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CHAPTER 2 Summary - CHAPTER 2 CONSTRUCTING FINANCIAL...

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CHAPTER 2 CONSTRUCTING FINANCIAL STATEMENTS Reporting Financial Condition The balance sheet is a company s financial report card o 3 components: assets, liabilities, and stockholders equity Balance sheet accounts carry over from one period to the next o ^^ the ending balance from one period becomes the beginning balance for the next Assets Asset a resource that is expected to provide a company with future economic benefits o When a company incurs a cost to acquire future benefits, that cost is capitalized and an asset is recorded o 2 characteristics: Must be owned or controlled by company (by cash, trading assets, or assuming an obligation) Must possess expected future benefits that can be measured Benefits = expected cash receipt, receipt of other noncash assets (accounts receivable or the reduction of a liability) *companies acquire assets to yield a return for their shareholders either o Directly ex. Inventory that is sold o Indirectly ex. A manufacturing plant that produces inventory o Assets must yield income that is greater than the cost of the funds to acquire them Liquidity the ease of converting noncash assets into cash o Current assets the most liquid assets; are expected to be converted into cash or used in operations within the next year Cash currency, bank deposits, certificates of deposit, and other cash equivalents Marketable securities - short-term investments that can be quickly sold to raise cash Accounts receivable amounts due to the company from customers buying on credit Inventory goods purchased or produced for sale to customers Prepaid expenses costs paid in advance for rent, insurance, or other services o *current assets are expensive to hold must be insured, monitored, financed, etc. and generate returns that are less than those from noncurrent assets o *companies maintain just enough current assets to cover liquidity needs and not reduce income Noncurrent assets long-term o Long-term and equity investments investments in the shares of other firms that management does not intend to sell in the near future
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o Property, plant, and equipment land, factory buildings, warehouses, office buildings, machinery, office equipment, and other items used in the operations of the company o Intangible and other assets patents, trademarks, franchise rights, goodwill, and other items that provide future benefits but do not have physical substance Historical cost the original acquisition cost o o Advantage: reliability the acquisition cost can be objectively determined and accurately measured o Disadvantage: some assets can be significantly undervalued on the balance sheet (land) Fair market value current market value found from online price quotes or sources like the WSJ (marketable securities) o Advantage: relevance how useful the information is to those who use the financial
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CHAPTER 2 Summary - CHAPTER 2 CONSTRUCTING FINANCIAL...

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