Week 2 Notes- Chapter 2: Further Look at Financial Statements
Week 2 Notes- Chapter 2: Further Look at Financial Statements Accy 206
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This 5 page Class Notes was uploaded by Khaylian Leflore on Friday September 4, 2015. The Class Notes belongs to Accy 206 at Northern Illinois University taught by Mark Hogan in Fall 2015. Since its upload, it has received 188 views. For similar materials see Introduction to Financial Accounting in Accounting at Northern Illinois University.
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Date Created: 09/04/15
Week 2 Notes Chapter 2 Further Look at Financial Statements Key Terms Current assets cash and other assets that a company expects to convert to cash use or sell Within one year or the operating cycle Whichever is longer Operating cycle the average time it takes from the purchase of inventory to the collection of cash from customers Aka the cash to cash cycle Long term investments investments in stocks and bonds of other corporations that are held for more than one year Property plant and equipment PPE includes land buildings equipment delivery vehicles and furniture Depreciation allocating the cost of PPE over a number of years resulting in depreciation expense Accumulated depreciation total amount of deprecation expensed thus far in the asset s life Intangible assets assets that do not have physical substance Current liabilities obligations the company is to pay Within one year or operating cycle Whichever is longer Current maturities payments to be made Within the next year on long term obligations Long term liabilities obligations a company expects to pay after one year Common stock investments of assets into the business by the stockholders Retained earnings income retained for use in the business Generally accepted accounting principles GAAP a set of rules and practices having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purposes Relevance when accounting information would make a difference in a business decision Information has to have 1 Predictive valuehelps provide accurate expectations about the future 2 Confirmatory valueconfirms andor corrects prior expectations 3 Materiality when an item s size makes it likely to in uence the decision of an investor or creditor Faithful representation when information accurately depicts what really happened during the operating cycle Information must be complete neutral and free from material error Comparability results when different companies use the same accounting principles Consistency when a company is using the same accounting principles and methods from year to year Monetary unit requires that only those things that can be expressed in money are included in the accounting records Economic entity states that every economic entity can be separately identified and accounted for Periodicity states that the life of a business can be divided into artificial time periods Going concern the business will remain in operation for the foreseeable future Historical cost aka cost principle dictates that companies record assets at their cost Fair value FV indicates that assets and liabilities should be reported at fair value the price received to sell an asset or settle a liability Full disclosure requires that companies disclose all circumstances and events that are relevant so info is transparent Ratio analysis expresses the relationship among selected items of financial statement data Profitability ratios measure the income or operating success of a company for a given period of time Liquidity ratios measure 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 Earnings per share EPS measures the net income earned on each share of common stock EPS net income preferred dividends Average common shares outstanding Liguidity the ability to pay obligations expected to become due Within the next year or operating cycle Working Capital Current Assets Current Liabilities Liquidity ratios measure the short term ability to pay maturing obligations and to meet unexpected needs for cash Current Ratio Current Assets Current Liabilities Solvency the 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 a company to survive over a long period of time Debttoassets ratio measures the percentage of total financing provided by creditors rather than stockholders DebttoAssets Ratio Total Liabilities Total Assets Free cash ow a measurement to provide additional insight regarding a company s cash generating ability Free Cash Flow cash provided by operation capital expenditure cash dividends Key Ideas of the Chapter 0 Current vs Longterm assets and liabilities o Materiality 0 Going concern 0 Cost vs FV 0 Earnings per share 0 WC and Current Ratio 0 Free Cash Flow
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