Safran’s Accounting Study Guide: Chapters 15 & 16 + Balance Sheet

These flashcards cover key concepts from Safran’s Accounting Study Guide on investments, statement of cash flows, and balance sheet basics.

Investments

Companies buy investments to earn income or control other businesses.

Three types of investments

Trading, Available-for-Sale (AFS), Held-to-Maturity (HTM) with different recording rules.

Fair Value

Method used for Trading and AFS investments to record them on the balance sheet.

Equity Method

Used for investments with 20-50% ownership where dividends reduce investment and share of net income increases it.

Consolidation

This occurs when a company has more than 50% ownership of another business.

Statement of Cash Flows

Shows where cash came from and went, explaining the difference between Net Income and actual cash flow.

Operating Cash Flow

Cash generated from normal business operations.

Free Cash Flow Formula

Operating Cash Flow – Capital Expenditures – Dividends Paid.

Current Assets

Assets used or converted to cash within 1 year, such as Cash, Accounts Receivable, Inventory.

Long-Term Assets

Assets used over many years, such as Fixtures, Equipment, Land.

Current Liabilities

Obligations due within 1 year, such as Accounts Payable, Wages Payable, Taxes Payable.

Equity

Owner’s claim on the company, comprised of Common Stock and Retained Earnings.

Accounts Receivable

Asset reflecting money customers owe to the company.

Accounts Payable

Liability representing money the company owes to its suppliers.

Why do companies buy investments?

To earn income or to control other businesses.

When companies acquire investments, what are their main objectives?

Earning income (e.g., interest, dividends) or gaining influence/control over another business.

What are the three main types of investments for financial accounting purposes?

Trading investments, Available-for-Sale (AFS) investments, and Held-to-Maturity (HTM) investments.

What is a Trading Investment?

An investment bought with the intent to sell in the near term for a quick profit.

What is an Available-for-Sale (AFS) Investment?

An investment not classified as trading or held-to-maturity, generally held for an indefinite period but may be sold if market conditions warrant.

What is a Held-to-Maturity (HTM) Investment?

A debt investment (like bonds) that a company has the positive intent and ability to hold until it matures.

What method is used to record Trading and AFS investments on the balance sheet?

The Fair Value method.

What does the term "Fair Value" mean in the context of investments?

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

When is the Equity Method used for recording investments?

When a company owns 20-50% of another company, indicating significant influence but not control.

How do dividends received affect an investment accounted for using the Equity Method?

Dividends received reduce the investment account balance.

How does the investee's (the company invested in) net income affect an investment accounted for using the Equity Method?

The investor's share of the investee's net income increases the investment account balance.

What is the formula to calculate the change in an investment's balance under the Equity Method?

The change is calculated as: \quad \text{Change in Investment} = \text{Investor's Share of Investee Net Income} - \text{Dividends Received by Investor} \quad

What happens when a company has more than 50% ownership of another business?

Consolidation occurs, meaning the financial statements of both companies are combined as if they were a single entity.

What is the primary purpose of the Statement of Cash Flows?

To show where cash came from and where it went during an accounting period.

What financial concept does the Statement of Cash Flows help explain?

The difference between Net Income (from the income statement) and the actual cash generated or used by the business.

What is Operating Cash Flow?

The cash generated from a company's normal, day-to-day business operations (e.g., from selling goods/services, paying employees/suppliers).

What is the formula for Free Cash Flow?

The formula is: \quad \text{Free Cash Flow} = \text{Operating Cash Flow} - \text{Capital Expenditures} - \text{Dividends Paid} \quad

What are Current Assets?

Assets that are expected to be used up or converted into cash within one year or one operating cycle, whichever is longer.

List some examples of Current Assets.

Cash, Accounts Receivable, Inventory, Short-Term Investments.

What are Long-Term Assets?

Assets that are expected to provide economic benefits for more than one year, typically many years.

List some examples of Long-Term Assets.

Fixtures, Equipment, Land, Buildings, Intangible Assets (e.g., patents).

What are Current Liabilities?

Obligations or debts that are due to be paid within one year or one operating cycle, whichever is longer.

List some examples of Current Liabilities.

Accounts Payable, Wages Payable, Taxes Payable, Short-Term Notes Payable.

What does Equity represent in a company?

The owner's claim on the company's assets after all liabilities have been paid; also known as shareholder's equity or owner's equity.

What are the primary components of Equity?

Common Stock and Retained Earnings.

What is Accounts Receivable?

An asset representing money owed to the company by its customers for goods or services delivered on credit.

Is Accounts Receivable an asset or a liability?

It is a current asset.

What is Accounts Payable?

A liability representing money the company owes to its suppliers for goods or services purchased on credit.

Investments

Companies buy investments to earn income or control other businesses.

Three types of investments

Trading, Available-for-Sale (AFS), Held-to-Maturity (HTM) with different recording rules.

Fair Value

Method used for Trading and AFS investments to record them on the balance sheet.

Equity Method

Used for investments with 20-50% ownership where dividends reduce investment and share of net income increases it.

Consolidation

This occurs when a company has more than 50% ownership of another business.

Statement of Cash Flows

Shows where cash came from and went, explaining the difference between Net Income and actual cash flow.

