TOPICAL OUTLINE FOR EXAM 1
Know the definitions of assets, liabilities and stockholders’ equity
Assets: Resources owned by a business.
Liabilities: The debts and obligations of a business. Liabilities represent the amounts owed to
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
Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not
Know how to calculate the amount of retained earnings at the end of the year
Understand the accounting equation
Know the parts/sections of the classified balance sheet
Current assets: assets that a company expects to convert to cash or use up within one year.
THE ORDER OF LIQUIDITY.
Short-term investments (such as short-term US government securities)
Receivables (notes, accounts, and interest)
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.
Long-term investments: are generally investments in stocks and bonds of other corporations
that are normally held for many years.
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.
Intangible assets: Assets that do not have physical substance.
Liabilities and Stockholder’s Equity:
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.
Long-term liabilities: are obligations that a company expects to pay
Bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension
IN THE ORDER OF MAGNITUDE.
Stockholders’ equity: common stock and retained earnings
Be able to calculate working capital, current ratio, debt to total assets, and earnings per share