D102 Unit 2

Asset

A resource owned or controlled by a company that will provide probable future economic benefit.

Liquidity

How easily something can be converted to cash.

Liabilities

An obligation to pay money “owe a supplier $5,000 (accounts payable) or provide a service/product.

Unearned Revenue

Customer already paid, but company still owes a service.

Mortgage Payable

The loan is the liability, the building is the asset (the distinction is important).

Common Liabilities

Accounts payable, taxes payable, mortgage payable, and unearned revenue.

Other Liabilities

Wages payable and Interest payable.

Owners Equity

The owners claim on the assets after liabilities have been deducted.

Equity Formula

Assets - Liabilities

Creditors

Primary Claim

Owners

Secondary Claim/Residual Claim

Paid in Capital/Capital Stock

Amounts owners originally/aditionally invested in the company.

Retained Earnings

Companies accumulated profits it keeps instead of paying out to shareholders as dividends.

Accounting Equation

Assets = Liabilities + Equity

Balance Sheet

A financial statement that displays what a company owns (assets), company owes (liabilities), and what belongs to owners (stockholders equity).

Current Assets

To be used, sold, collected, and converted within 1 year or less.

Long Term Assets

Expected to remain useful beyond 1 year.

Common Current Assets

Cash, inventory, and accounts recievables.

Cash

Actual money business has available ( coins, currency, money in a checking accounting, and/or savings.

Cash Equivlant

These are short-term investments, that is very liqud and low risk. Ex: securities witha. maturity less than 3 months, U.S. Treasury Secruity.

Prepaid Expense

Considered a current asset.

Long-Term Assets

Expected to remain around beyond one year.

Deffered Tax Asset

Considered long term asset and is a tax benefit exists but company gets it later.

Current Liabilities

Ex:

• accounts payables

• Short term loans payable

• Current portion long term debt

• unearned revenue

• Accured liabilities

Unearned Revenue

Money recieved before company provides goods/services.

Accured Liabilities

Expenses/obligations company has incurred but hasn’t paid yet. EX: wages, taxes, utilities, and interest.

Accounts Payable

Money company owes suppliers for purchases made on credit.

Long Term Liabilites

Obligations not expected to be paid within 1 year. Ex:

• Long term loans

• bonds

• Mortgages

• Long Term notes

Common Stock

Represents ownership in a corporation.

Par Value

States face value assigned to each share when its issued.

Additional Paid in Capital

This is: issue price (means actual amount paid) - par value (assigned amount)

Cumulative Preffered Stock

Preferred dividend isn’t paid this year, it can accumulate. Must be paid better common dividend.

Treasury Stock

A company’s own stock they repurchased back.

Income Statement

Reports a companies revenues and expenses over a period of time, such as a month or year. It shows if a company earned a profit or loss.

Net Income

The profit remaining after expenses are subtracted from revenues.

Revenue

Is the value of goods or services a company provides through its business operations.

Sales Revenue

Earned by selling goods

Service Revenue

Earned by providing services

Interest Revenue

Banks lending money

Other Revenue

Licensing fees, subscriptions, finanical service fees, and other business specific sources.

Recognized Revenue

You recognize revenue when its earned not when cash is recieved.

Net Income Formula

Total Revenues - Total Expenses

Expenses

A value of resources used to generate revenue, or a liability incurred as part of doing business.

Cost of Goods Sold

Cost of the products that a company actually sold during the period.

Calculating Gross Profit

Sales Revenue - COGS

Operating Expenses

Are costs associated with running a company’s business operations, beyond cost of goods sold.

Selling, General, & Admin Expenses (SG&A)

A broad reporting category for a variety of different expenses. Particularly costs of selling products and operating the business.

Research & Development (R&D) (SG&A)

It is research spending to produce a profitable new product but it is not an asset.

Wages & Salaries (SG&A)

These are the costs of employing people and employer-paid health care, including employee benefit such as pensions.

Bad Debt Expense (SG&A)

When business sells on credit, it allows a customer to receive a good or service no and pay later, but if customer does not pay at all its uncollectable accounts expenses.

Depreciation

Recognizing the cost of using long-lived assets.

What is a non cash expense

Depreciation expense

Single Step

Groups all revenue together and groups all expenses together.

Multi-step

Is calculating orofit in different stages, gross profit, operating income, and then net income.

Consolidated Finacial Statements

It combines the finaical results of a parent company and its subsidaries it owns.

Earnings Per Share

Shows how much net income a company earned per share of common stock.

EPS Formula

Net income / # of shares

Companies Gross Profit Percetange Formula

Net income / sales

Statement of Cash Flows

It explains how a company’s cash balance changes over a period of time. Reports cash coming into the business (inflow) and cash leaving the business (outflows).

Categories of Statement of Cash Flows

Operating activities, investing activites, and financing actvities.

Operating Activity

Cash effects of the companies normal bsuiness activities. Ex: selling, collecting, buying inventory, paying employees, and expenses.

Operating Inflows

• Selling trading securities

• Cash received from selling goods or services.

• Dividend revenue recieved in cash

• Interest revenue recieved in cash.

Operating Cash Outflows

• Cash paid to purchase inventory

• Cash paid for wages and salaries

• cash paid for taxes

• cash paid for interest expense

• cash paid for rent utlities and other expenses.

Net operating cash

Is the bottom line of operating activities

Investing Activities

Acquiring and selling productive assets, investment secruities, and lending money or collecting principal on banks.

Investing cash in flow

• selling plant assets, such as buildings or equipment.

• selling a business segment

• selling a non trading investment security

• collecting principal on loans

Investing Cash outflows

• Purchasing plant assets

• Purchasing non trading investment securities

• Making loans to other entities

• Acquiring another business

Financing Activities

Involves acquiring money from owners and lenders and pays money back to them.

Financing Activities Inflow

• Isssuing stock to shareholderes

• Borrowing money

• Borrowing notes

• Borrowing mortgages

• and other short term borrowing

Financing Activities Outflow

• Repaying loans and borrowings

• Paying cash dividends

Ending Cash Formula

Beginning cash - net change in cash

Ending Retained Formula

Beginning retained earnings + net income (profit earned) - dividends (profits distrbuted if applicable)

Net Cash Formula

Cash inflows - cash outflows