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

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CHAPTER 2 A Further Look at Financial Statements CHAPTER OVERVIEW Chapter 2 looks in depth at the classified balance sheet. You will look further at financial statements, learning how to construct ratios using a company's financial statements and how to use those ratios to analyze the company's strengths and weaknesses. You will also learn about the standard-setting environment, characteristics of accounting information, and the assumptions, principles, and constraints that underlie accounting standards. REVIEW OF SPECIFIC STUDY OBJECTIVES SO1. Identify the sections of a classified balance sheet. ¿ The balance sheet of a company presents a snapshot of its financial position at a point in time . A classified balance sheet breaks the statement components into several classifications, usually having four asset categories , two liability categories , and the one stockholders' equity category . ¿ The following are the four common asset categories : 1 . Current assets are those expected to be converted into cash or used in the business within a relatively short period of time , usually within one year. Please note that some companies use a period longer than one year because they have a longer operating cycle (the average time that it takes to spend cash to obtain or manufacture a product to sell, then to sell the product, and then to collect cash from the customer). The operating cycle is sometimes
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Kimmel Accounting: Tools for Business Decision Making 2-2 called the cash-to-cash cycle. Current assets are listed in the order in which they are expected to be converted into cash and include cash, short-term investments, receivables, inventories, and prepaid expenses . 2 . Long-term investments are investments in stocks and bonds of other corporations that are normally held for many years . This category also includes long-term assets, such as land, not currently used in the operation of the business. 3 . Property, plant, and equipment are assets with relatively long useful lives that are used in the operations of the business . Examples include land, building, machinery and equipment, delivery equipment, and furniture . These assets depreciate , or wear out with the passage of time, and their cost must be allocated to expense over the useful life of the asset. On the balance sheet, they are shown at their cost less total accumulated depreciation . (The one exception is land. Instead of depreciating, land normally appreciates.) 4 . Intangible assets are noncurrent assets that have no physical substance . They are essentially long-lived rights; examples include patents, copyrights, and trademarks or trade names . Beginning students often want to say that a patent has physical substance, that a piece of paper can be held in a hand. The piece of paper does have physical substance but is not the patent itself. It is only evidence that a patent exists. The patent is protection of invention granted by the federal government for a specified period of time. ¿ The following are the
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ch02 - CHAPTER 2 A Further Look at Financial Statements...

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