Financial Accounting – Balance sheet – Flashcards
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Financial accounting system
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Used to record, summarize, and report the activities (transactions) of the business
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The three categories business activities can be grouped into
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1. Financing activities 2. Investing activities 3. Operating activities
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Financing activities
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activities associated with raising money to pay for operations of the business
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Investing activities
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activities associated with buying and selling items used to operate the business long-term (equipment, buildings, etc)
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Operating activities
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activities associated with the day to day operations of the business (provide goods or services to customers and associated costs)
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Transaction
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Anything a business does that is an exchange of something for something else
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Examples of transactions:
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- provide services or goods to costumers in exchange for cash - purchase a delivery truck and pay cash for the truck - pay an employee for work - pay a utility company for electricity provided - borrow money from the bank and agree to pay it back with interest`
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The financial accountant must track ALL transactions and record them, summarize them, and report the financial position and results of the operations of the company
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The 4 financial statements
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1. Balance sheet 2. Income statement (statement of operations) 3. Statement of stockholder's equity (or owner's equity) 4. Statement of cash flows
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Generally Accepted Accounting Principles ("GAAP")
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A set of guidelines established by various accounting standard setting authorities in consultation with accounting professionals that give guidance on: 1. What type of financial info must be provided 2. What format to use to provide information 3. How to measure and quantify items reported on the financial statements
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Financial Accounting Standards Board ("FASB")
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FASB is currently the primary accounting standards setting authority in the U.S. It is part of GAAP
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International Accounting Standards Board ("IASB")
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The primary current accounting standards setting authority for many countries outside of the US
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Securities and Exchange Commission ("SEC")
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The gov agency that oversees US financial markets and accounting standards for public companies
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Footnotes
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Additional information provided after the financial statements
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Auditor's report
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A professional accounting firm examines the company's financial statements and gives a report that determines if the statements are fairly stated in accordance with GAAP
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Balance Sheet
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Shows what the business HAS (assets), OWES (liabilities), and amount OWNED (assets - liabilities). Balance sheet is cumulative - shows the total of all that has occurred since the company began business. The amount reported for cash is the NET of all the cash received and cash paid since the company's first day of business
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Income Statement
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Shows the amount of business earned during a period of time. Net income or loss = revenues - expenses Income statement is for a period of time - it is NOT cumulative - shows two or three comparable periods (a month, quarter, or year)
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Statement of owner's/stockholder's equity
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Shows the activity related to owners (stockholders) during a period of time Shows receipt of funds from the owners (issue stock) and payments back to the owners (dividends) Shows the net the business earned for the owners The statement of owner's equity is for a period of time - shoes what occurred that affected the owners during the month, quarter, or year
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Statement of Cash Flows
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Shows where the company's cash comes from and what the cash was used for during a period of time - it is NOT cumulative Shows three sections: 1. Cash from operating activities 2. Cash from investing activities 3. Cash from financing activities Cash is not the same thing as income. Goods or services can be provided to a customer and the customer might pay the company in a different period A company can incur costs to provide goods or services to customers and the company might pay for the cost in a different period
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Dividends
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money paid to owners
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In the statement of cash flows, the operating section means
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how much cash was generated from day to day operations
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In the statement of cash flows, the investing section means
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cash related to buying and selling long-term assets used in the business
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In the statement of cash flows, the financing sections means
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cash related to borrowing and repaying debt, or payments to or from owners
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"revenues" keyword
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earned
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cumulative earnings for the company
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retained earnings
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Assets
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A company's economic resources used to operate the business (what the company HAS)
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3 characteristics of assets in order to be reported on the balance sheet
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1. provide "probable" future economic benefit" 2. Be owned or controlled by the company 3. Be a result of a past transaction
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Money spent is called a "cost" or an "expenditure"
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A "cost" can only be reported on the balance sheet as an ASSET, if there is probable future economic benefit. When the asset is used or converted to cash, the asset becomes and "expense" bc there is no longer probable future economic benefit Expenses are not reported on the balance sheet (they are reported on the income statement)
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ALL ASSETS with what exception WILL EVENTUALLY BE REMOVED FROM THE BALANCE SHEET WHEN THE ASSET IS USED IN THE DAY TO DAY BUSINESS OR EXCHANGED FOR CASH?
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with the exception of cash
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Liabilities
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The company's debts and obligations (what the company OWES)
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3 characteristics of liabilities in order to be reported on the balance sheet
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1. require probable use of a future economic benefit (an asset) 2. be owed 3. result from a past transaction
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A LIABILITY WILL BE REMOVED FROM THE BALANCE SHEET ONCE IT IS PAID
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Owner's/Stockholder's equity
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Earnings kept in the company and financing provided by the owners
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3 characteristics of owner's/stockholder's equity in order to be reported on the balance sheet
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1. owner investments in the company (cash contributed in return for ownership) 2. Less: payments to owners (dividends) 3. Plus: profits and losses (net income)
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What is the stockholder's equity equal to?
