ACG 2021 Chapter 2: Chapter 2 Textbook Notes

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8 Feb 2017
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ACG Chapter 2 Textbook Notes
- The Classified Balance Sheet
o A classified balance sheet groups together similar assets and similar liabilities,
using a number of standard classifications and sections
o These groups help financial statement readers determine whether the company
has enough assets to pay its debts as they come due and the claims of short and
log te editos o the opay’s total assets
o Current Assets
Assets the company expects to convert to cash or use up within one year
or its operating cycle
The operating cycle of a company is the average time required to go from
cash to cash in producing revenue- to purchasing inventory, sell it to an
account, and then collect cash from customers
Common types are
Cash
Investments
Receivables
Inventories
Prepaid expenses
Companies list current assets in the order in which they expect to convert
them into cash
o Long Term Investments
Investments in stocks and bonds of other corporations that are held for
more than one year
Long-term assets such as land or buildings that a company is not
currently using in its operating activities
Long term notes receivable
o Property, Plant, and Equipment
Assets with relatively long useful lives that are currently used in operating
the business
Depreciation is the allocation of the cost of an asset to a number of years
The accumulated depreciation account shows the total amount of
depreciation that the company has expensed thus far in the assets life
o Intangible Assets
Goodwill
Patents
Copyrights
Trademarks
Trade names
o Current Liabilities
Obligations that the company is to pay within the next year or operating
cycle
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Examples
Accounts payable
Salaries and wages payable
Notes payable
Interest payable
Income taxes payable
o Long-Term Liabilities
Obligations that a company expects to pay after one year
Include bonds payable, mortgages payable, long-term notes payable,
lease liabilities, pension liabilities
o “tokholde’s Euity
Consists of common stock and retained earnings
Common stock is the investments of assets into the business by
stockholders
They record as retained earnings the income retained for use in the
business
- Using the Financial Statements
o Ratio Analysis
Expresses the relationship among selected items of financial statement
data
Profitability Ratios- measure the income or operating success of a
company for a given period of time
Liquidity Ratios- measure short-term ability of the company to pay its
maturing obligations and to meet unexpected needs for cash
Solvency Ratios- measure the ability of the company to survive over a
long period of time
Various comparisons are used to shed light on company performance
1. Intracompany company comparisons covering two years for the
same company
2. Industry-average comparisons based on average ratios for
particular industries
3. Intercompany comparisons based on comparisons with a
competitor in the same industry
o Earnings Per Share
Measures the net income earned on each share of common stock
Computed by dividing net income minus preferred dividend by the
average number of common shares outstanding during the year
A basic approach for calculating earnings per share is to divide earnings
available to common stockholders by average common shares
outstanding during the year
o Usig the “tateet of “tokholdes’ Euity
“tokholdes’ equity is comprised of two parts: retained earnings and
common stocks
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