Flashcards in Chapter 2 Deck (30):
Anything prepaid or assets that a company expects to turn into cash in one year or its operating cycle.
The average time required to go from assets to cash in producing revenue
Long term investments
Investments in stocks and bonds of other corporations that are held for more than a year. OR long-term assets such as land/buildings that a company is not currently using in its operation activities, OR long term notes receivable
Property, plant, equipment
Assets with relatively long useful lives that are currently used in operating the business
assets that do not have physical substance and yet often are very valuable.
Ex: trademarks, copy rights
Obligation that the company is to pay within the next year or operating cycle
Long- term liabilities
Obligations that a company expects to pay after one year.
Ex: Bonds, mortgages, payables
What does profitability radio mean
Measures income or operating success of company
Measures short-term ability of company to pay its maturing obligations and to meet unexpected need for cash.
current assets/current liabilities= ?:1
Percentage of solvency ratio
Measure the ability of company to survive over long period of time. Higher %= Lower solvency
Earnings per share (EPS)
measures net income earned on each share of common stock
Net income-perfered dividends/ average of common shares (beginning + end/ 2)
Current assets/current liabilities
When CA exceeds CL working capital is positive-more likely to pay back liabilities.
When CL exceeds CA working capital is negative-less likely to pay back liabilities
Debt to assets ratio/analysis
one way to measure solvency
total liabilities/ total assets=
The higher the total the riskier the com pay is to paying back debt
FASB 2 standards
Relevance-would this make a difference in a business decision?
Faithful representation- info accurately depicts what happened.
comparability, consistency, verifiable, timely, understandability
its ability to pay interest as it comes due and repay the balance of a debt in the long term
The difference between the amounts of current assets and current liabilities
Current assets- Current liabilities
Generally accepted accounting principles (GAAP)
Set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes.
Requires that only those things that can be expressed in money are included in the accounting records
States that every economic entity can be separately identified and accounted for
States that the life of a business can be divided into artificial time periods
The business will remain in operation for the foreseeable future
Principles in financial reporting
Historical cost (what you bought it for), fair value (what is the value of it now), full disclosure
what you bought the product for
the price today received to sell an asset or settle a liability)
Requires that companies disclose all circumstances and events that would make a difference to financial statement users
examples of current assets
cash, investments, receivables, inventories, prepaid expenses
How easily a company can sell short term assets and pay short term debt
current ratio= 1.18:1
For every dollar they owe in liabilities they have 1.18 worth of assets