financial accounting

• working capital = current asset - current liabilities

• indicator of company's ability to generate sustainable cash flows through operations and management of working capital

• focus on income statement and changes in current assets and liabilities from balance sheet

1. sale of goods or services

2. collection of interest and dividends

1. purchase of inventory

2. payment for operating expenses

3. payment of interest

4. payment of income taxes

focus on changes in PPE, long term investments and assets from balance sheet(depreciation, gains/losses on sale of PPE and other LT assets)

1. sale of debt/equity investments

2. sale of PPE

3. Collection of loan/notes receivable

1. purchase of PPE

2. purchase of debt or equity

3. loans to other corporations

focus on long-term debt and stockholder's equity from balance sheet

1. issuance of bonds or notes payable

2. issuance of stock

3. reissuance of treasury stock

1. repayment of bonds or notes payable

2. acquisition of treasury stock

3. payment of dividends

-significant investing and financing activities that do not affect cash -reported after the cash flow statement or in a note to the financial statements Examples

• purchase long term assets by issuing debt

1. begin with net income

2. list adjustments to net income to arrive at operating cash flows

adjust the items in the income statement to directly show the cash inflows and outflows from operations

1. Non cash items (depreciation expense)

2. Non operating items (gains and losses on sale of assets)

3. changes in current assets and current liabilities (increase in account receivables is the amount of revenue reported in the income statement but not yet collected in cash)

• amortization expense +depreciation expense

• loss on sale of assets

• gain on sale of assets

• increase in a current asset +decrease in a current asset -increase in a current liability +decrease in a current liability

net sales-increase in accounts receivable=cash received from customers

cost of goods sold - decrease in inventory = purchases purchases + decrease in accounts payable = cash paid to suppliers

operating expenses + increase in prepaid rent = cash paid for operating expenses

interest expense - increase in interest payable = cash paid for interest

income tax expense + decrease in income tax payable = cash paid for income taxes

+sale of long-term assets -purchases of long term assets +collections of notes receivables -loans to others

• issuance of shares

• purchases of treasury shares

• sale of treasury stock +issuance of notes and bonds payable (face value) -payment of notes and bonds payable -payment of dividens

measures how many times receivables are collected during year higher ratio indicates ability to quickly turn receivables into cash low ratio indicates trouble collecting receivables

measures the days it takes to convert receivables into cash shorter period maximize the speed of cash inflow AVP= 365/receivables turnover ratio

measures how many times average inventory is sold during the year ITR= cost of goods sold/average inventory

measures the average number of days it takes to sell its entire inventory during the year ADI=365/inventory turnover ratio

compares current asset to current liabilities A high current ratio indicates sufficient assets to cover its current obligations CA= current assets/current liabilities

more conservative measure of a company's ability to pay current liabilities ATR= (cash+current investments+A/R)/current liabilities

indicates the risk of bankruptcy DtoER=Total liabilities/stockholder's equity

compares interest payments with income available to pay them measure of solvency TIER=(net income + interest expense +tax expense)/interest expense

indicates the portion of each dollar of sales above its cost of goods sold GPR=gross profit/net sales gross profit = net sales - cost of goods sold

measures the income the company earns on each dollar invested in assets ROA=net income/average total assets

net income/average total assets=(net income/net sales)*(net sales/average total assets)

measures the income earned on each dollar of sales PM=net income/net sales

measures sales volume in relation to the investment in assets AT = net sales / average total assets

measures the income earned for each dollar in stockholders' equity ROE= net income/average stockholders' equity

EPS= (net income - dividends on preferred stock)/(average shares of common stock outstanding)

compares a company's share price with its earnings per share PER= stock price/earnings per share

Asset= liabilities + equity assets = liabilities + (stockholder's equity + (revenue-expenses)-dividends) net assets = assets - liabilities

Net income = revenues - expenses

ending retained earnings = beginning retained earnings + net income - dividends stockholder's equity = common stock/ share capital + retained earnings

Revenue of the period is matched with expenses required to create those revenues

per bank balance +deposit outstanding -checks outstanding +/- banks errors

per general ledger +notes received by bank +interest received -NSF checks received -unrecorded debit card payments -unrecorded EFT payments -bank service fees +/- company errors

sales revenue (including trade discounts)-sales returns and allowances - sales discounts = net sales

-buyer pays for the freight charge -freight is part of inventory cost -buyer records it when the goods leave the supplier -seller records it when the goods leave the seller

• freight charge is paid by the seller

• freight charges become part of cost of goods sold -buyer records it when they receive the goods -seller records it when the buyer receive the goods

purchase price + freight in - purchase returns - purchase allowances - purchase discounts = net purchases

transportation cost paid by the buyer under FOB shipping point

sales revenue - sales returns and allowances - sales discounts = net sales

average cost per unit = cost of goods available/number of units available goods available = beginning inventory + purchases