Definitions
Working Capital: current assets- current liabilities
Current Ratio: Current Assets/Current Liabilities
Free Cash Flow: Operating cash flow
Contra Asset: An asset account which is expected to have a credit balance (as opposed to a normal debit balance)
Liquidity: How easily something can be turned into cash
Profitability Ratios: How efficient a company is at making money
Liquidity Ratios: How quickly could a company pay off short term debts
Deferrals: Expenses paid in cash before used, or cash received for service not yet performed
Accruals: Revenue for service performed but not yet paid for, or expenses incurred but not yet paid for.
Depreciation: Paying for something over its expected lifetime; spread evenly
Terms
Materiality: Is it big enough to matter
Faithful Rep: Is it complete, unbiased, and accurate
Comparability: different companies use same accounting principles
Consistency: The company uses same accounting principles every year
Verifiable: different independent auditors, using standard methods (GAAP) come up with same results
Timely: Recent enough to have value (within 60 days)
Understandability: clear
“Recognize”=”Record”=”Book”= transaction date
Assumptions
Monetary unit assumption: Include in the financial statements only those things that can be measured in dollars.
Economic Entity Assumption: Must be able to separately identify the transactions of each company from those of others
Periodicity Assumption: Economic activity can be broken down into discreet time periods
Going-concern assumption: A business will stay in business for the near future
Periodicity Assumption: Business activity is divided into artificial time (months, quarters, fiscal years)
Government and other users need accounting information for those periods of time
Companies recognize revenue when performance obligation is satisfied
Sales revenue earned when merchandise reaches customers Not when ordered
Service revenue earned with completion of service
Expenses recognized in same period as the revenue with which they are associated
Inventory expense is recognized when the inventory is sold to customers, not when inventory is purchased by company
Accounting Rules
GAAP: Generally Accepted Accounting Principles
FASB: Written by Financial Accounting Standards Board
IFRS: International Financial Reporting System
Assets
Cash
Accounts receivable
Inventory
Supplies
Pre-paid items (rent, insurance)
Long term investments (stock in other companies)
Property & Equipment
Tax assets
Patents, trademarks, and copyrights
Depreciation (a contra-asset)
Assets on Balance Sheet
Broken down as “current” or “long term”
Listed in order of liquidity (Cash is always first)
Accounts receivable are very liquid
Long term assets
Assets the company plans to keep for more than a year
Liabilities
Notes Payable
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Taxes Payable
Bonds Payable
Mortgages
Deferred Tax Liabilities
Dividends payable
Bonds payable
Liabilities on Balance Sheet
Broken down as current or long term
Long term debt that matures within a year moves to current debt
Stockholders Equity
Common Stock
Preferred Stock
Retained Earnings
Dividends
Revenues
Service revenue
Sales revenue
Sales discounts
Sales returns and allowances
Interest revenue
Expenses
Administrative expenses
Amortization expense
Bad debt expense
Cost of goods sold
Depreciation expense
Income tax expense
Insurance expense
Interest expense
Maintenance and repairs expense
Rent expense
Salaries and wages expense
Supplies expense
Utilities expense
Not on balance sheet
Revenues and expenses (Income Statement)
Dividends paid (Statement of retained earnings
Normal Balances
Assets= Debit
Contra Asset= Credit
Liability= Credit
Contra liability= Debit
Owners Equity= Credit
Stockholders Equity= Credit
Owners
