Accounting: Chapter 2

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43 Terms

1
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The general group of ___________ owned by the \n firm are its assets
Resources
2
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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
3
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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
4
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Liabilities represent the _____________ that a firm has to outside creditors
obligations
5
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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
6
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Owner’s equity
is the value of the firm to its owners
7
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____________________ capital – amounts paid \n directly to the firm in exchange for shares of \n ownership
Contributed
8
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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
9
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Retained earnings represent a claim on a portion of the firm’s assets and are
not an asset themselves
10
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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
11
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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
12
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This formula can be restated as
Assets = Liabilities + Stockholders’ Equity
13
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Left-hand side shows the firm’s _______________
resources
14
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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
15
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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
16
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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
17
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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”
18
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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
19
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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
20
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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
21
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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
22
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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
23
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It illustrates the basic accounting equation at that point in time
Assets = Liabilities + Stockholders’ Equity
24
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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
26
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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
27
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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
28
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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
29
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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
30
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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)
31
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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
32
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Another intangible asset may arise from the \n _____________ of a company
Acquisition
33
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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
34
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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
35
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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
37
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Each liability item is presented on the B/S in order of ______________ (when the obligation is due)
maturity
38
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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
39
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______________ Liabilities (long-term, > 1 year):

\
• Long-term debt \n

• Other long-term liabilities (e.g., pensions)
Non-Current
40
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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”
41
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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
42
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•____________ are the costs incurred in order to \n generate revenues
Expenses
43
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Revenues – Expenses = Net Income (profit, \n earnings) \n

This again shows the owners’ ______________
Residual Claim