1、Gain increase in equity resulting from selling assets or recognizing the increase in value of assets (or decrease in value of liabilities); it is measured on a net basis as the positive difference between current value and amount recorded on the balance sheet.Loss decrease in equity resulting from s
2、elling assets or decrease in value of assets (or increase in value of liabilities); it is measured on a net basis as the negative difference between current value and amount recorded on the balance sheet.Accounting period - the time period between consecutive balance sheets for which a firm prepares
3、 an income statement and statement of cash flows (e.g., an annual report has a 12-month accounting period and a quarterly statement has a 3-month accounting period).b.Elements:Sales - revenue from selling goods or providing services to customers, which is reported as the top line on the income state
4、ment. Cost of Goods Sold or Cost of Sales labor, material, and overhead costs directly related to providing goods or services.Gross Profit is the difference between Sales Revenue and Cost of Goods Sold, which represents the profit that is available to cover all of the other expenses on the income st
5、atement.Operating Expenses are expenses related to the ordinary operating activities of the firm of providing goods or services to customers or gains and losses related to operating assets like PPE. Operating Profit or Income equals gross profit minus operating expenses. Other Nonoperating Revenue a
6、nd Expense are items related to FINANCING activities (i.e., interest expense) and INVESTING activities (i.e., interest income and gains and losses on investments).Income Before Tax equals operating profit minus other income and expense.Tax expense equals a GAAP based measure of the government charge
7、s on income.Net Income equals income before tax minus tax expense. c.Income statement accounts are called TEMPORARY ACCOUNTS because amounts accumulate for a defined period of time and are then zeroed out when the balance is transferred to retained earnings. Annual income statement amounts represent
8、 the total revenues or expenses for a 12 month period called the fiscal year.II.Balance sheet “snapshot” of assets, liabilities, stockholders equity at a point in timea.Basic DefinitionsOperating cycle - average time it takes to go from cash to goods and services sold to customers and then back to c
9、ash collected from customers.Asset: resource the firm controls because of a past transaction or event that provides expected future benefits.Current asset: asset a firm expects to convert to cash, sell, or consume within the longer of one year or an operating cycle. Noncurrent asset: asset not class
10、ified as current. Liability: creditors claims or obligation that represents a probable future economic sacrifice of assets or services based on a past transaction or event. Current liability: obligation a firm expects to pay within the longer of one year or an operating cycle.Noncurrent liability: l
11、iability not classified as current. Shareholders equity: measure of financing provided by owners of the firm that captures owners residual claim on assets of the firm after satisfying liabilities.Retained earnings: cumulative net income minus dividends over the life of the firm. Retained earnings ar
12、e a source of financing. When earnings exceed the dividends paid out to shareholders, it increases equity or the owners claim on the firm. There is NOT a corresponding “cash fund” in the asset section equal to the balance in retained earnings. Changes in retained earnings are a function of net incom
13、e and dividends declared, which may or may not correspond to changes in cash. Dividends: distribution of cash to the owners of the firm.c.Balance sheet accounts are called PERMANENT ACCOUNTS because the amounts accumulate year after year. The ending balance from the previous year becomes the beginni
14、ng balance for the next year. For example, ending cash amount in 2011 will be the beginning cash amount in 2014, that is then adjusted for 2014 inflows and outflows to determine the 2014 cash amount. d.Basic accounting equation:ASSETS = LIABILITIES + STOCKHOLDERS EQUITY The powerful implication is i
15、nvestments in assets can be financed with either DEBT or EQUITY! Assets are resources and liabilities and equity represent the claims on those resources.III.Statement of Retained Earnings (included in Statement of Shareholders Equity) presents a “video” of the change in retained earnings from net in
16、come and dividends during the period. IV.Statement of Cash Flows “video” of the sources and uses of cash over a period of time that explains the change in the cash balance on the balance sheet.a.Operating core operations and items related to measurement of net incomeb.Investing- firms INVEST in asse
17、ts so includes asset transactions:i.buy and sell property plant and equipment ii.buy and sell investmentsc.Financing - firms FINANCE with debt and equity so includes debt and equity transactionsi.borrow and pay back nonoperating debtii.issue and repurchase stockiii.pay dividendsd.Format +Net Operati
18、ng Cash Flow + Net Investing Cash Flow + Net Financing Cash Flow = Change in Cash for the Period Beginning Cash from Last Year +/- Change in Cash for the Period = Ending Cash for This YearBalance Sheet Account Name DefinitionsAn account accumulates the increases and decreases that occur for a single
19、 item. GAAP does not provide an all-inclusive list of acceptable account names so their usagevaries by firm.Separate accounts are reported if they are “material” or crucial to understanding firm performance. For example, some firms divide interest revenue and interest expense into separate accounts
20、while other firms combine them into one net account.You will receive credit in exams as long as the name is potentially used in practice and accurately describes and correctly classifies an account as asset, liability, or shareholders equity. It is acceptable, but not required, to use more specific
21、account names like prepaid rent for prepaid expense.The following list of account names are commonly used.Assets:Cash currency or balances in checking accounts, CDs, or money market accounts available to meet current obligations. Highly liquid short-term investments with less than90 days to maturity
22、 and little risk of value changes are called cash equivalents andincluded in the cash account.Short-term investment or marketable securities current value of investments in another firms debt or equity securities that can be quickly sold for cash.Accounts receivable amount due from customers for goo
23、ds and services already delivered. Gross accounts receivable is the amount owed. Net accounts receivable is the amount expected to be collected after subtracting an allowance for uncollectible accounts.Notes receivable amount to be received from an outside entity formalized with a note or lending ag
24、reement that specifies interest and payment terms.Inventory raw materials, work in process (products started but not finished), and finished goods available for sale to customers.Prepaid expenses asset recognized when cash paid in advance of when future expenses will be incurred.Long-term investment
25、sinvestments in bonds or equity securities expected to be held for the long-term.Property, plant, and equipment (gross) original cost to obtain and put into service buildings, land, and equipment.Accumulated depreciation a contra or offsetting account with the cumulative amount of the cost of proper
26、ty, plant and equipment assigned to depreciation expense.Property, plant and equipment (net) original cost minus accumulated depreciation.Intangible assets items like patents and copyrights that provide future benefit but do not have physical substance. Intangible assets are only recognized when the
27、y are purchased from an outside source. For example, if a firm purchases a patent from another company the cost is shown as an asset. However, if a firm does research that results in a patent, those research costs are included in R&D expense and an asset is only recognized for the legal and registra
28、tion fees to obtain the patent.Goodwill purchase price of an acquired company minus the market value of the identifiable assets minus liabilities of that company. The market values of both tangible and intangible assets are considered in the calculation of identifiable assets. Goodwill is ONLY recog
29、nized when one company purchases another company at a premium for things like future potential, market power, and quality of workforce that are not considered “identifiable assets.”Liabilities:Accounts payable amount owed to suppliers for inventory or other goods or services purchased on credit.Othe
30、r payables or accrued expenses amounts owed for expenses that have already been recognized like interest, taxes, salaries, and rent.Short-term loans payable or notes payableobligations formalized with a note or lending agreement that specify interest and payment terms and are due within the next year.Current
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