Chapter Five

Chapter Five - Accounting: Chapter Five 1 Chapter Five...

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Accounting: Chapter Five 1 Chapter Five Balance Sheet: reports the assets, liabilities, and stockholders equity of a business enterprise at a specific date Usefulness: Evaluate the capital structure, asses risk and future cash flows, and analyze the company’s liquidity, solvency, and financial flexibility Liquidity: “the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid” Solvency: the ability of a company to pay its debts as they mature Financial flexibility: measures the “ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities” Limitations: most assets and liabilities are reported at historical cost, use of judgment and estimates to determine many of the items, many items of financial value are omitted Classifications: assets, liabilities, and stockholder’s equity Assets: current assets, long term investments, property, plant, and equipment, intangible assets, other assets Liabilities: current liabilities, long term debt Owner’s Equity: capital stock, additional paid in capital, and retained earnings Current assets: cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer o Current assets are presented in the balance sheet in order of liquidity o Five major current assets: cash and cash equivalents, short-term investments, receivables, inventories, and prepaid expenses o Generally, if a company expects to convert an asset into cash or to use it to pay a current liability within a year or the operating cycle, which is longer, it classifies the asset as current o Cash: generally any monies available “on demand” Cash Equivalents: short-term highly liquid investments that mature within three months or less Restrictions or commitments must be disclosed o Short-Term investments: Held-to-maturity: Type: Debt Valuation: Amortized Cost Classification: current or noncurrent
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Chapter Five - Accounting: Chapter Five 1 Chapter Five...

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