financial accounting tools for business decision making chapter 2

Classified Balance Sheet

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

current assets

cash and other assets expected to be exchanged for cash or consumed within a year

Operating Cycle

The time span during which cash is paid for goods and services, which are then sold to customers from whom the business collects cash.

Long-term investments

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations; and (3) long-term notes receivable.

Property, Plant, and Equipment

assets with relatively long useful lives that are currently used in operating the business

intangible assets

assets that do not have physical substance

Current Liabilities

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

Long-term liabilities (long-term debt)

obligations that a company expects to pay after one year

ratio analysis

relationship among selected items of financial statement data

ratio

the mathematical relationship between two numbers or amounts

intracompany comparisons

covering two years for the same company

industry-average comparisons

based on average ratios for particular industries

intercompany comparisons

based on comparisons with a competitor in the same industry

Profitability Ratios

ratios that measure the rate of return a firm is earning on various measures of investment (success of a company over a given time)

earnings per share

net income or profit divided by the number of stock shares outstanding

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange

Working Capital

current assets - current liabilities

Liquidity Ratios

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Current Ratio

current assets divided by current liabilities

Solvency

The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Solvency Ratios

Measures of the ability of the company to survive over a long period of time.

debt to assets ratio

total liabilities/total assets..... a measure of solvency

Free Cash Flow

net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements

Securities and Exchange Commission (SEC)

monitors the stock market and enforces laws regulating the sale of stocks and bonds

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States.

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

International Financial Reporting Standards (IFRS)

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.

Public Company Accounting Oversight Board (PCAOB)

The group charged with determining auditing standards and reviewing the performance of auditing firms.

Comparability

different companies use the same accounting principles

Consistency

a company uses the same accounting principles and methods from year to year

verifiable

if independent observers, using the same methods, obtain similar results

timely

Available to a decision maker before it loses its capacity to influence decisions

Understandability

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

historical cost principle

dictates that companies record assets at their cost

fair value principle

assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Full Disclosure Principle

requires that companies disclose all circumstances and events that would make a difference to financial statement users

Cost Constraint

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.