FIN ACC Exam 2

Balance sheet

reports a companys financial position at a point in time

Closing entries

zero out the temporary accounts into retained earnings

Balance Sheet usefulness

it helps provide assets and liabilites that are classified (grouped) according to common characteristics like liquidity, long term solvency, and financial flexibility.

liquidity

a measure of how easily a company can meet its short term financial obligations

solvency

whether a companys total assets can cover all of its long term debts and financial commitments

financial flexibility

the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities needs

Balance Sheet limitations

the balance sheet does not equal the companys market value

why does a companys book value not equal the companys market value?

many assets are measured at their historical costs rather than the amounts for which the assets could be sold, and many aspects of a company may represent valuable resources, but these item are not recorded as assets in the balance sheet abd therefore have zero book value

accounts receivable

the money that customers owe a business for goods or services that have already been delivered or provided on credit

notes receivable

written promises where a borrower agrees to pay a specific amount to a lender

Inventory includes

raw materials, work in process, and finished goods

prepaid rent

money paid in advance for a future rental period

Long term Assets

Investments, Operating lease assets, other long term assets, PPE, intangible assets

PPE

equipment, land, buildings, machinery, furniture, and vehicles, and natural resources

Current liabilites

accounts payable, notes payable, deferred revenues, accrued liabilities, and current maturities

Intangible assets

patents, copyrights, trademarks, franchises, and goodwill

Contra asset

an account with a credit balance that reduces an assets book value

Quick Asset

includes cash and receivables, excludes inventory and prepaids

accounts payable

short term money a business owes to its suppliers or vendors for goods and services bought on credit

notes payable

written promises to pay cash at some future date

defered revenues

represent cash received from a customer for goods or services to be provided in a future period. Ex: sale of a gift card

Long term liabilites

long term notes, bonds, pension obligations, and lease obligations

Shareholders equity

Paid in capital and retained earnings

historical cost

the original amount payed for an asset, often used on the balance sheet instead of current market value

Shareholders equity

total assets minus total liabilites

Paid in capital

amounts invested by shareholders in exchange for stock

retained earnings

cumulative net income not distributed as dividends

Accumulated other comprehensive income (AOCI)

other equity components beyond paid in capital and retained earnings

Annual Report Disclosures

at the end of the fiscal year, public companies are required to provide shareholders with an annual report

What does an annual report include?

Financial statements (such as the balance sheet), and additional disclosures (such as business conditions, risk factors, legal proceedings, stock performance, etc)

Disclosure Notes

detailed explanations attached to financial statements that describe accounting policies, assumptions, and specific breakdowns behind reported numbers

Summary of Significant Accounting Policies

the first major footnote in a company's financial statements. It explains the specific accounting principles, measurement bases, and methods used to prepare the reports.

subsequent events

economic transactions or occurrences that happen between a company's balance sheet date and the date its financial statements are issued or available to be issued

related party transactions

transactions between a company and its owners, mamangement, and affiliated parties

Managements Discussion and Analysis

provides and managements biased but informed perspectives on significant events, trends and uncertainties on the businesses financial performance in their own words

Sarbanes Oxley Act

required coporate executive to personally certify financial statements

proxy statement

an official document that a public company sends to its shareholders before a meeting so they can make informed votes on coporate matters

ESG disclosures

disclosures on environmental, social, and governance practices (greenhouse gas emissions, pay ratios, board diversity)

Auditors report

the auditors opinion on the fairness of financial statements

Unqualified “Clean” Auditors Report

statements conform to GAAP.

Unqualified with an explanatory/emphasis paragraph

GAAP is met, but something needs emphasis. Examples are lack of consistency, going concern, or a material misstatement

Qualified Auditors Report

there is an exception, such as a GAAP departure, inadequate disclosure, or scope limitation

Adverse/Disclaimer Auditors report

the statements do not conform to GAAP and the auditor cannot give an opinion

default risk

the risk that a company wont be able to pay its obligations when due

operational risk

how well a company can withstand events/circumstances that might impair its ability to earn profits

horizontal analysis

measures the percentage increase or decrease from one year to another. (new-old)/old

vertical analysis

shows each item as a percentage of net sales. (item amount/net sales)

income statement / operations

reports a companys profit during a particular period

comprehensive income

includes net income and other gains and losses excluded from the income statement. Net Income +- OCI

gains and losses

increase or decrease in equity from transactions not classified as revenues or expenses and not involving owners

single step income statement

all revenues/gains grouped, all expenses/loses grouped, one subtraction for net income

Multistep income statement

separates operating from non operating activity, showing gross profit, operating income, and net income in statges.

gross profit

net sales revenue - COGS

Operating income

gross profit - total operating expenses

income smoothing

an accounting strategy that reduces fluctuations in a company’s reported net income from one period to the next, making its financial performance appear steady and predictable.

Restructuring Costs

includes costs associated with managements plans to materially change the scope of business operations. recognized in the period the exit or disposal cost obligation actually is incurred

nonoperating items

a cost a business incurs that is not related to its core, day to day operations

Operating expenses

day to day costs a business incurs (ex: selling, general & admin, utilites, and rent expenses)

discontinued operations

a part of a company (like a distinct store, a branch, or a subsidiary) that the business has either already sold or decided to sell, and this disposal represents a major shift in the company's strategy or operations. This separation helps investors see the true performance of the active business.

What happens when a component of discontinued operations has been sold?

You have to report the profit or loss the component generated during the period up until the date it was sold. (the difference between what you sold it for and its book value)

What happens when a component of discontinued is being held for sale?

You report the ongoing profit or loss the component generated during the reporting period while it is waiting to be sold. If the estimated fair value of the component is lower than the book value, it is an impairment loss

Change in Accounting Principle

switching from one acceptable method to another (FIFO to average cost); reported retrospectively because you have to go back and adjust prior periods

Retrospective Approach

“rewrite history”. Restate prior financial statements as if the new accounting method had always been used.

Modified Retrospective Approach

“only fixes the opening balance”. Adjust beginning retained earnings in the adoption year; do not restate prior periods.

prospective approach

“only looks forward”. Apply the change only to the current and future periods.

Change in Accounting estimate

revision of an estimate (useful life, bad debt %) due to new information; reported prospectively because you have to apply it going forward

Net Income

is the profit of a company, calculated by subtracting all realized expenses, losses, and taxes from recognized revenues and gains on the income statement.

Comprehensive Income

Net Income + Other Comprehensive Income (OCI). It captures all changes in equity during a period except those resulting from investments by owners or distributions to owners. Accumulated over time in a separate shareholders' equity account called Accumulated Other Comprehensive Income (AOCI)

Equity Formula

Retained earnings + common stock

Ending Equity Formula

Beginning Equity + Net Income - Dividends

When do you record the operating loss on Held for Sale for a discontinued operation?

only if the fair value is below the book value. never record a gain