Intermediate Accounting: Balance Sheet and Statement of Cash Flows

Flashcards covering key vocabulary related to the Balance Sheet and Statement of Cash Flows from Intermediate Accounting, including definitions of financial statement elements, classifications, preparation steps, and usefulness metrics.

Balance Sheet

Also known as the Statement of Financial Position, it reports assets, liabilities, and equity at a specific date, providing information about resources, obligations to creditors, and equity in net resources to help predict future cash flows.

Liquidity

Describes the amount of time expected to elapse until an asset is realized or converted into cash, or until a liability has to be paid, indicating a company's ability to pay short-term obligations.

Solvency

Refers to the ability of a company to pay its debts as they mature, particularly long-term debts.

Financial Flexibility

Measures an enterprise's ability to take effective actions to alter the amounts and timing of cash flows, enabling it to respond to unexpected needs and opportunities.

Assets

Present rights of an entity to economic benefits.

Liabilities

Present obligations of an entity to transfer economic benefits.

Equity

The residual (ownership) interest in an entity’s assets after deducting its liabilities.

Current Assets

Cash and other assets a company expects to convert into cash, sell, or consume within one year or the operating cycle, whichever is longer.

Cash Equivalents

Short-term, highly liquid investments that mature within three months or less and are readily convertible to a known amount of cash.

Short-Term Investments (Equity Securities)

All equity securities recorded at fair value with changes reported in net income, unless accounted for under the equity method or fair value is not practicable to determine.

Short-Term Investments (Debt Securities)

Classified into held-to-maturity, trading, or available-for-sale categories based on the company's intent and ability to hold them.

Receivables

Amounts owed to the company by customers or other parties; companies must disclose anticipated losses, nature of nontrade receivables, and any collateral.

Inventories

Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Disclosure includes basis of valuation (e.g., lower-of-cost-or-net realizable value/market) and cost flow assumption (e.g., FIFO or LIFO).

Prepaid Expenses

Payments of cash recorded as an asset because a service or benefit will be received in the future (e.g., insurance, rent, supplies).

Long-Term Investments

Securities, tangible fixed assets not currently used in operations (e.g., land held for speculation), special funds, or investments in nonconsolidated subsidiaries.

Property, Plant, and Equipment (PP&E)

Tangible, long-lived assets used in the regular operations of the business (e.g., land, buildings, machinery), which are expensed using depreciation or depletion (except land).

Intangible Assets

Assets that lack physical substance and are not financial instruments (e.g., patents, goodwill); limited-life intangibles are amortized, while indefinite-life intangibles are tested for impairment.

Current Liabilities

Obligations a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities (e.g., accounts payable, unearned revenue, short-term portion of long-term debt).

Long-Term Liabilities

Obligations that a company does not reasonably expect to settle within the normal operating cycle, typically involving bonds, long-term leases, pension obligations, or contingencies.

Capital Stock

The total par or stated value of shares issued by a corporation; must disclose par value, and authorized, issued, and outstanding share amounts for common and preferred stock.

Additional Paid-in Capital

The excess of amounts paid in by investors over the par or stated value of the stock issued.

Retained Earnings

The corporation’s accumulated, undistributed earnings, which can be unappropriated (available for dividends) or restricted.

Accumulated Other Comprehensive Income

The aggregate amount of other comprehensive income items, such as unrealized gains and losses on certain investments.

Treasury Stock

Shares of a company's own stock that it has repurchased; reduces stockholders' equity.

Statement of Cash Flows

Provides relevant information about an enterprise's cash receipts and cash payments during a period, categorizing them into operating, investing, and financing activities.

Operating Activities (Cash Flows)

Cash flow activities that involve the cash effects of transactions that enter into the determination of net income.

Investing Activities (Cash Flows)

Cash flow activities that include making and collecting loans and acquiring and disposing of investments and property, plant, and equipment.

Financing Activities (Cash Flows)

Cash flow activities that involve liability and owners' equity items, such as issuing debt, repaying debt, issuing primary stock, reacquiring stock, and paying dividends.

Significant Noncash Activities

Financing and investing activities that do not affect cash and are reported in a separate schedule or notes (e.g., issuing common stock to purchase assets, converting bonds into common stock).

Current Cash Debt Coverage Ratio

Measures whether a company can pay off its current liabilities from internally generated cash flows.

Cash Debt Coverage Ratio

Indicates a company’s ability to repay its total liabilities from net cash provided by operating activities.

Free Cash Flow

The amount of discretionary cash flow a company has that may be used for purchasing additional investments, retiring debt, purchasing treasury stock, or adding to liquidity (Net cash provided by operating activities - Capital expenditures - Cash dividends).

Notes to the Financial Statements

An integral part of financial reporting that explains qualitative information, provides supplemental quantitative data, and clarifies restrictions or contractual agreements related to financial statement items.

Accounting Policies

Specific principles, bases, conventions, rules, and practices applied in preparing and presenting financial information, for which disclosure is required for all significant principles.

Contractual Situations

Significant essential provisions of lease contracts, pension obligations, stock compensation plans, or obligations that require maintenance of certain financial ratios, which must be disclosed in the notes.

Contingencies

Existing situations involving uncertainty as to a possible gain (gain contingency) or loss (loss contingency), significant material events with an uncertain future (e.g., litigation, tax assessments).

Fair Value

Information that may be more useful than historical cost for certain assets and liabilities, particularly financial instruments defined as cash, an ownership interest, or a contractual right/obligation to deliver cash or another financial instrument.

Fair Value Hierarchy (Level 1 Measures)

Fair value measurements based on observable inputs, such as quoted market prices for identical assets or liabilities (least subjective).

Fair Value Hierarchy (Level 2 Measures)

Fair value measurements based on market-based inputs, such as those derived from market prices for similar assets or liabilities (more subjective than Level 1).

Fair Value Hierarchy (Level 3 Measures)

Fair value measurements based on unobservable inputs, such as a company’s own data or assumptions (most subjective).

Liquidity Ratios

Measures of a company's short-term ability to pay its maturing obligations (e.g., current ratio, quick ratio).

Activity Ratios

Measures of how effectively the company uses its assets (e.g., accounts receivable turnover, inventory turnover, asset turnover).

Profitability Ratios

Measures of the degree of success or failure of a given company or division for a given period of time (e.g., profit margin on sales, return on assets, earnings per share).

Coverage Ratios

Measures of the degree of protection for long-term creditors and investors (e.g., debt to assets ratio, times interest earned, cash debt coverage).