Accounting 201 9/10/13

Chapter 2
Classified Balance Sheet
-Snapshot at a point in time
-To improve understanding, companies group similar assets and similar liabilities
together.
Liquidity: How quickly you can turn it into cash or use the asset.
Current assets
-Assets you expect to turn to cash or convert within a year (or an operating cycle
depending on which is longer)
-Companies list current assets accounts in the order they expect to current to cash or use
them
Long term investments
-Investments in stocks and bonds of other corporations that are held for more than one
year
-Long term assets such as land and building that a company is not currently using in its
operating activities
-Long term notes receivable: giving someone a long time to pay you back.
Property plant and equipment
Long useful lives
Depreciations- allocating the cost of assets to a number of years
Accumulated depreciation total amount of depreciation expensed thus far
Intangible Assets
- Assets that do not have physical substance
- Includes goodwill, patents, copyrights, and trademarks or trade names
Current Liabilities

Obligations the company is to pay within the next year or operating cycle, whichever is
longer
Common examples are accounts payable salaries and wages payable notes payable interest
payable and income taxes payable
Current liabilities are current maturities of long term obligations.
Long term liabilities
-

Obligations a company expects to pay after one year

Stock holders equity

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Common stock investments as assets into the business by the stockholder

Retained earnings income retained for use in the business

Ratio Analysis: expresses the relationship among selected items of financial stamen data
-a single ratio means nothing
3 Types of ratios
-Profitability Ratios: measure the income or operating success
-Liquidity Ratios: Measure short term ability of the company
-Solvency Ratio: Ability to survive long term
EPS earnings per share: measures the net income earned on each share of common stock.
-net income minus preferred dividends divided by average common shares outstanding
For every share we had___ profit
Using a Classified balance sheet
-Liquidity ratios
Working Capital = current assets current liabilities
Current Ratio = current Assets/current liabilities
For every dollar of liability it tells you how many assets they have in comparison (higher the
ratio the better)
Solvency- the ability to pay interest as it comes

Debt to assets ratio: Debt to assets ratio = total liabilities/total assets

This finds the percentage of what percent of each dollar is borrowed
Free cash flow is a measurement to provide additional insight regarding a companys cash
generating ability
Free cash flow = cash provided by operation - capital expenditures - dividends
Generally accepted accounting principles (GAAP) a set of rules and practices that accounting
profession recognizes as a general guide for financial reporting
According to the FASB useful information should possess two fundamental qualities, relevance
and faith representation.
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Faithful representation means the information depicts what happened accurately

Assumptions in financial reporting

Monetary Unit: Requires that only those things that can expressed in money are included
in the accounting records
Economic entity: States that every economic entity can be separately identified and
accounted for
Periodicity: states that the life of a business can be divided into artificial time periods
Going Concern: the business will remain in operation for the foreseeable future
Principle in financial reporting
Historical cost: what you paid
Fair value: price you would get if you sold it
Full disclosure: The general need in business transactions for both parties to tell the
whole truth about any material issue pertaining to the transaction.