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Tulane - ACCN 2010 - Class Notes - Week 6

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Tulane - ACCN 2010 - Class Notes - Week 6

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background image Classified balance sheet 1. Assets Current assets Assets that a company expects to convert to cash or use up within its operating cycle (usually one year ) Operating cycle The average time required to go from cash to cash in producing revenue Common types of current assets Cash; investments; receivables; inventories; prepaid expenses List in the order of expectations to convert into cash Long-term investments/ Investments Common types Investments in stock and bonds of other corporations ( over a year ) Long-term assets that are not currently using : buildings; land Long-term notes receivable Property, plant and equipment Assets with relatively long useful lives that are currently used in operating the business Common types Land, buildings, equipment, delivery vehicles, furniture Depreciation The allocation of the cost of an asset to a number of years Less ( minus ) Accumulated depreciation Intangible assets ( other assets ) Assets that do not have physical substance and are valuable Common types Goodwill; patents; copyrights; trademarks Liabilities and Stockholders' Equity Current Liabilities Obligations that the company is to pay within operating cycle ( usually a year ) Common types Accounts payable; salaries and wages payable; notes payable; income taxes payable; interest payable; current maturities of long-term payment (within a year ) Long-term liabilities ( long-term debt ) Obligations that a company expects to pay after one year Common types Bonds payable; mortgages payable; long-term notes payable; lease liabilities; pension liabilities Stockholders' equity = common stock/ capital stock + retained earnings Ratio Analysis 2. Intracompany comparisons Covering two years for the same company Industry-average comparisons Based on average ratios for particular industries Intercompany comparisons Based on comparisons with a competitor in the same industry Profitability Ratios Measure the income or operating success of a company for a given period of time ○ Use Income Statement
○ Earnings per share (EPS)
Measure the net income earned on each share of common stock □ Earnings available to common stockholders = Net income - Preferred dividends □ Only use EPS to compare within a single company Use EPS to compare two companies is meaningless for different amount of common stockholders □ EPS = (Net Income - Preferred Dividends) / Weighted- Average Common Shares Outstanding Liquidity Ratios Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash ○ Use Balance Sheet
○ Working Capital = Current Assets - Current Liabilities
□ Positive : likelihood to pay its liabilities □ Negative : might not be able to pay short-term debts ○ Current Ratio □ = current assets / current liabilities □ More dependable indicator of liquidity than working capital □ Weakness : do not consider the composition of current assets Solvency Ratios Measure the ability of the company to survive over a long period of time ○ Debt to Assets Ratio ( in percentage ) □ = total liabilities / total assets □ The higher the ratio, the riskier the company ○ Free cash flows = net cash - capital expenditure - cash dividends Cash-generating capability of a company 3. Accounting Standards • GAAP ( generally accepted accounting principles ) • SEC ( Securities and Exchange Commission ) ○ Oversee U.S. financial markets & accounting standard-setting bodies • FASB ( Financial Accounting Standards Board ) ○ Primary accounting standard-setting body in U.S. • IASB ( International Accounting Standards Board ) • IFRS ( International Financial Reporting Standards ) ○ Used by most countries outside of U.S. • PCAOB ( Public Company Accounting Oversight Board ) ○ Determine auditing standards
○ Review the performance of auditing firms
4. Qualities of Useful Information • Relevance ○ Provided information with predictive value and confirmatory value ○ Materiality • Faithful representation ○ Complete, neutral, free-from-error information • Others: comparability ( different companies use same accounting principle ), consistency ( same company use same accounting principle over years ), verifiability, timeliness, understandability 5. Assumptions in Financial Reporting • Monetary Unit Assumption ○ Only things can be expressed in money should be recorded in accounting ○ Things like customer satisfaction report are not recorded in accounting • Economic Entity Assumption ○ Only focus on transactions of a single company • Periodicity Assumption ○ The life of a business can be divided into artificial time periods • Going Concern Assumption ○ Assume the company will continue operating 6. Principles in Financial Reporting • Historical Cost Principle Record assets at their cost • Fair Value Principle Assets and liabilities should be reported at the price received to sell an asset or settle a liability ○ Use FVP only when market price information is readily available □ E.g. investment securities • Full Disclosure Principle Disclose all circumstances and events that would make a difference to financial statement users 7. Cost constraint Weigh the cost of providing information against the benefit that financial statement users will gain from having the information available Chapter 2 2018年2月20日 星期二 上午 12:22
