amount given by shareholders to obtain shares of stock from a company

Expenses

The amount of assets consumed in generating revenue

Revenue

The amount of assets created from the sale of goods or services

earnings (loss) per share (EPS)

The amount of net income (earnings) related to each share of stock; computed by dividing net income by the number of shares of stock outstanding during the period.

What is the purpose of the notes to the financial statements?

The notes present the assumptions needed to help explain financial statements.

Information about accounting policies and practices, including assumptions, estimates, and judgments, are included in which element of the financial statements?

The notes to the financial statements

owners' equity

The remaining claim against the assets of a business after the liabilities have been deducted

What is owners' equity?

The residual amount representing the net assets available to another party after all obligations have been satisfied

What is the purpose of performing horizontal analysis of financial statements?

To highlight trends that may be occurring in the company over time

Vertical analysis allows an accountant to determine how expenses are changing relative to which line item on the income statement?

Total sales

The Statement of Retained Earnings

a statement of the earnings that have been retained in the business. The difference between earnings for the period and dividends for the period reflects the increase (or decrease) in retained earnings for the period.

Disclosure

accepted way to convey information to users when the information is too uncertain to be recognized

Investing activities

activities associated with buying and selling long-term assets—primarily the purchase and sale of land, buildings, and equipment.

Operating activities

activities that are part of the day-to-day business of a company. Major operating cash inflow results from selling goods or providing services, while major operating cash outflows include payments to purchase inventory and to pay wages, taxes, interest, utilities, rent, and similar expenses

Financing activities

activities whereby cash is obtained from or repaid to owners and creditors. For example, cash received from owners' investments, cash proceeds from a loan, or cash payments to repay loans would all be financing activities

vertical analysis

allows you to quickly see how a company compares to others in its industry

Common-size analysis

an accounting tool that focuses on the line items on financial statements as a percentage of a selected (or common) figure (dividing all financial statement amounts for a given year by sales for that year.)

illiquid assets

assets that may require months to sell and convert to cash

Supplementary information

business segment information domestic/international sales breakdown

liquid assets

cash and items that can be quickly converted to cash

Horizontal analysis

comparing percentages over time for the same company. Year 2 - Year 1 / Year 1

Liability

economic obligation to deliver assets or provide a service

Asset

economic resource owned or controlled by a company

Equity

equal to total assets minus total liabilities; represents the book value of the owners' assets after the liability obligations have been satisfied; stems from direct owner investment and past profits retained in the business

Examining trends across time (horizontal analysis) allows us to determine how

expenses are changing relative to sales on the income statement.

For the balance sheet, common-size financial statements are

generated by dividing each balance sheet item by total assets for that year.

Additional Information about Summary Totals

inventory make up receivables gross amount and allowance for bad debts pension liability

Financial statement analysis

involves examining both the relationships among financial statement numbers and the trends in those numbers over time

assets

money and other valuables belonging to an individual or business

Liabilities

obligations to pay cash, transfer other assets, or provide services to someone else.

The statement of cash flow categories

operating activities, investing activities, financing activities

Operating income

reports the results of what a company does on a daily basis, or its operations. It is calculated as sales minus cost of goods sold minus operating expenses

statement of retained earnings

shows the accumulated profits or losses of a business since the business started. Although this is not one of the three primary financial statements, it is important because it links the income statement and balance sheet together.

The balance sheet

tells you about a company's asset mix and liability mix.

The income statement

tells you about a company's profitability

The statement of cash flows

tells you where cash is coming from and where cash is going

Form 10-K

the annual report that publicly traded companies must file with the SEC. which contains the three basic financial statements described earlier.

The statement of cash flows explains the change in......

the cash balance in the balance sheet

Net income

the difference between total revenue and total expenses when total revenue is greater. sometimes called earnings or profit, is an overall measure of a company's performance. operating income minus interest expense and taxes.

Articulation

the interrelations among the financial statements (operating statement (the income statement or the statement of cash flows) and comparative balance sheets)

A common-size income statement reveals

the number of pennies of each expense for each dollar of sales.

Market value

the price at which property would sell. the price that would have to be paid to buy the same asset today

Form 10-Q

the quarterly report that publicly traded companies must file with the SEC

The income statement explains the change in....

the retained earnings balance in the balance sheet

book value

the value of a company measured by the amount of owners equity in the company

Comparing the financial statements of different companies allows you to see

where expenses might be different across the companies and allows you to target where further investigation or analysis might be warranted