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83 Cards in this Set
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5 Basic Concepts & Terms used in Accounting
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1. Entity Concept
2. Transactions 3. Source Documents 4. Monetary Unit Concept 5. Historical Cost Concept |
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Entity Concept
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An owner's asset that is considered to be separate from its owners and from any other company
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Transactions
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and exchange of property or service by a company with another entity
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Source Document
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a business record used as evidence that a transaction has occurred
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Ex. Company check, receipts, bill from supplier
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Monetary Unit Concept
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Record transactions should be recorded in money. Money unit depends on national currency
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Historical Cost Concept
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states that a company records its transactions based on the dollars exchanged (the cost) at the time the transaction occurred
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Accounting Equation
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Assets = Liability + Owner's Equity
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Assets
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A company's economic resources that will provide future benefits to the company
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Physical Assets
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land, buildings, supplies to be used, inventory that the company expects to sell to its customers, long term investments
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Nonphysical assets
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economic resources because of the legal rights (benefits) they convey to the company
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amounts owned by owner(accounts receivable, right to insurance protection
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Liabilities
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economic obligations (debts) of a company. the external parties whom a company owes the debts are referred to as creditors, such as suppliers, employees owed wages
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Owner's Equity
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the onwers current investment in the assets of the company. the capital invested int he company by the owner, the company's earnings from operations and the owner's withdrawals of capital from the company
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Dual effect of transactions
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a company must make at least two changes in its assets, liabilities or owner's equity
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account
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place a company uses to record and retain info about the effect of its transactions on a specidic asset, liability, or owners equity item
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ex. purchasing inventory on credit, purchasing store equipment on credit, selling extra store equipment, etc
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net income
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revenues - expenses
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revenues
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the prices a company charged to its customers for goods or services it provided during a specific time period
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expenses
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costs of providing the goods or services to customers during the time period
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accounting period
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time spun for which a company reports its revenues and expenses
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earnings and recording revenues
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includes purchasing inventory, selling inventory, and recording it
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matching concept
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states that to determine its net income for an accounting period, a company computes the expenses involved in earning the revenues of the period and deducts the total expenses from the total revenues earned in that period
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Accrual accounting
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recording its revenue and related expense transactions in the same accounting period that it provides foods or services
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accrue means to accumulate
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Order of recording daily operations (17 steps)
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1. Cash sale
2. Payment for credit purchase of inventory 3. additional inventory purchase 4. credit sale 5. receipt of payment for credit sale of extra store equipment 6. Withdrawal of cash by owner 7. Payments for consulting 8. advertising 9. acquisition of store equipment 10. payment of salaries 11. payment of telephone bills 12. payment of utility bills 13. summary cash sales 14. Supplies used 15. expired rent 16. depreciation of store equipment 17. Accrual of Interest |
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Income statement equation
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Net income = revenue - expenses
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Budgeting
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allows you to compare you expectations for revenue and expense amounts (reported in the projected income statement) with the actual amounts (reported in the actual income statement)
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Temporary accounts
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a company uses revenue and expense accounts for only one accounting period to record the effects of its transactions on its net income
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permanent accounts
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assets, liability, and the owner's capital. they are used for the life of the company to record the effects of its transactions on its balance sheet
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revenues
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prices charged to customers and result in increases in assets (cash or accounts receivable) or decreases in liabilities (unearned revenues)
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3 types of policies related to sales of their goods or services
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discount policies, sales return policies, sales allowance policies
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discount
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a quantity (or trade) discount is a reduction in the sales price of a good or service because of the number of items purchased or because of a sales promotion
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sales discount
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a percentage reduction of the invoice price if the customer pays the invoice within a specified period
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sales return
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occurs when a customer returns previously purchased merchandise
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sales allowance
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occurs when a customer agrees to keep the merchandise, and the company refunds a portion of the original sales price
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credit memo
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a business document that lists the information for a sales return or allowance
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net sales
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at the end of the accounting period, the balance of a company's sales revenue account column includes the initial sales revenue, less the sales returns and allowances and the sales (cash) discount taken
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expenses
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cost of goods sold
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cost of goods sold
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one of the major expenses of a retail company is the cost of goods (merchandise) that is sells during the accounting period
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perpetual inventory system
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keeps a continuous record of the cost of inventory on hand and the cost of inventory sold
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periodic inventory system
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does not keep a continuous record of the inventory on hand, but determines the inventory at the end of each accounting period by physically counting it
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net purchases
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used because the amount of merchandise purchases (invoice cost and transportation-in) is adjusted (reduced) for purchases, returns, allowances, and discounts
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cost of ending inventory
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the dollar amount of merchandise on hand, based on the physical count, at the end of the accounting period
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gross profit
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the amount of revenue 'left over' (after recovering the cost of the products it sold) to cover its operating expenses
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operating expenses
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the expenses (other than cost of goods sold) that a company incurs in its day to day operations
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selling expenses
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the operating expenses related to the sales activities of a company
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general & administrative expenses
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the operating expenses related to the general management of a company
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Risk
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the uncertainty about the future earnings potential of a company
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operating capability
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refers to a company's ability to continue a given level of operations in the future
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financial flexibility
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a company's ability to adapt to change in the future
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ratio analysis
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consists of computation in which an item on the company's financial statements is divided by another, related item
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profit margin equation
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profit margin = net income/net sales
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Gross profit percentage & equation
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ratio that relates a company's gross profit to its net sales.