Operating Cash Flow

Cash generated from normal business operations.

Free Cash Flow Formula

Operating Cash Flow – Capital Expenditures – Dividends Paid.

Current Assets

Assets used or converted to cash within 1 year, such as Cash, Accounts Receivable, Inventory.

Long-Term Assets

Assets used over many years, such as Fixtures, Equipment, Land.

Current Liabilities

Obligations due within 1 year, such as Accounts Payable, Wages Payable, Taxes Payable.

Equity

Owner’s claim on the company, comprised of Common Stock and Retained Earnings.

Accounts Receivable

Asset reflecting money customers owe to the company.

Accounts Payable

Liability representing money the company owes to its suppliers.

Why do companies buy investments?

To earn income or to control other businesses.

When companies acquire investments, what are their main objectives?

Earning income (e.g., interest, dividends) or gaining influence/control over another business.

What are the three main types of investments for financial accounting purposes?

Trading investments, Available-for-Sale (AFS) investments, and Held-to-Maturity (HTM) investments.

What is a Trading Investment?

An investment bought with the intent to sell in the near term for a quick profit.

What is an Available-for-Sale (AFS) Investment?

An investment not classified as trading or held-to-maturity, generally held for an indefinite period but may be sold if market conditions warrant.

What is a Held-to-Maturity (HTM) Investment?

A debt investment (like bonds) that a company has the positive intent and ability to hold until it matures.

What method is used to record Trading and AFS investments on the balance sheet?

The Fair Value method.

What does the term "Fair Value" mean in the context of investments?

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

When is the Equity Method used for recording investments?

When a company owns 20-50% of another company, indicating significant influence but not control.

How do dividends received affect an investment accounted for using the Equity Method?

Dividends received reduce the investment account balance.

How does the investee's (the company invested in) net income affect an investment accounted for using the Equity Method?

The investor's share of the investee's net income increases the investment account balance.

What is the formula to calculate the change in an investment's balance under the Equity Method?

The change is calculated as: \quad \text{Change in Investment} = \text{Investor's Share of Investee Net Income} - \text{Dividends Received by Investor} \quad

What happens when a company has more than 50% ownership of another business?

Consolidation occurs, meaning the financial statements of both companies are combined as if they were a single entity.

What is the primary purpose of the Statement of Cash Flows?

To show where cash came from and where it went during an accounting period.

What financial concept does the Statement of Cash Flows help explain?

The difference between Net Income (from the income statement) and the actual cash generated or used by the business.

What is Operating Cash Flow?

The cash generated from a company's normal, day-to-day business operations (e.g., from selling goods/services, paying employees/suppliers).

What is the formula for Free Cash Flow?

The formula is: \quad \text{Free Cash Flow} = \text{Operating Cash Flow} - \text{Capital Expenditures} - \text{Dividends Paid} \quad

What are Current Assets?

Assets that are expected to be used up or converted into cash within one year or one operating cycle, whichever is longer.

List some examples of Current Assets.

Cash, Accounts Receivable, Inventory, Short-Term Investments.

What are Long-Term Assets?

Assets that are expected to provide economic benefits for more than one year, typically many years.

List some examples of Long-Term Assets.

Fixtures, Equipment, Land, Buildings, Intangible Assets (e.g., patents).

What are Current Liabilities?

Obligations or debts that are due to be paid within one year or one operating cycle, whichever is longer.

List some examples of Current Liabilities.

Accounts Payable, Wages Payable, Taxes Payable, Short-Term Notes Payable.

What does Equity represent in a company?

The owner's claim on the company's assets after all liabilities have been paid; also known as shareholder's equity or owner's equity.

What are the primary components of Equity?

Common Stock and Retained Earnings.

What is Accounts Receivable?

An asset representing money owed to the company by its customers for goods or services delivered on credit.

Is Accounts Receivable an asset or a liability?

It is a current asset.

What is Accounts Payable?

A liability representing money the company owes to its suppliers for goods or services purchased on credit.

What is the Indirect Method for the Statement of Cash Flows?

A method used to prepare the operating activities section of the Statement of Cash Flows, starting with Net Income and adjusting it for non-cash items and changes in current assets and liabilities.

How do changes in current assets typically affect cash flow from operations (Indirect Method)?

An increase in a current asset (e.g., Accounts Receivable, Inventory) is subtracted from Net Income because it means cash was used. A decrease in a current asset is added to Net Income because it means cash was received.

How do changes in current liabilities typically affect cash flow from operations (Indirect Method)?

An increase in a current liability (e.g., Accounts Payable, Wages Payable) is added to Net Income because it means the company incurred an expense but did not yet pay cash. A decrease in a current liability is subtracted from Net Income because it means cash was used to pay off the liability.

Example: If Accounts Receivable increased by 5,000, how does this affect Operating Cash Flow (Indirect Method)?

The 5,000 increase in Accounts Receivable is subtracted from Net Income because it represents sales made on credit for which cash has not yet been collected.

Example: If Accounts Payable increased by 3,000, how does this affect Operating Cash Flow (Indirect Method)?

The 3,000 increase in Accounts Payable is added