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Bowen Liu TOPICAL OUTLINE FOR EXAM 1 Chapter 1 Know the definitions of assets, liabilities and stockholders’ equity o Assets: Resources owned by a business. o Liabilities: The debts and obligations of a business. Liabilities represent the amounts owed to creditors. o Stockholders’ equity: The stockholders’ claim on total assets. Understand the financial statements and be familiar with what items are reported on each (statement of cash flows is not on this exam) Know the order in which the financial statements are prepared and why Know how to calculate of net income o Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses Know how to calculate the amount of retained earnings at the end of the year Understand the accounting equation Chapter 2 Know the parts/sections of the classified balance sheet o Assets: 1. Current assets: assets that a company expects to convert to cash or use up within one year. IN THE ORDER OF LIQUIDITY. Cash Short-term investments (such as short-term US government securities) Receivables (notes, accounts, and interest) Inventories Prepaid expenses (insurance and supplies) Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or long-term. 2. Long-term investments: are generally investments in stocks and bonds of other corporations that are normally held for many years. 3. Property, plant, and equipment: are assets with relatively long useful lives that a company is currently using in operating the business. Land, buildings, machinery and equipment, delivery equipment, and furniture. 4. Intangible assets: Assets that do not have physical substance. o Liabilities and Stockholder’s Equity: 1. Current liabilities: obligations that companies reasonably expect to pay within the next year or operating cycle, whichever is longer. Accounts payable, wages payable, bank loans payable, interest payable, taxes payable, and current maturities of long-term obligations. 2. Long-term liabilities: are obligations that a company expects to pay after one year. Bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. IN THE ORDER OF MAGNITUDE. 3. Stockholders’ equity: common stock and retained earnings Be able to calculate working capital, current ratio, debt to total assets, and earnings per share 1
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Bowen Liu o Earnings per share = Net income - Preferred stock dividendsAverage common shares outstanding o EPS measures the net income earned on each share of common stock. o
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