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Intermediate Accounting I > Chapter Three > Flashcards

Chapter Three Flashcards

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1
Q

Balance Sheet

A

reports a company’s financial position at a point in time

organized list of A, L and E

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2
Q

the usefulness of the BS

A

assets are classified according to common characteristics

liquidity

long term solvency

financial flexibility

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3
Q

liquidity

A

the ability of a company to convert its assets to cash

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4
Q

long term solvency

A

whether a co will be able to pay all its liabilities (also long term)

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5
Q

financial flexibility

A

ability of co to alter cash flows in order to take advantage of unexpected investment opps and needs

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6
Q

does the BS have limitations

A

a co book value will show in BS but it will not directly measure the company’s market value

1) many assets are measured at their historical costs rather than the amounts for which assets could be sold

2) many aspects of a co may represent valuable resources, but these items are not recorded as assets in the BS so no BV

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7
Q

book value

A

assets - liabilities

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8
Q

current assets

A

expected to be converted to cash/consumed within coming year/normal operating cycle of business

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9
Q

operating cycle

A

use cash to acquire inventory

prepare inventory for sale to customers

deliver inventory to customers

collect cash from customers

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10
Q

elements of current assets listed in decreasing order of liquidity

A

cash/cash equiv.
short term investments
AR
inventory
prepaid expensesc

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11
Q

cash and cash equiv

A

on hand and in banks

cash: bank drafts, cashier’s checks, money orders, cash equiv

cash equivalents: maturity date no longer than three months from the date of purchase: commercial paper, money market funds, US treasury bills

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12
Q

short term investments

A

in stock and debt securities of other corps.

company has ability/intent to sell within next 12m or op cycle
(HTM, trading securities, AFS)

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13
Q

AR

A

result from g/s on account

also known as trade receivables

non trade receivables are from loans by the co to individuals/other entities

NR - formal agreement/note specific payment terms

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14
Q

inventory

A

merchandise

manufacturer:
RM
WIP
FG

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15
Q

prepaid expenses

A

when co incurs a cost of acquiring an asset in one period that will not be expensed until a future period

current/noncurrent depends on period in which item is consumed

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16
Q

long term assets

A

expected to be converted to cash/consumed for more than one year (op cycle)

investments
PPE
other long term assets
intangible assets

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17
Q

investments

A

not used directly in the operations of the business

examples:
investments in equity/debt securities of other corp
land held for speculation
long term receivables
cash set aside for special purposes

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18
Q

PPE

A

tangible, long lived assets used in ops of business

reported as a single amt in BS at ORIGINAL cost less Accumulated Deprec

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19
Q

intangible assets

A

exclusive rights

valuable resources in generating future rev

reported in BS net of accumulated amortization

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20
Q

other long term assets

A

catch all classification of long term assets not reported separately in one of the other long term classifications

long term operating lease
sometimes long term prepaid expense’s too (deferred charges)

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21
Q

mangement intent

A

key to understanding which category of asset is reported as what

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22
Q

current liabilities

A

expected to be satisfied through the use of CA or the creation of other current liabilities

AP
NP (short term)

deferred revenues (unearned SR)

