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by: Amy Turk

Accounting BUS 10123-002

Amy Turk

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About this Document

Notes on accounting
Exploring Business
Dr. Diane DeRubertis
Class Notes
Income, Revenue, Expenses, profit, Gross, Depreciation, Net, current, assets, liabilities, equity, cash, flows, investing, financing, profitability, margin, liquidity
25 ?




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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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