Chapter 3 Vocabulary - The Balance Sheet and Financial Disclosures

Balance Sheet

A financial statement that presents an organized list of assets, liabilities, and equity at a particular point in time

Book Value

Total assets minus total liabilities as shown in the balance sheet

Assets

The present rights of an entity to an economic benefit

Current Assets

Includes assets that are cash, will be converted into cash, or will be used up within one year from the balance sheet date (or operating cycle, if longer)

Operating Cycle

Period of time necessary to convert cash to raw materials, raw materials to finished product, the finished product to receivables, and then finally receivables back to cash

Cash

Currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts, such as checks and money orders received from customers

Cash Equivalents

Include money market funds, treasury bills, and commercial paper; investments that have a maturity date no longer than three months from the date of purchase

Short-Term Investments

Investments not classified as cash equivalents that the company has the ability and intent to sell within one year (or operating cycle, if longer)

Accounts Receivable

Amounts to be received from the sale of goods or services on account

Notes Receivable

Receivables supported by a formal agreement or note that specifies payment terms

Inventory

Goods awaiting sale (finished goods), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw material)

Goods acquired, manufactured, or in the process of being manufactured for sale

Prepaid Expenses

Costs of assets acquired in one period and expensed in a future period

Long-Term Assets

Include assets that are expected to be converted to cash or consumed in more than one year (or operating cycle, if longer)

Investments

Assets not used directly in operations

Property, Plant, and Equipment

Tangible, long-lived assets used in the operations of the business, such as land, buildings, equipment, machinery, furniture, and vehicles, as well as natural resources, such as mineral mines, timber tracts, and oil wells

Operating Lease

Lease where the lessor retains the risks and benefits of ownership, and the lessee pays for the rights to use the asset temporarily

Intangible Assets

Operational assets that lack physical substance and often involve an exclusive right to a company to provide a product or service; examples include patents, copyrights, franchises, and goodwill

Goodwill

Intangible asset equal to the fair value of the considerations given to acquire a company (the acquisition price) minus the fair value of the acquired company’s identifiable net assets

Liabilities

Present obligations of a particular entity to transfer an economic benefit

Current Liabilities

Expected to require the use of current assets for payment, and usually are payable within one year from the balance sheet date (or operating cycle, if longer)

Accounts Payable

Obligations to suppliers of merchandise or of services purchased on account

Notes Payable

Promissory notes (essentially an IOU) that obligates the issuing corporation to repay a stated amount at or by a specified maturity date and to pay interest to the lender between the issue date and maturity

Deferred Revenues

Cash received from a customer for goods or services to be provided in a future period

Accrued Liabilities

Expenses already incurred but not yet paid (accrued expenses)

Current Maturities of Long-Term Debt

The portion of long-term notes, loans, mortgages, and bonds payable that is payable within the next year (or operating cycle, if longer), reported as a current liability

Long-Term Liabilities

Obligations that are (a) due to be settled or (b) have a contractual right by the borrowing company to be settled in more than one year (or operating cycle, if longer) after the balance sheet date

Equity

Represents the residual interest in the assets of an entity that remains after deducting its liabilities

Paid-In Capital

Invested capital consisting primarily of accounts invested by shareholders when they purchase shares of stock from the corporation

Retained Earnings

Amounts earned by the corporation on behalf of its shareholders and not (yet) distributed to them as dividends

Accumulated Other Comprehensive Income (AOCI)

A component of shareholders’ equity that represents the sum of all the other comprehensive income reported in current and prior periods

Accounting Equation

Assets = liabilities + shareholders’ equity

Subsequent Event

A significant development that takes place after the company’s fiscal year-end but before the financial statements are issued

Related-Party Transactions

Transactions with owners, management, families of owners or management, affiliated companies, and other parties that can significantly influence or be influenced by the company

Fraud

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements that are the subject of an audit

Illegal Acts

Violations of the law, such as bribes, kickbacks, and illegal contributions to political candidates

Management’s Discussion and Analysis (MD&A)

Provides a biased but informed perspective of a company’s operations, liquidity, and capital resources

Proxy Statement

Provides disclosure on the content of executive pay packages to help shareholders and others better understand the commitments of the company

Auditors

Independent professionals who render an opinion about whether the financial statements fairly present the company’s financial position, performance, and cash flows in compliance with GAAP

Auditor’s Report

Report issued by CPAs who audit the financial statements that informs users of the audit findings

Default Risk

A company’s ability to pay its obligations when they come due

Operational Risk

How adept a company is at withstanding various events and circumstances that might impair its ability to earn profits

Comparative Financial Statements

Corresponding financial statements from the previous years accompanying the issued financial statement

Horizontal Analysis

Comparison by expressing each item as a percentage of that same item in the financial statements of another year (base amount) in order to more easily see year-to-year changes

Vertical Analysis

Expression of each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, but within the same year

Ratio Analysis

Comparison of accounting numbers to evaluate the performance and risk of a firm

Liquidity

The ability of a company to convert its assets to cash to pay its current liabilities

Long-Term Solvency

An assessment of whether a company will be able to pay all its liabilities, which includes long-term liabilities

Current Ratio

Measure of a company’s liquidity; computed as current assets divided by current liabilities

Working Capital

Differences between current assets and current liabilities

Acid-Test Ratio

Measure of a company’s liquidity; computed as current assets, excluding inventories, restricted cash, and prepaid items, divided by current liabilities

Debt to Equity Ratio

Compares resources provided by creditors with resources provided by owners; computed as total liabilities divided by shareholders’ equity

Capital Structure

The mixture of liabilities and shareholders’ equity in a company

Times Interest Earned Ratio

A way to gauge the ability of a company to satisfy its fixed debt obligations, calculated as income before subtracting interest expense and income taxes, divided by interest expense

Financial Leverage

By earning a return on borrowed funds that exceeds the cost of borrowing the funds, a company can provide its shareholders with a total return higher than it could achieve by employing equity funds alone

Operating Segment

A component of a public business entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other companies of the same enterprise); whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; for which discrete financial information is available