Accounting Principles-Chapter 2

Accounting Principles-Chapter 2 - Chapter 2-Introduction to...

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Chapter 2-Introduction to Financial Statements The Classified Balance Sheet -Balance sheet -snapshot of a company’s financial position at any time -Classified balance sheet generally contains these standard classifications listed Assets Liabilities and Stockholder’s Equity ______ _______________________________ Current Assets Current Liabilities Long Term Investments Long-term Liabilities Property, Plant and Equipment Stockholders’ Equity -Groupings help readers determine things like: 1. Whether the company has enough assets to pay its debts as they come due 2. The claims of short and long term creditor on the company’s assets Current Assets -Current Assets -assets that a company expects to convert to cash or use up within a year -Cutoff for most businesses for classification as current assets is one year from the balance sheet date -Example accounts receivable and supplies are current assets because companies expect to convert them to cash (accounts receivable) or use them up (supplies) -Some companies use a period longer than a year because they have a longer operating cycle than a year such as vineyards or airplane manufacturers
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-Operating Cycle -the average time it takes to purchase inventory, sell it on account, and then collect cash from customers -We will assume that a company uses one year to determine whether an asset or a liability is current or long term Common Types of Assets 1. Cash 2. Short-term investments (short-term US government securities) 3. Receivables (Notes receivable, Accounts receivable, and Interest receivable) 4. Inventories 5. Prepaid expenses (insurance and supplies) -On the balance sheet companies list these in the order in which they expect them to be converted into cash (order of liquidity) -A company’s current assets are important in assessing its short-term paying ability Long Term Investments -Are generally investments in stocks and bonds of other corporations as well as long term assets such as land and buildings that a company is not currently using in its operating activities Property, Plant, and Equipment -Assets with a long useful life that a company is currently using in its business activities Includes:
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Land Buildings Machinery Equipment Delivery Equipment Furniture Depreciation Depreciation -practice of allocating the cost of assets to a number of years -Done by assigning a portion of an asset’s cost as an expense each year -The assets that a company depreciates are reported on the balance sheet at cost less accumulated depreciation -The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far in the asset’s life Intangible Assets -Assets that don’t have physical substance yet but are very valuable - Examples: patents, trademarks, trade names that give the company exclusive right of use for a specified time Current Liabilities -Obligations that a company has to pay within the coming year
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Examples of Current Liabilities Notes Payable Accounts Payable Wages Payable Interest Payable
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