Genral purpose Financial Statements Flashcards
(38 cards)
Purpose of Balance Sheet
Reports economic resources and obligations as of a specific date.
Assets = Liabilities + Shareholders’ Equity
Order of Items on Balance Sheet
Current Assets Long Term Assets Short term liabilities Long Term liabilities Shareholders’s equity
Presented in order of liquidity (cash at the top)
Current Assets
Assets expected to be used up within one year.
Examples: Cash Inventory Prepaid expenses Accounts Receivable Short term investments
Examples of long-term assets
Property, Plant, and equipment
Investments
Goodwill
Patents
Current liabilities
Liabilities expected to be resolved within one year. Presented in order of maturity, usually starting with accounts payable.
Examples: Accounts payable Short term debt Bonds or dividends payable within the next year Income tax payable Accrued expenses Deferred revenue
Examples of long-term liabilities
Notes payable
Capital lease obligations
Bonds payable (non-current)
Balance Sheet shows what a company has as of what
A certain date, usually December 31.
Current Ratio
Used to evaluate current assets compared to current liabilities. Does the company have enough short term resources to cover their short-term liabilities. You want to see a ratio of at least 1 to show that the company has more current assets than current liabilities.
= Current assets/current liabilities
Quick ratio
More telling version of the current ratio, with inventory taken out of the equation.
= (Current Assets - Inventory)/ Current Liabilities
Debt to equity ratio
The ratio of what is owed to what is owned
= Total Liabilities/Shareholders’ Equity
Goods that are out on consignment should be included…
In the company’s inventory at their cost.
Money collected in advance for a product will go where
Liabilities section as deferred revenue. The transactions has created a “liability” to provide goods or services to the customer who has now paid in advance.
Gift Cards/gift certificates go where?
Deferred revenue until they are either used and become revenue, or if they expire, they become revenue when they expire.
Income statement
Revenues and expenses are from direct business activities, and gains or losses result from non-business activities such as a manufacturing company selling old equipment.
How is an income statement organized
Show a company’s activities for the year with the end result being net income.
Sales -COGS Gross Income -Selling, General & admin expenses -Depreciation Operating income \+/- Misc. revenue/gains/expenses/losses (interest income, misc. expenses) Income before tax -income tax expense Income from continuing operations \+/- Income from discontinued operations Net income
Multiple Step Income Statement vs Single Step Income Statement
Single step income statement is very simplified and just lumps revenues and gains together and then expenses and losses together, netting the two leaving net income
Multiple step income statement breaks things out so that investors can see gross profit, operating income, and then non-operating revenue/gains/losses separate from operating income, which all together is income from continuing operations. The last item is income from discontinued operations-if there is any- and then finally net income.
Amortization of a discount on a note payable is what?
Interest expense (it is a contra liability on the balance sheet and as it’s amortized it’s recognized on the income statement as an interest expense).
Gross Margin
Gross Profit/net sales
Measures the percentage of sales available for expenses and profit after subtracting COGS.
Profit Margin
Net Income/Net Sales
Measures the percentage of sales that becomes profit.
Earnings per share
Net income/weighted avg # of common shares outstanding.
Measures net income on a per share basis
Statement of comprehensive income
Shows a total picture of all operating income, gains & losses.
Net income + other comprehensive income = Comprehensive Income
Other comprehensive income items
Unrealized gains or losses on AFS securities
Unrecognized gains or losses from pension costs
Foreign currency translation adjustments
Unrealized gains or losses from certain derivative transactions
Comprehensive income presentation (two ways)
In combination with the income statement: Other comprehensive income would be added just below ‘net income’.
Or as a separate statement: You’d have the income statement and a separate statement of comprehensive income. The separate statement starts with net income and then reports other comprehensive income.
Reclassification Adjustments
“Accumulated other comprehensive income” (AOCI) is reported in the shareholders’ equity section of the balance sheet. The OCI items are accumulated there until the gain is realized (such as an AFS security actually being sold), and then will be reclassified through net income and the AOCI is reduced by that amount, otherwise these gains would be counted twice. These reclassification adjustments are reported in the notes to the financial statements.
