Chapter 2 Notes.docx

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Department
Marketing and Consumer Studies
Course
MCS 2600
Professor
Karen A.Gough
Semester
Winter

Description
ACCOUNTING CHAPTER 2 The classified Statement of Financial Position (Balance Sheet)  Statement of financial position presents a snapshot of a company's financial position  Companies tend to grow similar types of assets and similar types of liabilities together  Assets include o Current assets o Investments o Property, plant, and equipment o Intangible assets o Goodwill  Liabilities and Shareholders o Current liabilities o Non-current liabilities o Shareholders equity  Share capital  Retained earnings ASSETS  Assets are the resources that a company owns or controls that provide future economic benefits  Current Assets o Current assets are assets expected to be converted into cash or sold within one year of statement date o OPerating Cycle: average time it takes to go from cash to cash in producing revenue o Common types of current assets include:  Cash  Short term investments  Investments in debt securities or equity securities  Accounts Receivable  Amounts owed to the company by customers who purchased products or services on credit  Accrued receivables  Amounts owed to the company for interest, sales tac, rent, and like items  Notes receivable  Amounts owed to the company by customers or others that are supported by a written promise to repay  Loans receivable  Type of note receivable  Merchandise inventory  Goods held for sale to customers  Supplies  Consumable items like supplies and cleaning stuff  Prepaid expenses  Cost of things like rent and insurance paid in advance of use.  Non-Current Assets o Non current assets are not expected to be converted into cash, sold, or used up by the wbusiness within one year of the financial statement date o Common kinds of non-current assets include  Investments  Include multi year investment that management intends to hold to earn interest, equity securities  Property, plant, and equipment  Tangible assets with relatively long useful lives that are currently being used in operating the business  Intangible assets and goodwill  Non curent assets that don't have physical substance and that represent a priviledge or a right granted to , or held by, a company  Goodwill has no physical substance  Other assets LIABILITIES  Liabilities are obligations that result from past transactions - also classified as current and non- current  Current Liabilities o Obligations that are to be paid or settled within one year of the company's statement date o Common examples include:  Bank indebtedness  Short term loans from the bank typically occurring when a company uses an operating line of credit to cover cash shortfalls  Accounts payable  Represents amounts owed by the company to suppliers for purchases made on credit  Accrued liabilities  Amounts owed by the company for salaries, interest, sales tax, rent, income tax, and like items  Notes payable  Amounts owed, often to banks but also to suppliers or others, that are supported by a written promise to repay  Current maturities of long-term debt  Portion of the payment due to be made within the current year is classified as current maturities of longer term debt  Non-Current Liabilities o Obligations that are expected to be paid or settled after one year are non-current liabilities o Examples include  Notes payable including bank loans payable, mortgages payable, and bonds payable  Mortgage payable are similar to long term notes but have property pledged as security for the loan  Bonds payable are used by large corporations and governments to borrow large sums  Lease obligations  Include amounts to be paid int he future on long term rental contracts used for equipment or property  Pension and benefit obligations\  Amounts companies owe past and current workers for retirement benefits  Deferred income tax liabilities  Income tax that is expected to be payable in a later year or years when a company prepares its future corporate income return SHARE HOLDERS EQUITY  Share Capital o Shareholders purchase shares in a company by investing cash o Investments are recorded as either common or preferred shares - if preferred shares are issued in addition to common shares there totals are classified as share capital  Retained Earnings o Cumulative profits that have been retained for use in a company USING THE FINANCIAL STATEMENTS  Ratio analysis expresses the relationships between selected items of financial statement data  Ratios can give clues about underlying conditions that may not be easy to see when the items of a particular ratio are examined separately  Three comparisons o Intracompany comparisons: covering 2 years for the same company o Intercompany comparisons: based on comparisons with a competit
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