CHAPTER 3 Management

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  THE BASIC FINANCIAL STATEMENT Financial statements and their accompanying notes contain a wealth of useful information regarding the financial position of a company, the success of its operation, the policies and strategies of management, and insight into its future performance. The four basic financial statement :  1.   Statement of financial position- show the financial position- assets, liabilities and owner  ’ s equity of the firm on a particular date such as the end of a quarter or a year. 2.    Income or earnings statement- represents the result of operations- revenues, expenses, net  profit or loss, for the accounting period. 3.   Statement of changes in equity- summarizes the changes in a company ’ s equity for a  period of time (generally one year). 4.   Cash flow statement-  provides information about the cash inflows and outflows from operating , financing and investing activities during an accounting period. CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS     Financial reporting standards- set of standards or rules applied by accountants in  preparing financial statements. It allows for significant latitude in how certain transactions should be accounted for, meaning that professional judgements is  particularly important.  QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION    In order to justify providing accounting information, the benefit which may derived from the use of this information must exceed the cost of providing the data.    There are several cost of providing information: 1)   Cost of collecting, processing and disseminating. 2)   Cost of auditing. 3)   Costs associated with dangers of litigation and loss of competitive advantage. 4)   Costs to the user for analysis and interpretation. THE STATEMENT OF FINANCIAL POSITION    It shows the  financial condition or financial position of a company on a particular date.    A summary of what the firm owns (assets) and what the firm owes to outsider (liabilities) and to internal owners (stockholder  ’ s equity)   CURRENT ASSETS    Include cash or those assets expected to be converted into cash, used or consumed within one year or one operating cycle whichever longer.    Operating cycle- the time required to purchase or manufacture inventory, sell the product and collect the cash.    Working capital/net working capital- used to designate the amount by which current assets exceed current liabilities (current asset less current liabilities). CASH AND CASH EQUIVALENT    The cash account is exactly that, cash  in any form –  cash awaiting to deposit or in a bank account.    Cash equivalents- are short-term and highly liquid investment that are readily convertible to cash.   MARKETABLE SECURITIES    Are cash substitutes, cash that is not needed immediately in the business and is temporarily invested to earn a return. These investments are instruments with short-term maturities (less than one year) to minimize the risk of interest rate fluctuations.   A CCOUNTS RECEIVABLE    Customer balances outstanding on credit sales and are reported on the statement of financial position at their net realizable value, that is, the actual amount of the account less an allowance for doubtful accounts.  INVENTORIES    Items held for sale or used in the manufacture of products that will be sold.      Three different types of inventories : Raw material or supplies, work-in process, and finished goods. PREPAID EXPENSES    Certain expenses, such as insurance, rent, property taxes and utilities are sometimes paid in advance. They were included in current assets if they will expire within one year or one operating cycle, whichever is longer. PROPERTY, PLANT AND EQUIPMENT    Encompasses a company ’ s fixed assets ( also called tangible, long-lived, and capital assets). These assets produced economic benefits foe more than one year. Fixed assets are depreciated   over the period of time they benefit the firm.        Depreciation- method of allocating the cost of long-lived assets. OTHER NONCURRENT ASSETS 1.   Property held for sale 2.   Cash surrender value of life insurance policies 3.   Long-term advanced payments 4.   Long-term investment 5.   Intangible assets (Goodwill, patents, trademarks, copyrights, brand names and franchises) CURRENT LIABILITIES    Liabilities represents against assets, and current liabilities are those that must be satisfied in one year or one operating cycle, whichever is longer. Current liabilities include accounts and notes payable, the current portion of long-term debt, accrued liabilities and deferred taxes. ACCOUNTS PAYABLE    Short-term obligations that arise from credit extended by suppliers for the purchase of goods and services.  NOTES PAYABLE    Short-term obligations in the form of promissory notes to suppliers for the financial institutions. CURRENT MATURITIES OF LONG-TERM DEBT    The note lists the amount of long-term debt outstanding, less the portion due currently. ACCRUED LIABILITIES    Result from the recognition of an expense in the accounting record prior to the actual  payment of cash. NONCURRENT LIABILITIES    These are obligations with maturities beyond one year. 1)   Bonded indebtedness 2)   long-term notes payable 3)   mortgages 4)   obligations under leases  5)    pension liabilities 6)   deferred taxes     Deferred tax liabilities- amounts of income taxes payable in future period. EQUITY    Ownership Equity- is the residual interest in the assets that remain after deducting liabilities.      Owners- bear the greatest risk because their claims are subordinate to creditors in the event of liquidation   SHARE CAPITAL    Amount listed under share capital is based on the par or stated value of the shares issued. ADDITIONAL PAID-IN CAPITAL      This account reflects the amount by which the srcinal sales price of the stock shares exceeded par value as well as from other sources such as donated capital and treasury stock transactions.  RETAINED EARNINGS    The sum of every peso a company has earned since its inception, less any payments made to shareholders in the form of cash or stock dividends.      Funds a company has elected to reinvest in the corporate vaults.      Measurement off all undistributed earnings.  OTHER EQUITY ACCOUNTS 1)   Preferred Stock 2)   Foreign currency transaction effects 3)   Treasury Stock 4)   Accumulation of unrealized gains or losses on investment in debt INCOME STATEMENT    One of many pieces of a financial statement package     Earnings- Measured on an accrual rather than a cash basis, which means that income reported on the income statement is not the same as cash generated during the accounting  period.    Two basic formats of income statement
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