ACCT 2000- Letitia Lowe-Ardin (chapter 1-3)

Standard Classification of Assets

1. current assets

2. long term investments

3. property, plants, and equipment

4. intangible assets

Standard Classification of Liabilities and Stockholders' Equity

1. current liabilities

2. long term liabilities

3. stockholders' equity

Current Assets

assets that a company expects to convert to cash or use up within one year or the operating cycle

Operating Cycle

the average time it takes from purchase of inventory, to sale of goods, and then to collection of cash from customers

Common types of assets

- cash

- investments

- receivables

- inventories

- prepaid expenses

how are current assets listed?

by order of expected conversion to cash (liquidity)

long term investments

- investment in stocks and bonds

- long term assets

- long term notes receivable

what is meant by investments in stocks and bonds?

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

What are long term assets?

land or buildings that a company is not currently using in its operating activites

What is included in property, plant, and equipment?

land, buildings, equipment, delivery vehicles, and furniture

what is depreciation?

allocating the cost of assets over a number of years

what is accumulated depreciation ?

total amount of depreciation expensed so far in the asset's life

What is an intangible asset?

assets that do not have physical substance

(ex. goodwill, patents, copyrights, and trademarks)

What is considered a current liability ?

things the company has to pay within the next year or operating cycle (whichever is longer)

(ex. accounts payable, salaries and wages payable, notes payable, unearned revenue, interest payable, etc.)

what is a long term liability ?

things the company is expecting to pay after one year

(ex. bonds payable, mortgages payable, long term notes payable, lease liabilities, and pension liabilities)

what is considered stockholder's equity?

common stock and retained earnings

what is common stock?

investments of assets into the business by the stockholders

(cash received from investors)

What are retained earnings?

income retained for the use of business

What is a classified balance sheet?

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

what is a current ratio?

a measure of liquidity computed as current assets divided by current liabilites

what is the debt to asset ratio?

a measure of solvency calculated as total liabilities divided by total assets

what is a ratio analysis?

a technique that expresses the relationship among selected items of financial statement data

what is solvency?

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

what are solvency ratios?

measurement of the ability of a company to survive over a long period of time

what is working capital?

the difference between. the amounts of current assets and current liabilities

what is auditor's opinion?

an expression about whether financial statements conform with generally accepted accounting principles

what is a corperation?

a business that raises money by issuing a share of stocks

what is accounts payable ?

obligations to suppliers of goods (money out)

what is accounts receivable?

amounts due from customers (money in)

what is a creditor?

a party to whom a business owes money

what are hybrid organizational forms?

combines tax advantages with limited liability

what is a partnership?

a business that is owned jointly by two or more individuals but does not issue stock

where does accounts payable go on a balance sheet?

current liabilities

Where does accounts receivable go on a balance sheet ?

current assets

where does accumulated depreciation - equipment go on a balance sheet ?

property, plants, equipment

where do buildings go on a balance sheet ?

property, plant, equipment

where does cash go on a balance sheet?

current asset

Where does interest payable go on a balance sheet?

current liability

Where does goodwill go on a balance sheet?

intangible asset

Where does income taxes payable go on a balance sheet ?

current liabilities

where does inventory go on a balance sheet?

current assets

where do stock invests (to be sold in 7 months) go on a balance sheet?

current assets

where does land that is being used go on a balance sheet?

property, plant, equipment

where does mortgage payable go on a balance sheet?

long term liabilities

where do supplies go on a balance sheet?

current assets

where does equipment go on a balance sheet?

property, plant, and equipment

where does prepaid rent go on a balance sheet?

current assets

what is the Generally Accepted Accounting Principles (GAAP)?

a set of rules and practices, having substantial authoritative support that companies use to determine what type of financial information to disclose, what format to use, and how it should measure assets, liabilities, revenues, and expenses.

what sets accounting standards?

- securities exchange commission (SEC)

-financial accounting standards board (FASB)

-public company accounting oversight board (PCAOB)

-international accounting standards board (IASB)

What is the international standard called?

international financial reporting standards (IFRS)

What is relevance in accounting?

information that is RELEVANT if it would make a difference in a business decision

What is faithful representation in accounting?

information accurately depicts what really existed or happened (must be complete, neutral, and free from material error)

what is comparability in accounting?

when different companies use the same accounting principles

what is consistency in accounting?

