Bus 20-Chapter 2 Notes

qualitative characteristics of accounting information

• UNDERSTANDABILITY: the quality of accounting information that makes it comprehensible to those willing to spend the necessary time
• RELEVANCE: the capacity of information to make a difference in a decision
• FAITHFUL REPRESENTATION: the quality of information that makes it complete, neutral, and free from error
• COMPARABILITY: for accounting information, the quality that allows a user to analyze two ore more companies and look for similarities and differences
• CONSISTENCY: for accounting information, the quality that allows a user to compare two ore more accounting periods for a single company
• MATERIALITY: the magnitude of an accounting information omission or misstatement that will affect the judgement of someone relying on the information
• CONSERVATISM: the practice of using the least optimistic estimate when two estimates of amounts are about equally likely

operating cycle

• period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory

Current ratio

• higher ratio indicates high liquidity
• Current Assets
• Current Ratio=-------------------------------------
• Current Liabilities

Single Step/Multiple Step Income Statement

• SINGLE STEP"- expenses are added together and subtracted from all revenues in single step
• MULTIPLE: shows classifications of revenues and expenses as well as important subtotals.

profit margin

• net income
• -------------------
• sales
• HIgh Margin implies company is generating revenue and also controlling its costs