accrued liab

currently maturing portion of long term debt

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23
Q

AP

A

obligations to suppliers of merchandise or services purchased on acct

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24
Q

NP

A

written promises to pay cash at some future date

usually explicit interest in addition to face value

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25
deferred revenues
represent cash received from a customer for goods or services to be provided in a future period
26
accrued liab
represent obligations created when exp have been incurred but will not paid until a subsequent reporting periods
27
current maturities of long term debt
long term notes/loans/mortgages/BP due within next year or payable in installments
28
long term liab
due to be settled contractual right by the borrowing company to be settled in more than one year (op cycle) after BS date impact on future cash flows and long term solvency is assessed by reporting payment terms, interest rates, details in disclosure notes
29
shareholders eq
assets - liab arises from: paid in cap retained earnings also known as nets assets or BV sometimes includes AOCI (other equity components)
30
AOCI
accumulated other comprehensive income special gains/losses listed as special items on equity section of BS
31
at end of fiscal year, what are companies required to provide shareholders (especially if they have public securities) | examples of additonal disclosures (5)
annual report with financial statements (BS) additional disclosures - business conditions, risk factors, legal proceedings, stock performance, internal control procedures
32
examples of disclosure notes | what do they deal with on the BS
pension plans, long term debt, income taxes, ppE, leases, investments, employee benefit plans
33
what do disclosure notes need to include
summary of significant acct policies description of subsequent events related third party transactions
34
summary of significant acct policies
conveys valuable info about a company's choices from among various alternative acct methods
35
subsequent events
occurs after a company's fiscal year end but before the financial statements are issued
36
examples of subsequent events
issuance of debt/equity securities business combo or sale of business sale of assets event that sheds light on the outcome of a loss contingency
37
what are noteworthy events and transactions
occur only occasionally but are important: related party transactions (more frequent) errors and fraud illegal acts
38
related party transactions
Transactions between the company and owners, management, families of owners or management, affiliated parties, etc
39
errors and fraud
Misstatements that are unintentional (errors) or intentional (fraud)
40
illegal acts
Bribes, kickbacks, illegal contributions to political candidates, and other violations of the law.
41
why does management need to discuss/analyze
need discussion/analysis because biased but informed perspectives on significant events trends uncertainties to.... results of operations, liquidity, cap resources, off balance sheet arrangements, critical acct estimates
42
what is management responsible for in annual report?
assessment of co's internal control procedures executives personally certify FS per Sarbanes-Oxley Act of 2002
43
what does SEC require for disclosure on compensation to directors and executives
proxy statement - invites shareholders to annual meeting to elect board members and vote on issues/vote by proxy includes compensation and stock option info provided each year with annual report
44
what are sustainability disclosures
companies detail practices and policies related to sustainability of business ops environmental disclosures social disclosures governance disclosures
45
environmental disclosures
environment impact - green house immissions
46
social disclosures
issues of interest to broader stakeholders/society at large CEO pay ratio gender pay ratio gender diversity ratio
47
governance disclosures
co's actions and policies related to division of power within a co. gender diversity independence of Board of Directors ethical policies
48
Role of auditor
examine FS and internal control procedures attest to fairness of FS opinion stated in auditor's report
49
four basic types of auditor reports
unqualified - FS presented fairly unqualified with explanatory/emphasis paragraph qualified - scope of limitation or departure from GAAP (overall FS are presented fairly) adverse - FS not presented fairly disclaimer - insufficient evidence or not independent
50
unqualified auditor's report
"clean opinion" sufficient planning of audit understanding of co's internal control procedures gathering of evidence to accuracy of amounts reported in FS
51
unqualified with explanatory paragraph (emphasis of matter)
auditor believes FS are in conformity with GAAP, BUT other important info needs to be emphasized to FS users so: lack of consistency going concern material misstatement
52
when audit are issue other than unqualified opinion
qualified opinion adverse opinion disclaimer because: nonconformity with GAAP inadequate disclosures a limitation or restriction of scope of audit examination
53
users are most interested in the _____
outlook for the future
54
investors are interested in?
default risk operational risk
55
default risk
the risk the company won’t be able to pay its obligations when they come due
56
operational risk
to how a company can withstand various events and circumstances that might impair its ability to earn profits
57
liquidity
Liquidity most often refers to the ability of a company to convert its assets to cash to pay its current obligations
58
liquidity ratios
provide information about a company’s ability to pay its short-term obligations current ratio acid test ratio
59
current ratio
CA/CL
60
acid test ratio
Quick assets/CL
61
working capital
CA - CL popular measure of a company’s ability to satisfy its short-term obligations is the relation between current assets and current liabilities
62
current ratio interpretation
Nike's current ratio of 2.48 indicates that the company has a $2.48 of CA for each $1 of CL
63
interpretation of WC
Nike has 10,000 more in CA than in CL.
64
solvency ratio
indication of the riskiness of a company with regard to its ability to pay its long-term debts debt to equity ratio times interest earned ratio
65
debt to equity ratio
compares resources provided by creditors with resources provided by owners - so how reliant is the company on creditors vs owners provides measure of creditor's protection in the event of insolvency HIGHER RATIO HIGHER RISK Total Liab/Shareholders EQ
66
times interest earned ratio
[net income + interest expense + income taxes]/interest expense for a co to be solvent or take on more debt, co needs to have funds available to pay interest charges if incomes is many times greater than interest expense, creditor's interests are more protected than if income just barely covers this expense
67
risk and profitability
default risks exist, but sometimes there is a greater return to shareholders with borrowing this is known as? hint: FFL
68
favorable financial leverage
common but risky business activity borrowing funds provides greater returns to shareholders
69
what are the alternatives when a co needs money
debt and equity sometimes more debt can mean a higher return on shareholders equity
70
what is a reportable operating segment
determined by using a management approach evident from structure of co's internal organization component of a public business entity: recognize revs/exps, regular reviewed by entity chief operating decision maker, discrete financial info available
71
what amounts are reported by an operating segment
required disclosures: general info about OS info reported segment profit/loss and segment assets reconciliations of totals of segment revs, reported profit/loss, assets, other items to corresponding entity amts interim period info so could be: net sales, operating earnings, total assets, depreciation/amort, capital expenditures
72
what does US GAAP require in regards to certain geographic areas
certain reporting based on geo - revenues from external customers: domestically attributed to foreign countries long lived assets, long term customer relationships and other policies domestically attributed foreign countries
73
why is info about major customers important?
is business depending on certain customers for prosperity if 10% or more of revenue from certain customer must disclose: total amount of rev from them identity of operating segment(s) reporting the rev

Intermediate Accounting I (15 decks)

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