Accounting BUS 10123-002
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This 3 page Class Notes was uploaded by Amy Turk on Friday May 20, 2016. The Class Notes belongs to BUS 10123-002 at Kent State University taught by Dr. Diane DeRubertis in Spring 2015. Since its upload, it has received 8 views. For similar materials see Exploring Business in Business at Kent State University.
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Date Created: 05/20/16
ACCOUNTING The Income Statement ● a financial report that shows an organization’s overall profitability or loss over a period of time ● month, quarter, year ● shows a firm’s bottom line = its expenses minus revenues ● revenue = the total amount of money received or promised from the sale of goods/services and other activities ● cost of goods sold = the amount of money the firm spent to buy and produce the products it sold ○ cost of goods sold = beginning inventory and interim purchases = ending inventory ● expenses = costs incurred to day-to-day operations of an organization ○ common expense accounts shows on income statements ■ selling ■ general and administrative ■ interest ● gross income/profit = revenues minus the cost of goods sold ● depreciation = special type of expense included in general and administrative category ○ involves spreading the costs of long-lived assets over the total number of accounting periods in which they are to be used ● net income = the total profit of loss after all expenses are deducted from revenue ○ accountants usually divide profits into subcategories (operating systems, ie) The Balance Sheet ● a snapshot of an organization’s financial position at a given moment ● presents an accumulation of all the company’s transactions since it began ● shows what an organization owns and controls and sources of income used to pay for assets ● assets ○ current assets (short-term) ■ used or converted to cash within a calendar year ○ accounts receivable ■ money owed the company by clients or customers who have promised to pay at a later date ■ accountants usually include an allowance for bad debts, which the firm does not expect to collect ○ long-term assets (fixed) ■ represent a commitment of funds for more than a year ■ includes tangibles and intangibles ● liabilities ○ current liabilities = obligations to short-term creditors ■ accounts payable = amounts owed to supplies for goods and services purchased on credit ■ accrued expenses = all unpaid financial obligations incurred by the company ● owner’s equity = all the owner’s contributions to the organization, along with income earned by the organization, retained for financing growth and development Statement of Cash Flows ● cash from operating activities ○ calculated by combining the changes in the revenue, expense, current assets, and current liability accounts ● cash from investing activities = calculated from changes in the long-term or fixed asset accounts ● cash from financing activities = calculated from changes in the long-term liability accounts and the contributed capital accounts in owners equity Ratio Analysis ● calculations that measure an organization’s financial health ● profitability ratios = ratios measuring the amount of operating income or net income an organization is able to generate relative to its assets, owner’s equity, and sales ● profit margin = net income divided by sales ● return on assets = net income divided by assets ● return on equity = net income divided by owner’s equity ○ return on investment (ROI) Asset Utilization Ratios ● ratios that measure how well a firm uses its assets to generate each $1 of sales ● managers use asset utilization ratios to pinpoint areas of inefficiency in their operations Receivables Turnover ● sales divided by accounts receivable ● inventory turnover = sales divided by total inventory ● total asset turnover = sales divided by total assets Liquidity Ratios ● ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt ● high liquidity ratios may satisfy a creditor’s need for safety, but may indicate the company is not using its current assets efficiency ● liquidity ratios are best examined in conjunction with asset utilization ratios because high turnover ratios imply cash in flowing through very quickly ● current ratio = current assets divided by current liabilities ● quick ratio (acid test) = A stringent measure of liquidity that eliminates inventory Debt Utilization ● ratios that measure how much debt an organization is using relative to other sources of capital, such as owner’s equity ● debt financing is riskier than equity as it demands a monthly payment regardless of profitability ● recessions affect heavily indebted firms far more than those financed through equity ● most companies tend to keep debt-to-asset levels below 50 percent ● debt to total assets ratio = a ratio indicating how much of the firm is financed by debt and how much by owners equity ○ debt divided by interest expense ● times interest earned ratio ○ operating income divided by interest expense
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