Professional Documents
Culture Documents
Balance Sheet
Assets
To be reported on a balance sheet, an asset must
Liquidity refers to the ease of converting a noncash asset to cash. Asset portion of the balance sheet is divided into Current and Noncurrent Assets
Current assets comprise assets that can be converted to cash within a year Noncurrent assets (long-term assets) cannot be easily converted to cash within a year.
Historical Cost is
Objective Verifiable Therefore, not subject to bias
However, historical cost is not particularly relevant to most readers of the balance sheet Relevance vs. Reliability is an important issue with accountants.
Liabilities
Companies desire more current assets than current liabilities this difference is called net working capital
Equity
Equity consists of:
Contributed Capital (cash raised from the issuance of shares)
Earned Capital (retained earnings). Retained Earnings is updated each period as follows:
Income Statement
Income Statement
Revenues are increases in net assets as a result of business activities. Expenses are the outflow or use of assets to generate revenues, including costs of products and services sold, operating costs like wages and advertising, and nonoperating costs like interest on debt.
Accrual Accounting
Accrual accounting refers to the recognition of revenue when earned (even if not received in cash) and the matching of expenses when incurred (even if not paid in cash).
Accrual Accounting
Accrual accounting rests on two guiding principles: Revenue Recognition Principle record revenue when Earned Realized or Realizable Matching Principle record expenses when Incurred Neither the recognition of revenue nor the recording of expense necessarily involves the receipt or payment of cash
Accrual Example
Assume the following: Purchase of $100 of inventory on account Sale of all of the inventory for $150 on account Employees earn $20 of wages to be paid next period
Transitory Items
Discontinued operations: net income or loss from business segments that are up for sale or sold in the current period Extraordinary items: revenue and expenses that are both unusual and infrequent Changes in accounting principles: cumulative income or loss from changes in accounting methods (may be reflected in income from continuing operations in the future)
Transitory Items
Income from Continuing Operations may still contain transitory items: Gains (losses) on asset sales Restructuring expenses Asset write-downs Accruals
Contributed capital Retained earnings (including Other Comprehensive Income or OCI) Treasury stock
Statement of cash flows (SCF) reports cash inflows and outflows Cash flows are reported based on the three business activities of a company:
1. Operating activities: transactions related to the operations of the business. 2. Investing activities: acquisitions and divestitures of long-term assets 3. Financing activities: issuances and payments toward equity, borrowings, and long-term liabilities.