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Chapter 2&3

by: Sarah Smithson

Chapter 2&3 106

Sarah Smithson
GPA 3.689

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About this Document

Chapter 2 and 3 Notes
Introductory Microeconomics
David Van Der Goes
75 ?




Popular in Introductory Microeconomics

Popular in Economcs

This 6 page Bundle was uploaded by Sarah Smithson on Saturday January 30, 2016. The Bundle belongs to 106 at University of New Mexico taught by David Van Der Goes in Spring 2016. Since its upload, it has received 22 views. For similar materials see Introductory Microeconomics in Economcs at University of New Mexico.


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Date Created: 01/30/16
Chapter 2 Notes- A Further Look at Financial Statements Classified Balance Sheet • A=L+SE • Groups similar assets and liabilities together • Helps determine liquidity • Look at claims of short and long term creditors Assets • Current Assets ◦ Assets expected to be consumed within operating cycle or 1 year • Investments ◦ Assets not intended for use within the business and not expected to be sold within the next year • Property, Plant, Equipment ◦ Tangible assets with long lives used in the business • Intangible Assets ◦ Long term assets ◦ Non physical, used within business Liabilities • Current Liabilities ◦ Obligations expected to be paid within the coming year • Long term liabilities ◦ Obligations expected to be paid or satisfied after 1 year Stockholders Equity • Contributed capital ◦ Common stock Amounts (par value) contributed by stockholders Paid in capital in excess of par or additional paid in capital ◦ Retained earnings Earnings generated by the business Ratio Analysis • Relationships between components of financial statements • Can provide clues about underlying conditions that need attention • Ratio in isolation- might not be meaningful ◦ Compare to value from previous year, industry, or competitor • Focus on liquidity, solvency, and profitability ratios • Ratios have limitations Liquidity Ratios • Can the company pay its debts as they become due • Working capital ◦ CA-CL • Current ratio ◦ CA/CL • Quick ratio ◦ Cash+Marketable Sec.+Rec./CL • Composition of the CA is important • Positive number for WC preferred • Higher values for current and quick ratios Solvency Ratios • Can the company meet long term obligations and survive? • Debt (TL)/Total Assets ratio ◦ Measures amount of financing provide by creditors as compared to stockholders • Debt(TL)/Equity (TSE) is another measure of this phenomenon • Lower values preferred ◦ Indicates less debt (less risk) Income Statement • Single step ◦ Revenues-Expenses=Net Income • Multi Step covered in Chapter 5 Profitability Ratios • Gross Profit Ratio ◦ GP/Net Sales • Profit Margin ◦ NI/Net Sales • Return on Assets ◦ NI/Average Total Assets ◦ Overall measure of profitability ◦ Preferably these are higher ratios • Earnings per share ◦ EPS—(NI-Pfd. Div)/Average Common Shares Outstanding Statement of Stockholders Equity • Reports changes in retained earnings, common stock account ◦ Might include issuance of common stock, stock buyback, ect Statement of Cash Flows • CF Operating Activities ◦ Cash inflows and outflows associated with revenues and expenses On income statement Concerns primary activity of firm 2 • CF Investing Activities ◦ Cash inflows and outflows Acquisition and sale of long term/intangible assets • CF Financing Activites ◦ Cash inflows and outflows associated with issuance, repayment, or retirement of long term liabilities and capital stock • Combining results in Net Increase/Decrease in cash Using SCF Information • Free Cash Flow ◦ CF Op. Act-Capital Expenditures-Cash dividends ◦ Company must invest in new property, plant and equipment, pay dividends to maintain status quo ◦ Whatever left to pay debt, increase dividends, expand IFRS vs. GAAP • IFRS recommends classified statement of financial position for balance sheet • Format differs ◦ Noncurrent assets ◦ Current assets ◦ Equity ◦ Non current liability ◦ Current liabilities • Under IFRS, current assets are usually listed in reverse order of liquidity • Some companies report subtotal of net assets ◦ Assets-Liabliites • Many differences in terminology 3 Chapter 3 Notes- Accounting Information System AIS • The AIS is a system of collecting and processing transaction data and communicating it to users • Mostly automated Transactions • External event ◦ Occurs between firm and outside party ◦ Recorded if money is involved • Internal event ◦ Occurs within the firm ◦ Recorded if financial effect • Source documents ◦ Evidence of the transaction you are about to record Analyzing Transactions • Recognition issue ◦ When to record • Valuation Iddue ◦ What dollar amount to record • Classification issue ◦ What accounts are affected • Every business transaction has a dual effect on the accounting equation ◦ A=L+SE Account • Used to record increases and decreases in each specific ◦ Asset ◦ Liability ◦ Stockholders equity account • Mechanism by which we classify • Has its own page in the ledger • Each company has a chart of accounts • Order on chart of accounts is always ◦ A, L, SE, R, E • Every account has three parts ◦ Title, left or debit side ◦ Right or credit side • Use T accounts often ◦ Heuristic device ◦ Not used in formal practice ◦ Too many transactions • Ledger keeps running balance after each transaction Tabular Analysis v. Journal Entries • Tabular analysis ◦ analyze transactions and then decrease or increase the accounts affected by adding or subtracting to the balance. • Journal Entries ◦ Debit and credit accounts to reflect increases or decreases ◦ More efficient Debit and Credit • Abbreviated as Dr. an Cr. respectively • Debit ◦ Left ◦ Increase assets ◦ Decrease liabilities and stockholders equity ◦ Decrease revenues ◦ Increase expenses ◦ Increase dividends • Credit ◦ Right ◦ Decrease assets ◦ Increase liabilities and stockholders equity ◦ Increase revenues ◦ Decrease expenses ◦ Decrease dividends • Comparing totals on both sides • If total on left is greater, debit balance • If total on right is greater, credit balance • Balance is any difference between the two totals Another approach to rules of Debit and Credit • A=L+SE • Debits (left) increase accounts on left side (assets) • Credits (right) increase accounts on right (liabilities) • Now onto SE components • C/S, R/E, and Revenue are increased by credits • Expenses and Dividends are increased by debris Recording Transactions • Get details of transaction from source document 2 • Determine which accounts are involved • Apply rules of debit and credit • In journal entires ◦ Date ◦ Account names ◦ Amounts in Debit and Credit ◦ Explanation • Skip a space between journal entires, no $ signs Journal vs. Ledger • Journal ◦ Chronological document ◦ Record transactions in journal before entering them in the accounts ◦ Contains complete transactions • Ledger ◦ Contains all accounts ◦ Shows the balance in each account after each entry affecting the account Accounting Cycle (thus far) • Journalize transactions • Post from journal to ledger • Prepare trial balance ◦ List of accounts and their balances ◦ Purpose Does Debit=Credit? ◦ Useful in detecting errors in journalizing and posting ◦ Limitations Wont show if transaction not journalized Not posted Posted twice Wrong accounts used in journalizing and positing Wrong (but equal) amounts used in recording ◦ If trial balance does not balance Debit was entered as credit, or vice versa? Ledger account balance is incorrect, or was carried incorrectly to trial balance? Trial balance summed incorrectly? 3


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