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Accounting Ch 2 Book notes

by: Alikhan Ladhani

Accounting Ch 2 Book notes ACCT 2101

Marketplace > Georgia State University > ACCT 2101 > Accounting Ch 2 Book notes
Alikhan Ladhani
GPA 3.2

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Consist notes from the book
Principle of accounting
Kris J. Clark
Class Notes
Accounting, ACCT
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This 7 page Class Notes was uploaded by Alikhan Ladhani on Thursday January 28, 2016. The Class Notes belongs to ACCT 2101 at Georgia State University taught by Kris J. Clark in Spring 2016. Since its upload, it has received 109 views.


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Date Created: 01/28/16
CH 2.1 THE CLASSIFIED BALANCE SHEET • To improve users understanding of companys financial postion companies will use a classified balance sheet o Classified balance sheet groups together similar assets and similar liabilities using a number of standard classifications and sections. What is grouped is seen below Assets Liabilities & stockholders equity Current assets Current liabilities Long term investment Long term liabilities Property, plant, Stockholder equity equipment Intangible assets § Current assets consists of ú Cash, debt investment, accounts receivable, notes receivable inventory, supplies, prepaid insurance, § Long term investment consists of ú Stock investment, investment in real estate § Property, plant… ú Land, equipment § Intangible assets… ú Patents § Current liabilities… ú Notes payable, accounts payable, unearned sales revenue, salaries and wages payable, interest payable § Long term liabilities… ú Mortgage payable, notes payable § Stockholders equity… ú Common stock, retained earnings CURRENT ASSETS • Current assets – assets that a company expects to covert to cash or use up within one year or its operating cycle, whichever is longer o Most businesses consider current assets as thing that will be used within one year of the balance sheet date § Ex. Account receivable are current assets because the company will collect and convert them into cash within one year § Ex. Supplies is a current asset because the company expects to use the supplies in operations within one year. • Some companies operating cycle is longer than one year when they classify assets and liabilities o Operating cycle- the average time required to go from cash to cash in producing revenue—to purchase inventory, sell it on account, and then collect cash from customers § Some companies may take less than a year but others take longer ú Ex. Of longer are airplane and ship manufactures • Common types of assets and the order they need to be in when making a balance sheet. They are in this order this way because companies list them in the order they will expect to convert them in to cash o (1) cash, o (2) investments (such as short-term U.S. government securities), o (3) receivables (accounts receivable, notes receivable, and interest receivable), o (4) inventories, and o (5) prepaid expenses (insurance and supplies) LONG TERM INCETMENTS • long term investments o investments in stocks and bonds of other corporations that are held for more than one year o long-term assets such as land or buildings that a company is not currently using in its operating activities o long term notes receivable o ** long term investments can be referred to as investments PROPERTY, PLANT, AND EQUIPMENT • Property, plant, and equipment- are assets that last a long time and are currently used in operating the businesss • Depreciation- sharing the cost of an assets to a number of years o Companies do this by assigning a portion of the assets cost as an expense each year (instead of doing the full purchase price for one whole year) o The assest the company depreciates are reprted on the balance sheet at cost less accumulated depreciation o Accumulated depreciation- shows the total amount of depreciation that the company has expensed so far of the assets life o **Property, plant, and equipment is sometimes called fixed assets or plant assets INTANGIBLE ASSETS • Intangible assets- assets that do not have physical substance and yet often are very valuable o Common types are goodwill, patents, copyright and trademarks or trade names CURRENT LIABILITES- • current liabilities- obligations that the company is to pay within the next year or operating cycle, whichever is longer o ex. Accounts payable, salaries, wages payable, notes payable, interest payable and income taxes payable LONG TERM LIABILITES • Long term liabilities (long term debt)- obligations that a company expects to pay after one year o Includes bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities o Most companies report long term debt maturing after one year as a single amount in the balance sheet and show details of it in the notes while others list the various long term liabilities STOCKHOLDERS EQUITY • There are two parts o Common stock- investments of assets into the business by the stockholders o retained earnings- income retained for use in the business • the two parts make up the stockholders equity • **common stock also called capital stock CH 2.2 USING THE FINANCIAL STATEMENTS RATIO ANALYSIS • Ratio analysis- expresses the relationship among selected item of financial statement data • Ratio- expresses the mathematical relationship between one amount and another o for analysis of primary financial statements ratio is classified as followed § profitable ratios- measure the income or operating success of a company for a given time period § liquidity ratios- measures short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash § solvency ratios- measure the ability of the company to survive over a long period of time • single ratio by itself has no meaning