Ch 2.docx

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Kari- Lyn Williamson

Ch 2: Further Look at Financial Statements I. Classified Balance Sheet - groups together similar assets & liabilities using number of standard classifications & sections , help determine  whether comp has enough assets to pay debts  claims of short & long term creditors on company’s total assets - asset, liability, stockholders’ equity A. Current Assets - assets company expects to covert to cash or use up within 1 year or its operating cycle, whichever is longer - operating cycle: ave time it takes to go from cash to cash in producing rev from purchasing inventory to selling it to colleting cash - assume companies uses 1 year to det whether asset or liability is current or long term - current assets o cash o short term investments o receivables o inventories o prepaid expenses - companies list current assets in order they expect to convert to cash B. Long Term Investments - long term investments are generally o investments in stocks & bonds of corps held for more than 1 year o long term assets (land/buildings) comp not using in operating activities C. Property, Plant, equipment (fixed assets/plant assets) - assets with long useful lives currently used in operating the business - depreciation: prac of allocating cost of assets to number of years accumulated depreciation: total amount of depreciation company has expensed thus far in asset’s life D. Intangible Assets - assets that don’t have physical substance but valuable o goodwill, patents, copyrights, trademarks o give exclusive right for per of time E. Current Liabilities - obligations company is to pay within coming year or operating cycle, whichever longer st o notes payable (1 ) o accounts payable (2 ) nd o wages payable o bank loans payable o interest payable o taxes payable - current maturities of long term obligations F. Long Term Liabilities - obligations company expects to pay after 1 year o bonds payable o mortgages payable o long term notes payable o lease liabilities o pension liabilities G. Stockholders’ Equity - common stock: investments of assets into business by stockholders - retained earnings: income retained for use in business II. Using Financial Statements A. Ratio Analysis - expresses the relationship among selected items of fin statement - ratio: express relationship b/w 1 quant over another o single ration not meaningful - intracompany comparisons: covering 2 years for same comp - industry-ave comparisons: ave rations for particular industries - intercompany comparisons: compares w/ competitor in same industry B. Using Income statement - profitability rations: measure operating success of company for given per of time C. Earnings per share - measures net income earned on each share of common stock - compute by dividing net income by ave number of common shares outstanding during the year - EARNINGS PER SHARE = (net income – preferred stock dividends )/(ave. common shares outstanding) - compare earnings per share of single company can evalueate performance from perspective of stockholder, on a per share basis D. Using statement of stockholders’ equity - adds net income and subtracts dividends - comprised of retained earnings & common stock - report all changes in stockhold
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