Chapter 2: 2

Classified Balance Sheet

A financial statement format that organizes assets, liabilities, and stockholders' equity into specific categories for improved understanding.

Current Assets

Assets expected to be converted to cash or used within one year.

Liquidity

The ease with which an asset can be converted to cash.

Accounts Receivable

Collectable amounts from customers.

Inventory

Goods held for sale.

Prepaid Insurance

Insurance contracts paid in advance and consumed over time.

Long-Term Investments

Assets not expected to be converted to cash or used within one year.

Property, Plant, and Equipment (PPE)

Long-term assets actively used in company operations.

Depreciation

The allocation of an asset's cost over its useful life due to wear and tear.

Intangible Assets

Non-physical assets that provide value, such as patents and trademarks.

Current Liabilities

Obligations due within one year.

Long-Term Liabilities

Obligations not due for settlement within one year.

Common Stock

Value of stock sold to the public.

Retained Earnings

Accumulated income retained for reinvestment in the business.

Accumulated Depreciation

The total depreciation expense recognized for an asset over time.

Profitability Ratios

Ratios that measure how efficiently a company generates profit from its revenue.

Liquidity Ratios

Ratios that assess a company's ability to meet short-term obligations.

Solvency Ratios

Ratios that evaluate a company's ability to sustain operations and pay long-term debts.

Working Capital

Current Assets minus Current Liabilities; indicates short-term financial health.

Current Ratio

Current Assets divided by Current Liabilities; measures liquidity.

Debt to Assets Ratio

Total Liabilities divided by Total Assets; assesses financial leverage.

Net Sales

Total revenue from operating activities minus returns and allowances.

Net Income

Revenue remaining after all expenses have been deducted.

Earnings Per Share (EPS)

Net Income divided by the number of outstanding shares.

Free Cash Flow

Operating Cash Flow minus Capital Expenditures and Dividends Paid.

Financial Reporting

The process of disclosing financial information to various stakeholders.

Qualities of Useful Information

Attributes such as relevance, faithful representation, comparability, and verifiability.

Relevance

Information must aid in decision-making and must be material.

Faithful Representation

Data must be complete, neutral, and free from error.

Comparability

Data must be comparable across different organizations and consistent over time.

Timeliness

Information must be available when it is needed for decision-making.

Understandability

Reports must be clear and accessible to informed users.

Monetary Unit Assumption

Only quantifiable data is included in financial reporting.

Economic Entity Assumption

Each business entity's transactions are tracked separately.

Periodicity Assumption

Financial statements are prepared for specific intervals.

Going Concern Assumption

Assumes that a business will continue to operate in the foreseeable future.

Historical Cost Principle

Assets are recorded at their original purchase cost.

Fair Value Principle

Some assets and liabilities may be valued at current market prices when actively traded.

Statement of Cash Flows

A financial statement showing how cash is generated and used over a period.

Operating Activities

Cash flows from core business operations.

Investing Activities

Cash used for long-term investments such as PPE.

Financing Activities

Cash flow related to financing, such as issuing and repurchasing stock.

Conceptual Wrinkle of Liquidity

Excessive focus on liquidity can lead to missed growth opportunities.

Liquidity

The ability of a company to meet its short-term obligations.

Economic Downturns

Periods of reduced economic activity, which can affect a company's financial health.

Materiality

The principle that only significant information should be included in financial reports.

Verifiability

The quality that allows auditors to confirm the accuracy of financial data.

Depreciation on Land

Land is not depreciated.

Purpose of Depreciation

Reflects the reduction of long-term asset value over time.

Statement of Earnings

An alternative name for the income statement that shows profitability.

EPS Calculation

Net Income divided by the number of outstanding shares.

Interpretation of Current Ratio

A ratio greater than 1 indicates sufficient current assets to meet liabilities.