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Accounting > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

Classified Balance Sheet definition

A

a balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections

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2
Q

Current Assets definition

A

Assets that a company expects to convert to cash or use up within one year, or the operating cycle, whichever is longer

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3
Q

Current liabilities definition

A

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer

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4
Q

Current Ratio definition

A

A measure of liquidity, computed as

Current Assets/ Current liabilities

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5
Q

Debt to Assets Ratio definition

A

A measure of solvency, calculated as

total liabilities/ total assets

It measures the percentage of total financing provided by creditors (rather than stockholders)

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6
Q

Intangible Assets definition

A

Assets that do not have physical substance

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7
Q

Liquidity definition

A

The ability of a company to pay obligations that are expected to become due within the next year or operating cycle

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8
Q

Liquidity Ratios definition

A

Measures of the short term ability of a company to pay its maturing obligations and to meet unexpected needs for cash

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9
Q

Long Term Investments definition

A

Generally,

  1. Investments in stocks and bonds of other corporations that a company holds for more than one year;
  2. Long-term assets, such as land and buildings, not currently being used in the company’s operations
  3. Long term notes receivable
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10
Q

Long Term Liabilities (debt) definition

A

Obligations that a company expects to pay off AFTER one year

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11
Q

Operating Cycle definition

A

The average time required to purchase inventory, sell it on account, and then collect cash from customers- that is go from cash to cash

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12
Q

Property, Plant, and Equipment definition

A

Assets with relatively long useful lives that are currently used in operating the business

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13
Q

Ratio definition

A

An expression of the mathematical relationship between one quantity and another

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14
Q

Ratio Analysis definition

A

A technique that expresses the relationship among selected items of the financial statement data

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15
Q

Solvency definition

A

The ability of a company to pay its interest as it comes due and to repay the balance of debt due at its maturity

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16
Q

Solvency ratios definition

A

Measures of the ability of a company to survive over a long period of time

17
Q

Working capital definition

A

The difference between the amounts of current assets and current liabilities

18
Q

What are the 4 standard classifications of assets?

A
  1. Current assets
  2. Long term investments
  3. Property, Plant and Equipment
  4. Intangible Assets
19
Q

What are the 3 standard classifications of liabilities?

A
  1. Current liabilities
  2. Long- term liabilities
  3. Stockholders’ Equity
20
Q

Groupings on financial statements help readers determine what 2 things

A
  1. Whether the company has enough assets to pay its debts as they come due
  2. The claims of short and long term creditors on the company’s total assets
21
Q

List the 5 most common assets in order of liquidity

A
  1. Cash
  2. Investments
  3. Accounts receivable
  4. Inventories
  5. Pre-paid expenses
22
Q

What are two other names for PPE

A
  1. Fixed assets

2. Plant assets

23
Q

Accumulated depreciation definition

A

This account shows the total amount of depreciation that the company has expensed thus far in the asset’s life

24
Q

Depreciation definition

A

The allocation of the cost of an asset to a number of years

25
Q

Name 4 popular intangible assets

A
  1. Goodwill
  2. Patents
  3. Copyrights
  4. Trademarks
26
Q

What is another name of intangible assets?

A

“Other assets”

27
Q

What are 5 common current liabilities?

A
  1. Accounts payable
  2. Salaries and wages payable
  3. Notes payable
  4. Unearned revenue
  5. Current maturities of long term obligations
28
Q

What are 5 common long term liabilities?

A
  1. Bonds payable
  2. Mortgages payable
  3. Long term notes payable
  4. Lease liabilities
  5. Pension liabilities
29
Q

Intracompany comparisons

A

Cover two years for the same company

30
Q

Industry Average Comparisons

A

Based on average ratios for particular industries

31
Q

Intercompany comparisons

A

Based on comparisons with a competitor in the same industry

32
Q

Working Capital Formula

A

Current Assets- Current Liabilities

33
Q

What are the two ratio which measure liquidity?

What are their formulas?

A

Working Capital= current assets- current liabilities

Current Ratio= current assets / current liabilities

34
Q

Which liquidity ratio is a more dependable indicator of liquidity?

A

Current ratio

35
Q

What is a weakness of the current ratio?

A

It doesn’t take into account the composition of the current assets

36
Q

Why is debt financing riskier than equity financing?

A

Debt must be repaid at specific points in time, whether the company is performing well or not.

37
Q

The ________ the percentage of debt financing, the riskier the company

A

higher

38
Q

Debt to Equity Ratio Formula

Describe how to apply this ratio

A

Total liabilities/ stockholders equity

the higher the ratio is, the lower the solvency

39
Q

The adequacy of the debt to assets ratio is often judged in light of the company’s _________

A

Net income

Accounting (8 decks)

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