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

what is verifiable in accounting?

financial data can be independently checked and confirmed as accurate

what is monetary unit assumption in accounting?

requires that only those things that can be expressed in money are included in the accounting records

what is economic entity assumption in accounting ?

states that every economic entity can be separately identified and accounted for

what is periodicity assumption in accouting?

separates financial information into time periods for reporting purposes

What is the going concern assumption in accounting?

states that the business will remain in operation for the foreseeable future

what are the measurement principles in financial reporting?

-historical cost

-fair value

-full disclosure

-cost constraint

What is the historical cost principle?

measurement basis used when a reliable estimate of fair value is not available

What is fair value?

indicates that assets and liabilities should be reported at fair value

what is the full disclosure principle?

disclose all circumstances and events that would make a differenced to financial statement users

What is cost constraint?

the cost of gathering and reporting financial information must not be greater than the benefit of having it

what is the primary criterion by which accounting information can be judged?

usefulness for decision making

what is the accounting information system?

the system of collecting and processing transaction data and communicating financial information to decision makers

what are transactions?

economic events that require recording in the financial statements

(occur when assets, liabilities, or stockholders' equity items change as a result of some economic event

what is the accounting equation?

Assets = Liabilities + Stockholders' Equity

what is an income statement

reports the success or profitability of the company's operations over a specific time period

what is a retained earning statement?

reports the changes in retained earnings for a specific period of time

what is a balance sheet?

reports the assets, liabilities, and stockholders' equity at a specific date

what is the fair value principle?

accounting principle that states that assets and liabilities should be reported at fair value (the price that would be received if an asset was sold or the amount that would be required to be paid to settle a liability)

what is the Financial Accounting Standards Board (FASB)?

the primary accounting standard - setting body in the US

International Accounting standards board (IASB)

an accounting standard setting body that issues standards adopted by many outside countries (NOT THE US)

What is materiality?

whether an item is large enough to likely influence the decision of an investor or creditor

what is the Public Company Accounting Oversight Board (PCAOB)?

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

what is the Securities and Exchange Commission (SEC)

the agency of the US government that oversees US financial markets and accounting standard setting bodies

Where would you find revenue during a certain period?

income statement

where would you find supplies on hand at the end of the year?

balance sheet

where would you find cash that was received from issuing new bonds during the period?

statement of cash flows

where would you find total outstanding debts at the end of a period?

the balance sheet

Where would you find service revenue?

income statement

where would you find equipment?

balance sheet

where would you find an advertising expense ?

income statement

where would you find accounts receivable?

balance sheet

where would you find common stock?

balance sheet

where would you find interest payable?

balance sheet

what is the working capital formula?

current assets - current liabilities

what is the formula for current ratio?

CR = current assets ÷ current liabilities

What is the formula for debt to assets ratio?

Total liabilities ÷ total assets (multiply by 100 for percentage)Fƒ

A company has current assets of $18,000 and current liabilities of $12,000. What is the working capital?

Working capital = $6,000

(18,000 - 12,000 = 6,000)

A company has current assets of $21,000 and current liabilities of $14,000. What is the current ratio?

Current ratio = 1.50 : 1

( 21,000 ÷ 14,000 = 1.50 )

A company has current assets of $36,000 and current liabilities of $45,000. What is the current ratio?

current ratio = 0.80 : 1

(36,000 ÷ 45,000 = 0.80)

which company has better liquidity:

Company A with a current ratio of 1.75 OR Company B with a current ratio of 1.10 ?

Company A

(higher working capital)

If working capital is negative what does that mean?

current liabilities are grater than assets

A company has current liabilities of $15,000 and long-term liabilities of $25,000. What are the total liabilities?

$40,000

(15,000 + 25,000 = 40,000)

A company has total liabilities of $12,000, long-term liabilities of $18,000, and total assets of $50,000. What is the debt to assets ratio?

60.0%

(12,000 + 18,000 = 30,000 -> 30,000 ÷ 50,000 = 0.6 x 100 = 60.0)

which company has better solvency : Company A with a debt-to-asset ratio of 70% OR Company B with 45% ?

Company B

(debt to asset ratio is lower)

Company A has current assets of $30,000 and current liabilities of $20,000. Calculate working capital and current ratio.

Working Capital - $10,000

( 30,000 - 20,000 = 10,000)

Current Ratio - 1.50 : 1

( 30,000 ÷ 20,000 = 1.50)

identify the assumption or principle violated:

reported at its fair value of $260,000 merchandise inventory with a cost of $208,000

historical cost principle

(assets are supposed to be recorded at their original cost)