Accounting Chapter 2

Front 1

1. Identify the categories on a classified balance sheet

Back 1

a. Current Assets
b. Long-term Investments
c. Property, plant and equipment
d. Intangible Assets
e. Current Liabilities
f. Long-Term Liabilities
g. Stockholders’ Equity

Front 2

a. Current Assets

Back 2

i. Assets that are expected to be converted to cash or used in the business within a one year or one operating cycle
ii. Cash, short-term investments, receivables, inventories, and prepaid expenses

Front 3

b. Long-term Investments

Back 3

i. Assets that can be converted into cash, but whose conversion is not expected within one year

Front 4

c. Property, plant and equipment

Back 4

i. Assets currently used in operating the business
ii. Record these assets at cost and depreciate them over their useful lives

Front 5

d. Intangible Assets

Back 5

i. Assets that have no physical substance
ii. Goodwill, patents, copyrights

Front 6

e. Current Liabilities

Back 6

i. Obligations that are to be paid within the current year or operating cycle

Front 7

f. Long-Term Liabilities

Back 7

i. Obligations expected to be paid after one year

Front 8

g. Stockholders’ Equity

Back 8

i. Common Stock
ii. Retained Earnings

Front 9

a. Earnings Per Share

Back 9

i. (net income- preferred stock dividends)/Average common shares outstanding
ii. Profitability ratio

Front 10

b. Working Capital

Back 10

i. Current assets - current liabilities
ii. Liquidity in the short-term

Front 11

c. Current ratio

Back 11

current assets)/(current liabilities)
ii. liquidity in the short term

Front 12

d. Debt to assets ratio

Back 12

i. (Total Liabilites)/(total assets)
ii. higer the percentage of debt financing, the riskier the business
iii. solvency-the ability of a company to pay interest as it comes fdue and to repay the balance of debt due at maturity
iv. if at 55% means that every dollar of assets was financed by 54 cents of debt
v. lower ratio better

Front 13

e. Free cash flow

Back 13

i. (cash provided by operations)-Capital expenditures-(cash dividends)
ii. Describes the cash remaining from operations after adjusting for capital

Front 14

3. What are the sections/sources on the statement of cash flows?

Back 14

a. Operating Activates
i. Cash inflows and cash outflows associated with the primary operations of the business
b. Investing Activities
i. Cash outflows from purchasing resources needed in operating the business.
c. Financing activities
i. Cash inflows from sources funding the business. Cash outflows for repaying debt, paying dividends or buying shares of common stock

Front 15

four main characteristics of useful information

Back 15

a. Relevance
b. Reliability
c. Comparability
d. Consistency

Front 16

a. Relevance

Back 16

i. If information has the ability to make a difference in a decision scenario, it is relevant
ii. timely

Front 17

b. Reliability

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i. Verifiable-must be able to prove that it is free of error
ii. Faithful representation-must be factual
iii. Neutral-cannot be selected, prepared or presented to favor one set of interested users over another

Front 18

c. Comparability

Back 18

i. Companies must disclose the accounting methods used

Front 19

d. Consistency

Back 19

i. When firms use the same accounting principles and methods from year to year

Front 20

5. Identify and define the assumptions

Back 20

a. Monetary Unit Assumption
i. States that only transactions expressed in terms of money are included in accounting records

b. Economic Entity assumption
i. Every economic entity can be separately identified and accounted for
ii. separates private vs. company money

c. Time Period Assumption
i. Allows the business to be divided into artificial time periods that are useful for reporting

d. Going Concern Assumption
i. Assumes business will be in existence for the foreseeable future
ii. Assumption allows use of cost(rather than liquidation value)

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5. Identify and define principles

Back 21

e. Cost principle
i. Requires assets to be recorded at original cost because that amount is verifiable

f. Full Disclosure Principle
i. Requires that all circumstances and events that would make a difference to financial statement users should be disclosed

Front 22

Constraints

Back 22

g. Materiality
i. An item is material when its size makes it likely to influence the decision of an investor or creditor. Has to follow GAAP

h. Conservatism
i. Allows the accountant to choose the accounting method that will be the least likey to overstate assets and income
ii. A company should not intentionally understate assets or income