Accounting: Chapter 2

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The general group of ___ owned by the \n firm are its assets

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Resources

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An asset is anything of ___ that \n can somehow help the firm provide its goods and services to its customers, either directly or \n indirectly

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Economic Value

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43 Terms

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The general group of ___ owned by the \n firm are its assets

Resources

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An asset is anything of ___ that \n can somehow help the firm provide its goods and services to its customers, either directly or \n indirectly

Economic Value

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Characteristics of an asset: \n • It must be owned or by the company \n • It must provide expected ___ benefits

Controlled;

\
Future

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Liabilities represent the _ that a firm has to outside creditors

obligations

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A liability should be reported if the following three conditions are met:

  1. The future sacrifice is ;
  2. The amount of the obligation is known or can be
    reasonably (“estimable”); and
  3. The transaction or event that caused the
    obligation has _ (“in the past”)

Probable';

\
estimated

\
occurred

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Owner’s equity

is the value of the firm to its owners

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capital – amounts paid \n directly to the firm in exchange for shares of \n ownership

Contributed

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\n _ (“earned” capital) – the \n portion of the income that the firm has earned \n over the years that has not been distributed to \n the owners in the form of dividends

Retained Earnings

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Retained earnings represent a claim on a portion of the firm’s assets and are

not an asset themselves

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An important point that I want to reinforce is that “equity” refers to the _– that is, what the owners have a claim to. Consider the example of a home purchase.

ownership stake

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Equity refers to the : owners don’t have a claim to the value of the entire asset – only to the portion of the asset value that isn’t owed to other parties (i.e., the residue)

residual claim

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This formula can be restated as

Assets = Liabilities + Stockholders’ Equity

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Left-hand side shows the firm’s _

resources

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Right-hand side shows the of the \n resources \n

• Liabilities and stockholders’ equity both represent legal ownership claims on the firm’s assets

sources

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In order to answer this question, you have ask the person to clarify: over what do you want to know how much lemonade we’ve sold?

period of time

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So the question of how much lemonade we have is one that can only be addressed at a given _ in time: e.g., right now, at the beginning of the year, etc.

point

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But the question about how much lemonade we’ve sold is one that can only be addressed for a given period of time: e.g., this month, this year, since the inception of the business, etc.

Important distinction: “stocks” versus “flows”

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One key intuition here is that the balance in a stock is changed over time by inflows and outflows:

Beg balance + inflows – outflows = End balance

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So the balance of a stock at any given point in time is a function of all the prior _

\
E.g.: the KwH of energy in my car battery right now equals all the prior KwH from charging less all the KwH I’ve used driving \n

So there are different ways to determine the stock balance

inflows and outflows

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Another key intuition is that stocks and flows have different __•

\
These are very different things and it’s important to “see” the difference between them

measurement units

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In accounting, we report the “at a given _ in time” stocks on the Balance Sheet, and we report the major “for a given ” flows on the Income Statement

point;

\
time period

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The balance sheet indicates the financial position of the firm at a particular point in time (“stocks”)

• Point in time is the end of their “fiscal” period \n • Either the last day of the quarter or of the fiscal year

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It illustrates the basic accounting equation at that point in time

Assets = Liabilities + Stockholders’ Equity

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Assets are presented on the B/S in order of \n ___ (the asset’s nearness to cash)

\
• Current assets are cash or will become cash or be used up within one year

Liquidity

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_Assets: used/turned to cash within one year

\
• Cash and cash equivalents \n • Accounts receivable (see supplier-customer relationship) \n • Inventory (see supplier-customer relationship)

Current

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___ Assets (long-term assets):

\
• Property, plant and equipment (PP&E, “fixed assets”) (e.g., land, factories, office buildings, machinery, etc.) LT Investments and Intangibles

Non-Current

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Now, let’s say that in July our lemonade stand posted our record high in sales, and we had a big pizza party (paid out of the company’s funds) to celebrate. Would we consider the \n cost of the pizza party to be an asset to the company? \n

No; the expected future benefits are nebulous and cannot be \n

Reasonably Measured

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Let’s say that under my long-term contract as the CEO of the company, my salary is far less than either what I could earn elsewhere or what I contribute to the company. In this scenario, is my contract an asset to the company? \n

No; in economic terms there may be an intangible asset, but under financial accounting rules you cannot record intangible assets as assets

Internally Generated

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Assets may be tangible or intangible \n

Tangible assets have a and \n substance \n

Intangible assets do not have any physical form – they consist of such items as customer databases, patents, copyrights, or trademarks

Physical Form

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Accountants do not allow internally-developed \n intangible assets to be recorded

(e.g., benefits from a pizza party, or excess value on my contract)

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Intangibles are recorded if they have a clearly \n __ value and were acquired from another company (or if the company itself was acquired)

Measurable

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Another intangible asset may arise from the \n _ of a company

Acquisition

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Say Apple buys a company for $500M whose \n identifiable net assets are $400M. Did Apple overpay for the company?

No; a sales price between arms-length parties is sacred

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There must be value that we can’t ___ identify

\
Specifically

\
Similar to dark matter in physics → “dark value”

\
This includes, e.g., the good credit standing, reputation for quality, skilled set of employees, etc. of the target

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\n After an M&A, the amount paid in excess of the market value of the identified net assets is called ___, and may be recorded as an asset \n

• Specific intangibles (e.g. patents) included in net assets

Goodwill

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You cannot record your goodwill as an asset

OWN

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Each liability item is presented on the B/S in order of (when the obligation is due)

maturity

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__ Liabilities: must be paid within one year

\
• Accounts payable (see supplier-customer relationship) \n

• Accrued liabilities (e.g., accrued/unpaid wages)

Current

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Liabilities (long-term, > 1 year):

\
• Long-term debt \n

• Other long-term liabilities (e.g., pensions)

Non-Current

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•The income statement measures the firm’s \n performance over a period of time (“flows”)

•E.g. “For the Year Ending December 31, 2017”

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are the monies the firm has \n received or is entitled to receive in exchange for \n goods and services

Revenues

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are the costs incurred in order to \n generate revenues

Expenses

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Revenues – Expenses = Net Income (profit, \n earnings) \n

This again shows the owners’

Residual Claim