gross profit percentage = grossprofit/netsales |
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statement of owner's equity
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summarizes the transactions that affected owner's equity during the accounting period
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close entries
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entries made by a company to transfer the ending blances from its temporary revenue and expense accounts into its permanent account for owner's capital
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Why balance sheet is important
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presents company's financial position on a specific date, allowing users to "take stock" of a company's assets, liabilities and owner's equity on that date
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balance sheet
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a financial statement that reports the types and the monetary amounts of a company's assets, liabilities and owner's equity on a specific date
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classified balance sheet
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the balance sheet shows subtotals for assets, liabilities, and owners equity on a specific date
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assets
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a company's economic resoures that it expects will provide future benefits to the company
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current assets
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cash and other assets that the company expects to convert into cash, sell, or use up within one year
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current assets include (5 things)
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Cash
Marketable securities receivables inventory prepaid items |
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current asset: cash
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cash on hand in checking/savings accounts
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current asset: marketable securities
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sometimes called temporary investments or short term investments, are items such as government bonds and capital stock of corporations in which the company has temporarily invested (and which company expects to sell within a year)
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current asset: receivables
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includes accounts receivable (amounts owed by customers) and notes receivable (and related items)
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current asset: inventory
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goods held for resale
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current asset: prepaid items
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insurance, rent, office supplies, and store supplies will not be converted into cash but will be used up within one year
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long term investments
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items such s notes receivable, government bonds, bonds and capital stock of corporations, and other securities that company intends to hold on for more than year
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property & equipment
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all the physical, long term assets used in the operations of a company
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book value
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the original cost minues the related accumulated depreciation
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accumulated depreciation
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the total amount of depreciation expense recorded over the life of an asset to date, thus it is the portion of the asset's cost that has been "used up" to earn revenues to date
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Liabilities
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the economic obligations (debts) of a company
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current liabilities
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obligations that the company expects to pay within one year by using current assets
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includes:
accounts & salaries payable unearned revenues short term notes (and interest) payable |
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noncurrent liabilities
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obligations that a company does not expect to pay within the next year
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Owners equity
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the owner's current investment in the assets of the company
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liquidity
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a measure of how quickly a company can convert its assets into cash to pay its bills
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working capital
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a company's current assets minus its current liabilities
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current ratio & equation
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shows the relationship between current assets and current liabilities and is probably the most commonly used indicator of a company's short run liquidity
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current ratio = current assets/current liabilities
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quick ratio & equation
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a more convincing indicator of a company's short term debt-paying ability
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quick ratio = quickassets/currentliabilities
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financial flexibility
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the ability of a company to adapt to change
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debt ratio & equation
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The debt ratio shows the percentage of total assets provided by creditors and its calculated as follows:
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debt ratio = totalliabilities/totalassets
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methods of measuring company's financial success in income statement & balance sheet (8)
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1.return on assets
2.return on owners equity 3. Evaluating operating capability 4. inventory turnover 5. accounts receivable turnover |
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return on total assets equation
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return on total assets = (netincome + interest expense) / average total assets
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return on owners equity equation
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return on owner's equity = netincome/average OE
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operating capability
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refers to a company's ability to sustain a given level of operations
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inventory turnover
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inventory turnover = cost of goods/average accounts receivable
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limitations of balance sheet
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they dont provide much information about a company's cash flows during an accounting period
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