CHAPTER 2 – Investing and Financing Decisions and the Balance Sheet
CHAPTER 2 – Investing and Financing Decisions and the Balance Sheet
I. THE OBJECTIVE OF FINANCIAL REPORTING, THE ELEMENTS OF THE BALANCE SHEET, AND THE RELATED KEY ACCOUNTING ASSUMPTIONS AND PRINCIPLES. A. Primary objective of financial reporting
1. To provide useful economic information about a business to help investors and creditors make good financial decisions.
a. Decision makers are expected to have a reasonable understanding of accounting concepts and procedures.
b. Decision makers need to be able to use financial information to help them predict future cash flows related to investing and financing.
B. Elements of the Balance Sheet
1. Balance sheet elements present the basic accounting equation (A = L + SE).
a. Assets: economic resources with probable future benefits owned by the entity as a result of past transactions.
1. Listed on the balance sheet in the order of liquidity.
2. Current assets are assets that will be used or turned into cash within one year.
b. Liabilities: probable debts or obligations of the company that result from past transactions, which will be paid with assets or services.
1. Listed on balance sheet in the order of maturity dates.
2. Current liabilities are obligations that will be paid in cash or other current assets or satisfied by providing cash, goods, or services within one year.
c. Stockholders equity: the owners’ residual interest in net assets (assets minus liabilities).
Two categories:
1. Contributed capital (Stock) Assets (usually cash) provided by the owners in exchange for ownership
2. Retained earnings a) The cumulative earnings that are not distributed to the owners and are reinvested in the business. b) Increased by net income and reduced by declared dividends. Classified Balance Sheet accounts:
1. ASSETS:
a. Current assets:
1. Cash
2. Marketable securities
3. Receivables
4. Inventory
5.
I. THE OBJECTIVE OF FINANCIAL REPORTING, THE ELEMENTS OF THE BALANCE SHEET, AND THE RELATED KEY ACCOUNTING ASSUMPTIONS AND PRINCIPLES. A. Primary objective of financial reporting
1. To provide useful economic information about a business to help investors and creditors make good financial decisions.
a. Decision makers are expected to have a reasonable understanding of accounting concepts and procedures.
b. Decision makers need to be able to use financial information to help them predict future cash flows related to investing and financing.
B. Elements of the Balance Sheet
1. Balance sheet elements present the basic accounting equation (A = L + SE).
a. Assets: economic resources with probable future benefits owned by the entity as a result of past transactions.
1. Listed on the balance sheet in the order of liquidity.
2. Current assets are assets that will be used or turned into cash within one year.
b. Liabilities: probable debts or obligations of the company that result from past transactions, which will be paid with assets or services.
1. Listed on balance sheet in the order of maturity dates.
2. Current liabilities are obligations that will be paid in cash or other current assets or satisfied by providing cash, goods, or services within one year.
c. Stockholders equity: the owners’ residual interest in net assets (assets minus liabilities).
Two categories:
1. Contributed capital (Stock) Assets (usually cash) provided by the owners in exchange for ownership
2. Retained earnings a) The cumulative earnings that are not distributed to the owners and are reinvested in the business. b) Increased by net income and reduced by declared dividends. Classified Balance Sheet accounts:
1. ASSETS:
a. Current assets:
1. Cash
2. Marketable securities
3. Receivables
4. Inventory
5.