Accunting 810 Ch. 1

Accounting Formula

Assets= liabilities + equity

Owner Financing %

( Equity / Assets ) x100

Beginning Assets

Ending - increase

Operating Income

Revenue - Expenses

Year over year increase

(y2-y1) / y1

Investors and Equity Analysts

Use financial statements to judge a companies profitability, financial strength, and to make reasonable estimates of the companies equity securities.

Lenders and Credit Analysts

Use financial statements to assess a companies ability to repay its debts and to determine how to manage credit associated with the comapny’s debt securities.

Comapny Managers and Employees

Use financial statements to inform decisions such as where to invest scarce resources, how to finance those investments, and how to maximize the company profitability

Operating Activities

Hiring, training, manufacturing products, delivering services, marketing and selling products or services, and managing any after sale customer support.

Investing Activities

Companies acquire land, buildings, equipment, grow the business with new products or services, or acquire other companies to expand into new markets.

Financing Activities

Companies raise cash to fund the operating and investing activities. Selling stock to equity investors and borrowing from banks and other lenders.

Managers and Employees

Guage current and future financial health

Investment Analysts and Information Intermediaries

Predict future performance

Creditors and Suppliers

Determine loan terms, loan amoounts, interest rates, and collateral

Customers and Strategic Partners

Asses a companies ability to provide products or services and assess the company’s staying power and reliability

Regulators and Tax Agencies

Fot antitrust assessments, public protection, selling prices, import-export analyses, and selling tax policies

Voters and Their Representatives

Economic, social taxation, and other initiatives, and to monitor government spending

Form 10-K

Audited annual report:

Four financial statements

Explanatory notes

Managements discussion and analysis

Form 10-Q

Unaudited quarterly report:

Summary versions of the four financial statements

Limited additional disclosures

Lower Cost of Capital

Lower interest rates or higher stock prices

Higher Cost of Capital

Higher interest rates or lower stock rates

SEC’s Regulation Fair Disclosure (FD)

To curbe the practice of selective disclosure (only disclosing information to certain stockholders or financial analysts)

Generally Accepted Accounting Principles (GAAP)

The standards that govern U.S. financial statements

International Financial Reporting Standards (IRFS)

Other countries use this. Overseen by the International Accounting Standards Board located in London.

The Four Financial Statements

Balance Sheet

Income Statement

Statement of Stockholders Equity

Statement of Cashflows

Balance Sheet

Reports on a companies financial position at a specific point in time.

Reports:
Resources (Assets)

Sources (how assets are financed)

Income Statement, Statement of Stockholder’s Equity, Statement of Cashflows

Report on performance over a period of time

Link the balance sheet from the beginning of the period to the end

Equity

Owner’s claim on assets (financing from stockholders)

Liabilities

Nonowner claims on assets (financing from banks, creditors, and suppliers)

Cost of Goods Sold (COGS)

The amount paid to purchase or manufacture the goods (inventories) that it sold

Gross Profit

Revenues - COGS

Expenses

COGS

Gross Profit

SG&A

Selling, General, and Administrative Expenses (SG&A)

The overhead costs of the company (Salary, marketing costs, Occupancy cost, HR, IT costs, etc).

Statements of Stockholer’s Equity

Reports on year-over-year changes in equity accounts that are reported on the balance sheets:

Common stock and additional paid-in capital

Retained earnings

Statement of Cashflows

Reports cash inflows and outflows from operating avtivities, investing activities, and financing activities

Return on Assets

Net income/ average Assets

Profitability (Profit Margin: PM)

Net Income/ sales

Prodictivity (Asset Turnover: AT)

Sales/ average assets

Return on Equity (ROE)

Net income/ Average Stockholder’s Equity