CHAPTER 2: A further look at financial statements

accounts payable

Amounts owed to suppliers for purchases made on credit (on account).

accrual basis of accounting

An accounting basis in which transactions that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash.

basic earnings per share (EPS)

A measure of profitability showing the income earned by each common share. It is calculated by dividing income available to common shareholders by the weighted average number of common shares.

Bank indebtedness

A short-term loan, such as an operating line of credit, pre-arranged with a bank to cover cash shortfalls.

accounts receivable

Amounts owed by customers who purchased products or services on credit (on account)

contra asset account

An account that is offset against (reduces) another related asset account on the statement of financial position. Examples include allowance for doubtful accounts and accumulated depreciation.

conceptual framework

A coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting statements.

cost constraint

The pervasive constraint that ensures that the value of the information provided in financial reporting is greater than the cost of providing it.

comparability

An enhancing qualitative characteristic of useful information that enables users to identify and understand similarities in, and differences among, items.

current portion of long term debt

(also known as current maturities of long-term debt) The portion of a non-current or long-term loan that is repayable within the current year.

current assets

Assets that are expected to be converted into cash, sold, or used up within one year of the company’s financial statement date.

current ratio

A measure of liquidity used to evaluate a company’s short-term debt-paying ability. It is calculated by dividing current assets by current liabilities.

data analytics

The process of analyzing data to find patterns and correlations, trends, and other valuable insights to enhance decision-making.

current liabilities

Obligations that will be paid or settled within one year of the company’s financial statement date.

elements of financial statements

A set of broad categories or classes used to group financial information for presentation in the financial statements, such as assets, liabilities, equity, income, and expenses.

debt to total assets

A measure of solvency showing the percentage of total financing that is provided by lenders and other creditors. It is calculated by dividing total liabilities by total assets.

fair value

(also known as current value or current cost) An estimate of the price a company would pay to purchase an asset or settle a liability today with arms’-length parties under normal business conditions.

deferred revenue

A liability representing cash receipts from customers that have not yet met the criteria for revenue recognition.

going concern assumption

The assumption that the business will remain in operation for the foreseeable future.

historical cost basis of accounting

Measurement basis that states that assets and liabilities should be recorded at their cost at the time of acquisition.

faithful representation

A fundamental qualitative characteristic describing information that represents economic reality. It must be complete, neutral, and free from material error.

fair value basis of accounting

A method of accounting under which assets are recognized on the statement of financial position at their fair values.

intangible assets

Assets of a long-lived nature that do not have physical substance but represent a privilege or a right granted to, or held by, a company.

long term investments

(also known as investments) Investments in debt securities intended to be held for many years to earn interest, and equity securities of other companies held to generate investment income or held for strategic reasons.

liquidity ratios

Measures of a company’s short-term ability to pay its maturing obligations (usually current liabilities) and to meet unexpected needs for cash. These include working capital and the current, receivables turnover, average collection period, inventory turnover, and days in inventory ratios.

inventory

Goods held for sale to customers.

non current assets

non current liabilities

(also known as long-term assets) Assets that are not expected to be converted into cash, sold, or used up by the business within one year of the financial statement date.

notes payable

(also known as loans payable) Amounts owed to suppliers, banks, or others that are normally interest-bearing and supported by a written promise to repay.

operating cycles

Average period of time it takes for a business to pay cash to obtain products or services and then receive cash from customers for these products or services.

notes receivalbe

Amounts owed by customers or others that are normally interest-bearing and supported by a written promise to repay.

objective of financial reporting

The provision of financial information about a company that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company.

prepaid expenses

Costs paid in advance of use that benefit more than one accounting period. They are initially recorded as assets and become expenses only when they are used or consumed and no longer have future benefit.

price earnings [P-E] ratio

A profitability measure of the ratio of the market price of each common share to the earnings per share. It reflects investors’ beliefs about a company’s future income potential.

Profitability ratios

Measures of a company’s operating success for a specific period of time. These include the gross profit margin, profit margin, return on assets, return on common shareholders’ equity, earnings per share, price-earnings, payout, and dividend yield ratios.

property, plant, and equipment

Tangible assets, such as land, buildings, and equipment, with relatively long useful lives that are being used to operate the business.

timeliness

An enhancing qualitative characteristic of useful information that means that information is available to decision makers in time to be capable of influencing their decisions.

relevance

A fundamental qualitative characteristic describing information that makes a difference in a user’s decision. It should have predictive value, confirmatory value, or both, and be material.

solvency ratios

Measures of a company’s ability to survive over a long period of time by having enough assets to settle its liabilities as they fall due. These include the debt to total assets and times interest earned ratios and free cash flow.

supplies

Consumable items used in running a business, such as office and cleaning supplies.

trading investments

Investments that are acquired principally for the purpose of selling in the near term.

working capital

A measure of liquidity used to evaluate a company’s short-term debt-paying ability. It is calculated by subtracting current liabilities from current assets.

verifiability

An enhancing qualitative characteristic of useful information that means that different knowledgeable and independent users could reach a consensus that the information is faithfully represented.

understandability

An enhancing qualitative characteristic of useful information that means that information is clearly and concisely classified, characterized, and presented.