o intracompany comparisons- covering two yrs of ratio for the same company o industry average comparison- average ratios for particular industries o intercompany comparisons- comparisons with a competitor in the same industry USING THE INCOME STATEMENTS • The income statement shows how successful a company is at making a profit from its sales • It reports the amount earned during the period (revenue) and the cost during the period(expenses) • To evaluate the profitability of a company you will use ratio analysis, which is the Profitability ratios EARNINGS PER SHARE • Earnings per share(EPS)- measures the net income earned on each share of common stock ▯▯▯ ▯▯▯▯▯▯▯▯▯▯▯▯▯▯▯▯ ▯▯▯▯▯▯▯▯▯ • ???????????? = ▯▯▯▯▯▯▯ ▯▯▯▯▯▯ ▯▯▯▯▯▯ ▯▯▯▯▯▯▯▯▯▯ • a higher EPS suggest improved performance • What is “earnings available to common stockholders”? It is an earnings amount calculated as net income less dividends paid on another type of stock, called preferred stock • It is best to compare earnings per share of a single company over time than across companies because the wide variations in the numbers of shares of outstanding stock among companies USING THE STATEMENT OF STOCKHOLDRS EQUITY • Stockholders equity comprised of two parts o retained earnings and common stock • stockholders equity is affected by factors other than changes in retained earnings o ex. Company issuing or retire shares of common stock § companies will then use a statement of stockholders equity rather than retained earnings statement § statement of stockholders equity- A financial statement that presents the causes of changes to stockholders' equity during the period, including those that caused retained earnings to change. USING A CLASSIFIED BALANC SHEET • Liquidity- its ability to pay obligations expected to become due within the next year or operating cycle • working capital o working capital- (one measure of liquidity) difference between the amounts of current assets and current liabilities § WORKING CAPITAL= CURRENT ASSETS – CURRENT LIABILITES o When current assets exceed current liabilities, working capital is positive. Meaning that the company will be able to pay its liabilities o When working capital is negative, company may not be able to pay short term creditors and the company will be forced in to bankruptcy • Current ratio o Liquidity ratios- measure the short term ability of company to pay its maturing obligations and to meet unexpected needs for cash § Current ratio- one type of liquidity ratio calculated as ▯▯▯▯▯▯▯ ▯▯▯▯▯▯ § ???????????????????????????? ???????????????????? = ▯▯▯▯▯▯▯ ▯▯▯▯▯▯▯▯▯▯▯ ú measures for every current liability how much current assets the company has SOLVENCY • Solvency- ability to pay interest as it comes due and to repay the balance of a debt due at its maturity • Solvency ratios- measure the ability of the company to survive over a long period of time DEBT TO ASSETS RATIO • Debt to assets ratio- measure of solvency calculated as total liabilities divided by total assets. It measures the percentage of total financing provided by creditors • Debt financing is more risky than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. • ???????????????? ???????? ???????????????????????? ???????????????????? = ▯▯▯▯▯ ▯▯▯▯▯▯▯▯▯▯▯ ▯▯▯▯▯ ▯▯▯▯▯▯ • ** Some users evaluate solvency using a ratio of liabilities divided by stockholders' equity. The higher this “debt to equity” ratio, the lower is a company's solvency. Ch 2.3 Financial Reporting Concepts The Standard Setting Environment • Securities and Exchange Commission (SEC) is the agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies • Financial Accounting Standards Board (FASB) is the primary accounting standard-setting body in the United States Qualities of Useful Information • Relevance- makes a difference in a business decision o predictive value- helps provide accurate ecpectations about the future o confirmatory value- confirms or corrects prior expectations • Faithful representation- information accurately depicts what really happened o Complete (nothing important has been omitted), neutral (is not biased toward one position or another), and free from error. • The FASB and ISAB find mulitpe enhancing qualities useful (comparability, consistency, verifiability, timeliness, understandability) o comparability results when different companies use the same accounting principles. o Consistency company uses the same accounting principles and methods from year to year. o verifiable independent observers, using the same methods, obtain similar results o timely must be available to decision-makers before it loses its capacity to influence decisions (SEC requires companies to provide annual reports within 60 days of their year end) o understandability presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning. • Fiscal year- accounting period that is one year. Does not have to end on dec 31 Assumption in Financial Reporting • Monetary unit assumption- things that can be expressed in money • Economic entity assumption- tates that every economic entity can be separately identified and accounted for. • periodicity assumption states that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business • going concern assumption states the business will remain in operation for the foreseeable future. Principles in Financial Reporting • historical cost principle (or cost principle) dictates that companies record assets at their cost o ex buy land for $1,000 over time the value increases to $2,000. Will report it as $1,000 • fair value principle- indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability) • full disclosure principle requires that companies disclose all circumstances and events that would make a difference to financial statement users •


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