Accounting 1, Chapter 6

assets=liabilities+owner's equity

-net credit sales divided by average accounts receivable, -accounts receivable turnover measures how efficiently a company collects cash from its credit customers -users prefer to see a higher turnover, which shows that the company has less cash tied up in accounts receivable, collects this cash faster, and usually has fewer customers who don't pay

total amount of depreciation expense recorded over the life of an asset to date

accounting report that summarizes a company's financial position (assets, liabilities, and owners equity) on a given date

asset's original cost minus the related accumulated depreciaiton

balance sheet which shows subtotals for assets, liabilities, and owner's equity in related groupings

cash and other asssets that a company expects to convert into cash, sell, or use up within one year

obligations that a company expects to pay within one year by using current assets.

current assets divided by current liabilities (more useful than working capital for measuring a company's liquidity because the current ratio allows comparisons of different sized companies)

total liabilities divided by total assets, debt ratio used to assess long term financial flexibility,

cost of goods sold divided by average inventory

measure of how quickly a company can convert its assets into cash to pay its bills

items such as notes receivable, government bonds, bonds and capital stock of corporations, and other securities which a company intends to hold for more than one year

obligations that a company does not expect to pay within one year

number of days in a company's business year divided by its accounts receivable turnover

number of days in a company's business year divided by its inventory turnover

company's ability to continue a given level of operations

all of the physical (tangible), long term assets a company uses in its operations

quick assets divided by current liabilities, the quick ratio is a more convincing indicator of a company's short term debt paying ability (short term lenders use this when deciding to extend credit)

net income divided by average owner's equity equity, Don't add interest expense back to net income because it is a measure of a company's profit available to owners AFTER incurring the financial cost related to creditors

net income and interest expense are added together and then divided by average total assets

a company's current assets minus its current liabilities, the term working capital is used because this excess of current assets is the dollar amount of liquid resources a company has to "work with" after it pays all of its short term debts

cash, marketable securities, receivables, inventory, and prepaid items

liquidity (according to how quickly they can be converted into cash, sold, or used up)

cash on hand and cash in checkings and savings accounts

items such as government bonds and capital stock of corporations in which the company has temporarily invested (and which the company expects to sell within a year)

accounts receivable and notes receivable

insurance, rent, office supplies, and store supplies that will not be converted into cash but will be used up within one year

balance sheet shows noncurrent assets, such as long term investments and property and equipment, in separate categories

accounts payable, salaries payable, unearned revenues, short-term notes, and (interest) payable

liquidity (how quickly they will be paid)

advance collections from customers for the future delivery of goods or the future performance of services.

long-term notes payable, mortgages payable, and bonds payable

1. industry structure (if a company has too high a current ratio compared with the ratios of similar companies in the same industry, this may indicate poor management of current assets) 2. the length of a company's operating cycle(the shorter a company's operating cycle, the less likely it is to need a large amount of working capital or as high a current ratio to operate efficiently) 3. the "mix" of current assets (the proportion of different items that make up the total current assets, the mix has an effect on how quickly the current assets can be converted into cash)

1.0 or 1:1

important financial characteristic because it enables a company to increase or reduce its operating activities as needed. Current ratio and quick ratio can be used to assess short term financial flexibility

1. the higher a company's debt ratio, the lower its financial flexibility, a high debt ratio signals a company may not be able to borrow money to adapt to business opportunities. 2. Creditors prefer a company have lower debt ratio because if business declines, a lower debt ratio indicates that a company is more likely to be able to pay the interest it owes as well as its other fixed costs 3. Owners prefer a higher debt ratio up to a certain point, particularly when the return earned on assets purchased by the company with borrowed money is higher than the interest the company has to pay to its creditors.

-because of the historical cost concept, the balance sheet does not always show each asset's current value, but if the company has no intention of selling the asset, the current value may not be relevant -Both financial statements do not provide much information about a company's cash management because they are based on accrual accounting, hence investors and creditors need a financial statement that provides a summary of a company's cash flows during a an accounting period, which is the need for a cash flow statement