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ID: 2386561 • Letter: #
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<div>What is meant by the term <span>operating cycle?</span></div>
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<div>Define current assets. What basis is used for ordering individual items within the current assets section?</div>
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<div>Distinguish between long-term investments and property, plant, and equipment.</div>
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<div>How do current liabilities differ from long-term liabilities?</div>
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<div>Identify the two parts of stockholders' equity in a corporation and indicate the purpose of each.</div>
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<div>(a) Julia Alter believes that the analysis of financial statements is directed at two characteristics of a company: liquidity and profitability. Is Julia correct? Explain.</div>
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<div>   (b)Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain.</div>
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Explanation / Answer
Average time period between buying inventory and receiving cash proceeds from its eventual sale. It is determined by adding the number of days inventory is held and the collection period for accounts receivable.
Average time period between buying inventory and receiving cash proceeds from its eventual sale. It is determined by adding the number of days inventory is held and the collection period for accounts receivable. Some industries, such as distillery and lumber, have a long operating cycle.
There is no stated basis, but most companies will arrange their current assets in order of liquidity, so different companies having the same items may arrange them differently because they know their own assets better and they know which are more liquid than others. If you arrange them in order of increasing liquidity, you would usually start off the list with inventory, then a/cs receivable, then other receivables (including prepaid expenses), then marketable securities, and finally cash and cash equivalents.
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.
A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing."
A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.
Long-term liabilities are generally considered to be those debts that will not mature (or come due) for over a year. Current liabilities are generally considered to be those obligations that come due within the year.
Current liabilities do; however, include more than just debt. Generally current liabilities will include anything that must be paid within the next year that is not directly related to the costs of production (because the company could stop producing widgets, but would still have to make lease payments, etc.).
Companies with long-term liabilities whose payments include principal will occasionally show the principal portion of the long-term liabilities that will be paid in the current year within the current liabilities (and remove those principal payments from the long-term liabilities).
Stockholders' equity consists of two parts: common stock and retained earnings.
Companies record as common stock the investments of assets into the business by the stockholders. They record as retained earnings the income retained for use in the business.
Alter, Julie K PhD in Millburn, NJ is a private company categorized under Offices of Health Practitioner. Our records show it was established in 1999 and incorporated in New Jersey. Current estimates show this company has an annual revenue of less than $500,000 and employs a staff of approximately 1 to 4.
Different groups of users of financial statements are interested in different aspects of a company's financial activities. Short-term creditors are interested primarily in the company's ability to make cash payments in the short term; they focus their attention on operating cash flows and current assets and liabilities. Long-term creditors, on the other hand, are more interested in the company's long-term ability to pay interest and principal and would not limit their analysis to the company's ability to make cash payments in the immediate future. The focus of common stockholders can vary from one investor to another, but generally stockholders are interested in the company's ability to pay dividends and increase the market value of the stock of the company. Each group may focus on different information in the financial statements to meet its unique objectives.
This chapter completes our study of financial accounting - providing information for external users (primarily investors and creditors) to support investment, credit, and other decisions. We have focused attention exclusively on business and accounting in the United States. In Chapter 15 we introduce the subject of international business and accounting, after which we turn our attention to the subject of management accounting for the remainder of the textbook.
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