Chapter 2

Question 1

Current assets

Answer 1

Anything prepaid or assets that a company expects to turn into cash in one year or its operating cycle.

Question 2

Operatin cycle

Answer 2

The average time required to go from assets to cash in producing revenue

Question 3

Long term investments

Answer 3

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

Question 4

Property, plant, equipment

Answer 4

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

Question 5

Intangible assets

Answer 5

assets that do not have physical substance and yet often are very valuable.
Ex: trademarks, copy rights

Question 6

Current liabilities

Answer 6

Obligation that the company is to pay within the next year or operating cycle

Question 7

Long- term liabilities

Answer 7

Obligations that a company expects to pay after one year.

Ex: Bonds, mortgages, payables

Question 8

What does profitability radio mean

Answer 8

Measures income or operating success of company

Question 9

current ratio

Answer 9

Measures short-term ability of company to pay its maturing obligations and to meet unexpected need for cash.
current assets/current liabilities= ?:1

Question 10

Percentage of solvency ratio

Answer 10

Measure the ability of company to survive over long period of time. Higher %= Lower solvency

Question 11

Earnings per share (EPS)

Answer 11

measures net income earned on each share of common stock

Net income-perfered dividends/ average of common shares (beginning + end/ 2)

Question 12

Current ratio

Answer 12

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

Question 13

Debt to assets ratio/analysis

Answer 13

one way to measure solvency
total liabilities/ total assets=
The higher the total the riskier the com pay is to paying back debt

Question 14

FASB 2 standards

Answer 14

Relevance-would this make a difference in a business decision?
Faithful representation- info accurately depicts what happened.

Question 15

Enhancing qualities

Answer 15

comparability, consistency, verifiable, timely, understandability

Question 16

Solvency

Answer 16

its ability to pay interest as it comes due and repay the balance of a debt in the long term

Question 17

Working capital

Answer 17

The difference between the amounts of current assets and current liabilities
Current assets- Current liabilities

Question 18

Generally accepted accounting principles (GAAP)

Answer 18

Set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes.

Question 19

Monetary Unit

Answer 19

Requires that only those things that can be expressed in money are included in the accounting records

Question 20

Economic entity

Answer 20

States that every economic entity can be separately identified and accounted for

Question 21

Periodicity

Answer 21

States that the life of a business can be divided into artificial time periods

Question 22

Going concern

Answer 22

The business will remain in operation for the foreseeable future

Question 23

Principles in financial reporting

Answer 23

Historical cost (what you bought it for), fair value (what is the value of it now), full disclosure

Question 24

Historical Cost

Answer 24

what you bought the product for

Question 25

Fair value

Answer 25

the price today received to sell an asset or settle a liability)

Question 26

Full disclosure

Answer 26

Requires that companies disclose all circumstances and events that would make a difference to financial statement users

Question 27

examples of current assets

Answer 27

cash, investments, receivables, inventories, prepaid expenses

Question 28

Liquidity

Answer 28

How easily a company can sell short term assets and pay short term debt

Question 29

current ratio= 1.18:1

Answer 29

For every dollar they owe in liabilities they have 1.18 worth of assets

Question 30

debt to assets= 62%

Answer 30

For every dollar of assets there is .62 dollars of debt