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total assets - total liabilities
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liquidity
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when the asset is expected to convert into cash and the liability is expected to be paid
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current assets
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expected to be used or collected in cash within one year or less
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current liabilities
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expected to be paid within one year or less
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property, plant, and equipment
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physical assets expected to be used for more than one year
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intangible assets
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non-physical assets expected to be used for more than one year
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long-term liabilities
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expected to be paid in more than one year
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Assets
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- cash and cash equivalents - inventory - prepaid expenses - supplies - short-term investments
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Total current assets
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- long-term investments - long-term notes receivable
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Liabilities
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- accounts payable - short-term notes payable - current maturities of long-term debt
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Total current liabilities
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- long-term debt (or LT notes payable) - bonds payable
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Property/Plant/Equipment (P/P/E)
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- land - buildings - furniture and fixtures - equipment - vehicles
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Intangible assets
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- goodwill - patents, net - copyrights, net - trademarks, net
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Stockholder's equity
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- common stock - retained earnings
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Accounts
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used to describe what the company has, owes, and owns and what changes with each transaction a company uses accounts that are descriptive of the business common account names are used by companies bc day to day transactions are very similar
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Prepaid expense
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always an asset bc future benefit has been paid ahead
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Payable
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always a liability bc it indicates an amount will have to be paid
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Debt
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always a liability bc it indicates an amount will have to be paid
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Historical cost
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the current value of everything that is exchanged - can be cash, another asset or liability that must be repaid, or a combination
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Short-term or current
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means that the cash is expected to be collected or paid in more than 1 year
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Long-term or non-current
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means that the cash is expected to be collected or paid in more than 1 year
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the "operating cycle"
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the time it takes the company to spend cash to do business and get the cash back again typically less than one year, but it can take longer
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Operating cycle's typical transactions:
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1. purchase assets to be sold to customers 2. pay for assets purchased 3. sell assets or provide service to customers 4. collect from customers
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Current assets and current liabilities
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they will change as the company carries out the business activities of the operating cycle
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Cash (part of assets)
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money or any instrument that banks will accept for deposit to a company's account includes: checks, money orders and bank drafts
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Cash equivalents
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investments with maturities of 3 months or less, readily convertible into cash with a market value unlikely to change includes: CDs, treasury bills, commercial paper
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Inventory
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items held only for sale to the customer total inventory increases when the company purchases goods only to sell to customers total inventory decreases when the company provides goods to customers
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Prepaid expenses
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amounts the company pays in advance before a service is provided prepaid expense increases when the company makes a payment before the service is provided to them
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Supplies
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items that are used up in day to day operations that must be continuously replaced
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Investments and marketable securities
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a financial instrument that is purchased for the purpose of earning money on the investment an investment increases when the company takes excess cash and purchases (invests in) a financial instrument (stocks or bonds) to earn more money an investment decreases when the company sells the investments for cash
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Notes receivable
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amounts owed to the company normally interest is charged and the note is repaid in longer than 3 months notes receivable occurs when the company loans its cash to another party - the company charges interest for providing the service of loaning the money
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P/P/E
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assets used long-term in the day to day operations to generate revenues
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Intangible assets
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assets used long-term to generate revenues the company has an exclusive right to do something and there is no physical substance
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Other long-term assets
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assets held for more than one year that do not fit into the other long-term asset categories
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accounts payable (part of liabilities)
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amounts owed to suppliers normally paid in 30-60 days occurs when the company buys inventory or supplies and the company does not pay for it when received
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suppliers?
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those who provide inventory and services over and over again, each month
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Short-term notes payable
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amounts owed from borrowing from a bank or a financing company liability occurs when the funds are received from the bank or financing company liability is gen. decreased each period as a payment is made to repay the liability
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Commercial paper
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amounts owed from borrowing from investors
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Current maturities of long-term debt
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the portion of long-term debt that will be repaid within 1 year or less
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Long-term notes payable or long-term debt
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amounts owed to banks and other financing companies that will be paid later than 1 year from now
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Bond payable
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amounts owed to investors (normally LT)
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Owner's equity has two parts:
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1. amounts received from investors in exchange for ownership 2. the cumulative net income (total of all years) that is re-invested in the company and has not been paid back to owners in the form of dividends
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Common stock
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money received from investors in exchange for ownership
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Retained earnings
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total of all years' profits and losses less all year's dividends paid to owners 1. ending retained earnings is reported in the balance sheet 2. net income or net loss and dividends are NOT reported on separate line items on the balance sheet (they are included in the total retained earnings) 3. the statement of owner's equity will report what happened during the year to change retained earnings
