ch02 - CHAPTER 2 A Further Look at Financial Statements...

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CHAPTER 2 A Further Look at Financial Statements Study Objectives 1. Identify the sections of a classified balance sheet. 2. Identify and compute ratios for analyzing a company's profitability. 3. Explain the relationship between a retained earnings statement and a statement of stockholders' equity. 4. Identify and compute ratios for analyzing a company's liquidity and solvency using a balance sheet. 5. Use the statement of cash flows to evaluate solvency. 6. Explain the meaning of generally accepted accounting principles. 7. Discuss financial reporting concepts. Study Objective 1 - Identify the Sections of a Classified Balance Sheet In a classified balance sheet companies often group similar assets and similar liabilities together as they have similar economic characteristics. The groupings help users to determine (1) whether the company has enough assets to pay its debts and (2) the claims of short-and long-term creditors on the company's total assets. A classified balance sheet generally contains the following standard classifications: Current Assets Assets that are expected to be converted to cash or used in the business within a short period of time, usually one year Examples of current assets: cash, short-term investments (which include marketable securities), receivables (accounts receivable and notes receivable), inventories, supplies, and prepaid expenses (rent, insurance, advertising). On the balance sheet, current assets are listed in the order in which they are expected to be converted into cash (order of liquidity). 2-1
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Long-Term Investments Assets that can be converted into cash, but whose conversion is not expected within one year. Assets not intended for use within the business. Examples are investments of stocks and bonds of other corporations. Property, Plant, and Equipment Assets with relatively long useful lives. Assets used in operating the business. Examples include land, buildings, machinery, delivery equipment, and furniture and fixtures. These are listed in the order of permanency. Record these assets at cost and depreciate them (except land) over their useful lives. The full purchase price is not expensed in the year of purchase because the assets will be used for more than one accounting period. Depreciation is the practice of allocating the cost of assets to a number of years. Depreciation expense is the amount of the allocation for one accounting period. Accumulated depreciation is the total amount of depreciation that has been expensed since the asset was placed in service. Cost less accumulated depreciation is reported on the balance sheet. Intangible Assets Noncurrent assets. Assets that have no physical substance.
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ch02 - CHAPTER 2 A Further Look at Financial Statements...

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