Chapter 3

• A set of standards or rules that accountants apply when preparing financial statements

  Financial Reporting Standards
• It allows for significant latitude in how certain transactions should be accounted for, meaning that professional judgment is particularly important.

  Financial Reporting Standards
• It shows the financial condition of a company on a particular date. A summary of what the firms own and owes to outsiders and to internal owners.

  Statement of Financial Position
• It includes cash or those assets expected to be converted into longer. Also refers essentially to those assets that are continually used up and replenished in the ongoing operations of the business.

  Current Assets
• The time required to purchase or manufacture inventory, sell the product, and collect the cash.

  Operating Cycle
• Used to designate the amount by which current assets exceed current liabilities (CA-CL).

  Working Capital/Net Working Capital
• Short term and highly liquid investment that are readily convertible to cash and so near their maturity they present insignificant risk of changes in value because of change in interest rates.

  Cash Equivalents
• Cash substitutes, cash that is not needed immediately in the business and is temporarily invested to earn a return.

  Marketable Securities
• Customer balances outstanding on credit sales and reported on the statement of financial position at their net realizable value.

  Accounts Receivable
• Items held for sale or used in the manufacture of products that will be sold.

  Inventories
• 3 types of inventories

  1. Raw materials/supply

  2. Work in Process

  3. Finished good
• These are not material to the statement of financial position as a whole.

  Prepayments
• A company's fixed assets (tangible-long lived).

  Property, Plant and Equipment.
• Allocating the cost of long-lived assets.

  Depreciation
• The difference between original cost and any accumulated impairment losses to date.

  Book Value
• A firm's statement of financial position includes a multitude items such as property held for sale, the cash surrender value of life insurance policies, and long-term advance payments.

  Other Non-Current Assets
• It represents claims , against assets, including accounts, notes payable, the current portion of long-term debt, accrued liabilities and deferred taxes.

  Current Liabilities
• Short-term obligations that arise from credit extended by suppliers for the purchase of goods and services.

  Accounts Payable
• Short-term obligations in the form of promissory notes to suppliers or financial institutions.

  Notes Payable
• Result from the recognition of an expense in the accounting records prior to the actual payment of cash. They are liabilities because there will be an eventual cash outflow to satisfy the obligations.

  Accrued Liabilities
• This category include bonded, indebtedness long-term notes payable, mortgages, obligations under leases, pension liabilities, long-term warranties and deferred income taxes.

  NonCurrent Liabilities
• Amounts of income taxes payable in periods in respect of taxable temporary differences.

  Deferred Tax Liabilities
• The residual interest of assets that remain after deducting liabilities.

  Equity
• They do not ordinarily received a fixed return but do have voting privileges in proportion to ownership interest.

  Ordinary shareholders
• The amount by which the original sales price of the stock shares exceeded par value as well as from other sources such as donated capital, treasury stock transactions.

  Additional Paid in Capital
• These include preferred stock foreign currency translation effects, treasury stock and the accumulation of unrealized gains or kisses in investments in debt and equity securities that are classified as non current investment.

  Other Equity Accounts
• These are measured on an accrual rather than a cash basis.

  Earnings
• It comes in two basic formats and with considerable variations in detail presented; multiple step format and single step version.

  Income statement
• It provides several intermediate profit measures-gross profit, operating profit, and earnings before income tax-prior to the amount of net earnings for the period.

  Multiple-step format
• Groups all items of revenue, then deducts all categories of expense to arrive at a figure for net income.

  Single-step version
• It occurs when a firm sells a major portion of its business.

  Discontinuing operations
• Cancellation of sale

  Sales return
• Deduction from the original sales invoice price.

  Sales Allowance
• The first deduction from sales.

  Cost of Goods sold/Cost of sales.
• The relationship between cost of goods sold and net sales is called _______.

  COGS Percentage
• Net sales - COGS=?

  Gross profit or gross margin.
• The first step of profit measurement on the multiple-step income statement. It indicates how much profit the firm is generating after deducting the cost of products sold.

  Gross profit
• Include selling and administrative, advertising , lease payments, depreciation and repairs and maintenance

  Operating expenses
• Expenses that relate to the sale of products or services and to the management of the business.

  Selling and administrative expenses
• They include salaries, rent, insurance, utilities, supplies and sometimes depreciation and advertising expense.

  Selling and administrative expenses