background image Classified balance sheet 1. Assets Current assets Assets that a company expects to convert to cash or use up within its operating cycle (usually one year ) Operating cycle The average time required to go from cash to cash in producing revenue Common types of current assets Cash; investments; receivables; inventories; prepaid expenses List in the order of expectations to convert into cash Long-term investments/ Investments Common types Investments in stock and bonds of other corporations ( over a year ) Long-term assets that are not currently using : buildings; land Long-term notes receivable Property, plant and equipment Assets with relatively long useful lives that are currently used in operating the business Common types Land, buildings, equipment, delivery vehicles, furniture Depreciation The allocation of the cost of an asset to a number of years Less ( minus ) Accumulated depreciation Intangible assets ( other assets ) Assets that do not have physical substance and are valuable Common types Goodwill; patents; copyrights; trademarks Liabilities and Stockholders' Equity Current Liabilities Obligations that the company is to pay within operating cycle ( usually a year ) Common types Accounts payable; salaries and wages payable; notes payable; income taxes payable; interest payable; current maturities of long-term payment (within a year ) Long-term liabilities ( long-term debt ) Obligations that a company expects to pay after one year Common types Bonds payable; mortgages payable; long-term notes payable; lease liabilities; pension liabilities Stockholders' equity = common stock/ capital stock + retained earnings Ratio Analysis 2. Intracompany comparisons Covering two years for the same company Industry-average comparisons Based on average ratios for particular industries Intercompany comparisons Based on comparisons with a competitor in the same industry Profitability Ratios Measure the income or operating success of a company for a given period of time ○ Use Income Statement
○ Earnings per share (EPS)
Measure the net income earned on each share of common stock □ Earnings available to common stockholders = Net income - Preferred dividends □ Only use EPS to compare within a single company Use EPS to compare two companies is meaningless for different amount of common stockholders □ EPS = (Net Income - Preferred Dividends) / Weighted- Average Common Shares Outstanding Liquidity Ratios Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash ○ Use Balance Sheet
○ Working Capital = Current Assets - Current Liabilities
□ Positive : likelihood to pay its liabilities □ Negative : might not be able to pay short-term debts ○ Current Ratio □ = current assets / current liabilities □ More dependable indicator of liquidity than working capital □ Weakness : do not consider the composition of current assets Solvency Ratios Measure the ability of the company to survive over a long period of time ○ Debt to Assets Ratio ( in percentage ) □ = total liabilities / total assets □ The higher the ratio, the riskier the company ○ Free cash flows = net cash - capital expenditure - cash dividends Cash-generating capability of a company 3. Accounting Standards • GAAP ( generally accepted accounting principles ) • SEC ( Securities and Exchange Commission ) ○ Oversee U.S. financial markets & accounting standard-setting bodies • FASB ( Financial Accounting Standards Board ) ○ Primary accounting standard-setting body in U.S. • IASB ( International Accounting Standards Board ) • IFRS ( International Financial Reporting Standards ) ○ Used by most countries outside of U.S. • PCAOB ( Public Company Accounting Oversight Board ) ○ Determine auditing standards
○ Review the performance of auditing firms
4. Qualities of Useful Information • Relevance ○ Provided information with predictive value and confirmatory value ○ Materiality • Faithful representation ○ Complete, neutral, free-from-error information • Others: comparability ( different companies use same accounting principle ), consistency ( same company use same accounting principle over years ), verifiability, timeliness, understandability 5. Assumptions in Financial Reporting • Monetary Unit Assumption ○ Only things can be expressed in money should be recorded in accounting ○ Things like customer satisfaction report are not recorded in accounting • Economic Entity Assumption ○ Only focus on transactions of a single company • Periodicity Assumption ○ The life of a business can be divided into artificial time periods • Going Concern Assumption ○ Assume the company will continue operating 6. Principles in Financial Reporting • Historical Cost Principle Record assets at their cost • Fair Value Principle Assets and liabilities should be reported at the price received to sell an asset or settle a liability ○ Use FVP only when market price information is readily available □ E.g. investment securities • Full Disclosure Principle Disclose all circumstances and events that would make a difference to financial statement users 7. Cost constraint Weigh the cost of providing information against the benefit that financial statement users will gain from having the information available Chapter 2 2018年2月20日 星期二 上午 12:22

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School: Tulane University
Department: OTHER
Course: Financial Accounting
Professor: Christine Smith
Term: Spring 2018
Tags:
Name: chapter 2 booknote
Description: chapter 2 book note
Uploaded: 02/26/2018
4 Pages 23 Views 18 Unlocks
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