Chapter 1 & 2 Review Exam - 3/1/2018

= + Liabilities Equity Assets Accounting Equation Liabilities & Equity The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because in a general way it states that assets must be equal to the claims against those assets. If you have an asset we can have two broad categories of claims against that asset. First, we may have claims by creditors for liabilities. Finally, after all creditor claims are satisfied, the residual owners, and stockholders, have a claim on those assets. Assets

Resources owned or controlled by a company Assets – What you OWN Cash Accounts RECEIVABLE Notes RECEIVABLE Resources owned or controlled by a company Land Prepaid Expenses Assets may be viewed as resources owned or controlled by a company. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies. Buildings Store Supplies Equipment

Creditors’ claims on assets Liabilities – What you OWE Accounts PAYABLE Notes PAYABLE Creditors’ claims on assets Liabilities represent the claims of creditors on the entity’s assets. Liabilities include accounts payable (amounts we owe to creditors for assets purchased on account), notes payable, taxes payable, and wages payable (amounts we owe to our employees at the end of the accounting period). Wages PAYABLE Taxes PAYABLE

Financial Statements 3) Balance Sheet** (Assets, Liabilities & Equity) 1) Income Statement* (Revenues – Expenses = Net Income) 2) Retained Earnings Statement* (Income – Dividends) * Represents a period of time (i.e. Jan 1 –Dec 31) ** Represents a single point of time (i.e Dec 31) LO 4 Describe the content and purpose of each of the financial statements.

Income Statement Was I profitable? Illustration 1-4 LO 4 Describe the content and purpose of each of the financial statements.

Retained Earnings Statement Statement shows amounts and causes of changes in retained earnings during the period. Time period is the same as that covered by the income statement. Users can evaluate dividend payment practices. Illustration 1-5 Helpful Hint The heading of this statement identifies the company, the type of statement, and the time period covered by the statement. LO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users 2) Retained Earnings Statement 1) Income Statement Illustration 1-4 Illustration 1-5 Net income is needed to determine the ending balance in retained earnings. LO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users Retained Earnings Statement Balance Sheet Ending balance in retained earnings is needed in preparing the balance sheet. LO 4 Describe the content and purpose of each of the financial statements.

The Classified Balance Sheet - Assets Illustration 2-2 LO 1

Classified Balance Sheet – Current Assets Illustration 2-3 Assets that a company expects to convert to cash or use up within one year. Companies list current asset accounts in the order they expect to convert them into cash. CASH is always first & I like to see ACCOUNTS RECEIVABLE second. LO 1 Identify the sections of a classified balance sheet.

Classified Balance Sheet – LT Investments Investments/Long-Term Investments Investments in stocks and bonds of other corporations that are held for more than one year, LT notes receivable Property, Plant, and Equipment/Fixed Assets/Plant Assets (Long-term Asset) It has a long useful life (>one year). Currently used in operations. Includes land, buildings, equipment, delivery vehicles, and furniture. Depreciation – allocating/expensing the cost of an asset over the number of years it produces revenue. Accumulated depreciation – cumulative total of depreciation expense recognized thus far in the asset’s life. LO 1

Classified Balance Sheet – Intangible Assets Helpful Hint Sometimes intangible assets are reported under a broader heading called “Other assets.” Assets that do not have physical substance. Includes goodwill, patents, copyrights, and trademarks or trade names. Illustration 2-6 LO 1

Classified Balance Sheet - Liabilities Illustration 2-2 LO 1

Classified Balance Sheet – Current Liabs Current Liabilities Obligations the company is to pay within the next year or operating cycle, whichever is longer. Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable. Also included as current liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations. LO 1 Identify the sections of a classified balance sheet.

Classified Balance Sheet – LT Liabs Long-Term Liabilities Obligations a company expects to pay after one year. Include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. Illustration 2-8 LO 1 Identify the sections of a classified balance sheet.

Classified Balance Sheet - Equity Stockholders’ Equity Common stock - investments of assets into the business by the stockholders. Retained earnings – the cumulative total of a company’s income/losses minus dividends since the business started (i.e. cumulative GPA). Illustration 2-2 LO 1 Identify the sections of a classified balance sheet.

Using the Income Statement Profitability Ratio Using the Income Statement Illustration: Earnings per share (EPS) measures the net income earned on each share of common stock. Best Buy Illustration 2-11 LO 2

Financial Ratios for Ch 2 Earnings per Share (Profitability ratio) Net Income – Preferred Dividends Average Common Shares Outstanding Working Capital (Liquidity ratio) Current Assets – Current Liabilities Debt to Assets (Solvency ratio) Total Liabilities Total Assets

Using a Classified Balance Sheet Illustration 2-13

Financial Reporting Concepts Principles in Financial Reporting Measurement Principles Historical Cost Fair Value Full disclosure Or cost principle, dictates that companies record assets at their cost. Indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Requires that companies disclose all circumstances and events that would make a difference to financial statement users. LO 7 Discuss financial reporting concepts.