Investing & Financing Decisions

• The Separate Entity Assumption states that business activities must be accounted separately from the personal activities of its owners
• The Going Concern Assumption states that the business will continue operating in the foreseeable future, meeting its contractual demands
• The Monetary Unit Assumption states that the business reports its financial results with the national monetary unit
• Elements of the balance sheet are measured by historical cost, which is the cash-equivalent value on the date of the transaction.
• Additional Paid-in Capital is the money paid by an investor above the par value of the stock price
• Treasury Stock is stock bought back by the issuing company
• Current assets are resources that will be used or turned into cash within one year
• Inventory is always considered a current asset
• Current liabilities are those that will be settled within one year
• Assets are listed in order of liquidity, and liabilities are listed in order of maturity
• Stockholders’ Equity can be referred to as financing provided by owners or contributed capital.
• Retained Earnings can be referred to as financing provided by operations or earned capital.
• Companies may not report intangibles like patents or short-term leases on the balance sheet for various reasons. Hence, it is important to read the notes to the financial statements to gain a holistic view of operations.
• The Dual Effects Concept states that each transaction has at least two effects on the accounting equation, which must remain in balance
• Par value is the legal face value of the share established by the company’s board of directors. It has no relation to the market price of the share.
• It is impractical for companies to keep track of account balances after each transaction. Instead, they are recorded in a general journal, which is then transferred to a general ledger.
• Credits are the sources of economic benefit - liabilities, owners’ equity, and revenue
• Debits are the destinations of economic benefit - dividends, expenses, and assets
• The DEALER acronym helps remember that debits are on the left, credits are on the right
• Assets increase with debits, liabilities, and equity increase with credits
• Double Entry Bookkeeping is the concept that every accounting entry has an opposite entry in a different account, so at least two t-accounts are used when recording a transaction
• Current Ratio = Current Assets / Current Liabilities
• The Current Ratio measures a company’s ability to pay its short-term obligations with short-term assets. The higher the ratio, the better equipped the company is. However, a ratio that is too high may suggest an inefficient use of resources.
• The current ratio may be a misleading measure of liquidity if significant funds are tied up in assets that cannot be easily converted into cash.
• The current ratio can be improved by paying creditors immediately before the preparation of financial statements.