Financial Reports

what are accounting reports prepared based on

GAAP - Generally Accepted Accounting Principals

Definition of assets

things that a business owns that can be used to generate income

Definition of financing

obtaining the money required to obtain the assets

Definition of liabilities

money owed to others

Definition of Owners equity

the owners own funds (shareholders) invested in the business

Definition of accounts receivable

the money people or businesses owe you

Definition of accounts payable

money you owe to people or businesses

Definition of bonds payable

a form of financing

promise to pay interest at designated times, with the stipulation that you will pay the principal several years later

Definition of common stok

shares of ownership in a business

Definition of shareholders

people who fund the activities of a corporation

Definition of retained earnings

profit put back into the business (after dividends)

Definition of dividends

profits used to pay yourself and/or shareholders

Definition of creditors

people or institutions who you owe money to

they do not receive dividends, require the business to repay fund with interest over specific period of time

examples of creditors

bank

people

vendors

Definition of revenue

income generated from sale of goods or services, associated with the main operations of an organization (before cost or expenses)

Definition of expenses

money spent, or costs incurred in an organizations efforts to generate revenue, represents the cost of doing business

what is the time period principle

a business should report their financial states appropriate to a specific time period

allows for preparation of interim financial statements

what is the periodicity concept

company’s complex and ongoing activities can be divided up and reported in pre-determined time frames

consistently reports its results, periods are kept the same over time for the sake of comparability

what are the two types of accounting periods

calendar year

fiscal year

what are the 3 fundamental business activities

obtaining financing

marketing investments

conducting a profitable operation

what is the definition of obtaining financing

financing activities to acquire assets involve obtaining funds from owners as well as creditors

definition of making investments

funds to help buy inventory, equipment and supplies, information systems, dispensing systems, buildings and land

definition of conducting a profitable operation

final step is to engage in operations

what is the most important rule in accounting

the accounting equation

what is the accounting equation

Assets = Liabilities + Owner’s Equity

what are the 3 main or essential financial statements

Balance sheet

income statement

statement of cashflow

definition of balance sheet

snapshot of firms investments (assets) and how they are financed (liabilities and owners equity)

definition of income statement

connects the begging and ending balance sheets in any given period by providing details of operating activities (sales and expenses)

definition of statement of cash flow

connects the beginning and ending balance sheets by indicating the impact of the company’s investments, financing, and operations on cash flow during a fiscal year

what does the balance sheet not tell you

how the income was generated and what types of expenses were incurred during the accounting period

what 3 categories do recorded values on the statement of cash flow generally fall into

operating

investing

financing

what does the statement of retained earnings do

communicates the distribution of net profits

what is a financial ratio used for

used to examine and organizations financial performance

financial ratio pearls

some can provide info of the profitability of an organization

others can provide info on the liquidity of an organization

shows specific relationships between items on the balance sheet and income statement

should not be used in isolation from other financial reports

what do profitability ratios measure

overall success

what are the most two used profitability ratios

gross profit margin

net profit margin

gross margin ratio formula

sales-COGS / total sales

net profit margin formula

net income / total sales

return on assets formula

net income / avg total assets

return on equity formula

net income / avg owner’s equity

what is return on equity also known as

return on investment

what are the to liquidity ratios

current and quick

what is the current ratio formula

current assets / current liabilities

what current ratio value is generally considered a bad place to be in

less than 2

when would you use current ratio

for bills that are used within 30-60 days

what does the quick ratio not include and why

inventory because it cannot be quickly converted to cash

quick ratio formula

(current assets - inventory - prepaid expenses) / current liabilities

what quick ratio number should organizations strive for

at least 1

Inventory turn over ratio formula

COGS / avg inventory

what do you get when you divide the inventory turnover ratio by 365

you get days on hand inventory

what is the receivable turnover ratio formula

credit sales / avg accounts receivable

what does receivable turnover ration measure

measures how quickly receivables are turned into cash

what happens if you divide the receivables turnover ratio by 365 and what does it tell you

you get the avg collection period

tells you the number of days that credit sales remain in accounts receivable before they are collected

what are the financial ratio limitations

seasonal factors

distortion may occur when calculating financial rations for terms shorter than 1 year