Financial Accounting (Chapters 1, 2, 3)

Terms to know

Creditors

persons or entities who companies owe money to

Liabilities

amounts owed to creditors; current or future obligation to pay money to others

Common stock

total amount paid in by stockholders for the shares they purchase

Dividends

distribution of a portion of a company’s profits to its shareholders

Revenues

amounts earned from a sale of a product

Expenses

costs like salaries, rents, utilities that are necessary to produce and sell the product

Net income

when revenues exceed expenses

Net loss

when expenses exceed revenues

Four financial statements

income statement, retained earnings statement, balance sheet, statement of cash flow

Income statement

shows how successfully your business performed during a period of time, subtract expenses from revenues

Retained earnings statement

indicates how much of previous income was distributed to owners of you business int he form of dividends

Balance Sheet

presents a picture at a point in time of what your business owns (assets) and what it owes (liabilities)

Retained earnings

net income retained in the corporation

Stockholders’ equity

owners’ claim to assets (common stock and retained earnings)

Basic accounting equation

Assets = Liabilities + Stockholders’ Equity

Annual report

always includes financial statements and management discussion and analysis

Management’s Discussion and Analysis

Financial highlights, liquidity, comparisons to prior year

Annual report

letter from CEO to shareholders

Notes to financial statement

accepting policies, explain uncertainties

Long-term investment

investments in stocks and bonds of other corporations that are held for more than one year

PP and E

asset with long useful lives, includes land, buildings, equipment, delivery vehicles, and furniture

Depreciation

cost is written off over useful life of asset

Accumulated depreciation

total amount of depreciation expensed to date in an asset’s life

Profitability ratios

how successful was a company at making money

Solvency ratios

how will the company fare long term

Earnings per share

net income - preferred dividends / weighted average shares outstanding

Classified balance sheet

groups together similar assets and similar liabilities, using standard classifications

Assets (of classified balance sheet)

current assets, long-term investments, PP and E, intangible assets

Liabilities and Stockholders’ equity (of classified balance sheet)

current liabilities, long-term liabilities, stockholders’ equity 

current assets

assets that a company expects to convert to cash or use within one year of operation cycle

Operating cycle

average time required to go from cash to cash in producing revenue

Long-term investments

investments in stocks and bonds of other corporations held for more than one year

Intangible assets

goodwill, trademarks, copyrights, patents

Liquidity ratios

measure short-term ability of company to pay maturing obligations

Earnings per share

measures net income earned on each share of common stock

Working capital

current assets - current liabilities

Current ratio

= current assets / current liabilties

Debt to assets ratio

measures solvency (divide total liabilities by total assets)

Monetary unit assumption

only things expressed in money are in accounting records

Economic entity assumption

every economic entity can be separately identified / accounted for

Periodicity assumption

life of business can be divided into artificial time period + useful reports

Going concern assumption

business will remain in operation for foreseeable future

Historical cost principle

dictates that companies record assets at their cost

Fair value principle

indicated that assets and liabilities should be reported at fair value

Full disclosure principle

requires companies disclose sufficient details regarding circumstances and events that would make a difference to financial statement users

Journal entries

record transactions, all activities that happen in a company on financial sheet

T-account

explains to a client what happened in their account simply

Trial balance

summarize transactions in order from assets to liabilities

Debits

increase: assets, expenses, dividends

decrease: liabilities, equity, revenue

Credits

increase: liabilities, equity, revenue

decrease: assets, expenses