Accounting 201 Chapter 2

Groups together similar A & L, using a number of standard classification and sections

-Presents a snapshot at a point in time

-Improve understandin by grouping similar A & L

Assets that are to be used or converted into cash within 1 year or operation cycle (shorter one)

*List C.A. in the order by liquidity first*

1.Cash

2.investments

3.receivables

4.inventories

5.prepaid expenses

Obligations to pay someone within the next year/operation cycle

The average time required to go from cash to cash in producing rev- to purchase inventory

1) investments in stock and bonds of other corporations that are held for more than 1 yr

2) Long term assets such as land and buildings that a company is not currently using in oper act

3) Long term notes receivable

Assets with long useful lives that are currently used in operating a business

Allocation of the cost of an asset to a # of years

Shows total amt of depreciation that a company has expensed thus far in the assets life

-Assets that do not have physical substance

-Includes goodwill, patents, copyrights, trademarks

Obligations that a company expects to pay AFTER 1 year

Income kept for use in the business

common stock plus retained earnings

Expresses the relationship among selected items of financial statement data

-A single ratio by itself is meaningless

Measures the income of a company in a given period

Measures the net income earned on each share of common stock

*(Net income-preffered dividend) /average # of common shares outstanding*

PROFITABILITY

CR= Current assets / Current liabilities

*higher ratio suggest favorable liquidity*

LIQUIDITY

Measures the % of total financing provided by creditors rather than stockholders

*DTAR= Total liabilities / total assets*

-*If 52%, every dollar of assets is followed by 52 cents of liability *

SOLVENCY

-The diff between the amts of CA and CL

*W.C.= Current Assets - Current liabilities*

Measures short-term ability to pay obligations and to meet unexpected needs for cash

Ability to pay interest as it comes due and to repay the balance of a debt due at its maturity

Measure the ability of the company to survive over a long period of time

A measurement to provide additional insight regarding a companies cash-generating ability

*FCF= (cash provided by operations) -

(Capital expenditures) -

(Cash dividends)

A set of rules and practices that the accounting profession recognizes as a general guide for financial reporting purposes

1) SEC

2) Financial acct standards board (FASB)

3) International acct standards board (IASB)

4)International financial reporting standards(Ifrs)

Info that helps provide accurate expectations about the future

Info confirms prior expectations

When the SIZE of an item makes it likely to influence the decision of an investor or creditor

Info accurately depicts what happened

- Info must be COMPLETE, NEUTRAL, and FREE FROM ERRORS

Only things that can be expressed in money are included in the accounting records

States that every economic entity can be separately identified and accounted for

States that the life of a business can be divided into artificial time periods

Cost principle that dictates companies must record assets at their cost

Indicates that assets and liab should be reported at fair value

Weighs the cost that companies will incur to provide the info against the benefit that financial statement users will gain from having the info