Understanding Accounting Financial Statements by liaoqinmei

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									16. Understanding Accounting &
     Financial Statements




                             1
                 Topics
• Accounting, accountants, the accounting
  process
• Financial statements
• Evaluating financial statements




                                            2
                      Accounting
• Information contained in the financial statements
   – Balance sheet
   – Income statement
   – Statement of cash flows
• Accountants
   – Private/management
   – Public
   – CPA
   – Government
• Public Company Accounting Oversight Board
   – Sarbanes-Oxley Act
   – Sets audit standards & monitors accounting firms


                                                        3
             Accounting (Cont.)
• The accounting process
  – Accounting equation
     • Assets = Liabilities + Owners’ Equity
  – Double-entry bookkeeping
  – Accounting cycle
     •   Analyze source documents
     •   Journalize transactions
     •   Post transactions to ledger
     •   Prepare trial balance
     •   Prepare financial statements & close books


                                                      4
       The Financial Statements
• All refer to a given period of time
• Balance sheet (Fig. 16.4)
   – Assets
       • Current assets
       • Fixed assets
       • Intangible assets
   – Liabilities
       • Current liabilities
       • Long-term liabilities
   – Owners’ equity

                                        5
The Financial Statements (Cont.)
• The income statement (Fig. 16.5)
   – Revenues
   – Cost of goods sold (COGS)
   – Gross income
   – Operating expenses
   – Operating income
   – Depreciation
   – Net interest expense
   – Taxable income
   – Income taxes
   – Net income
                                     6
The Financial Statements (Cont.)
• The statement of cash flows (Fig, 16.6)
  – Cash flows from operating activities
  – Cash flows from investing activities
  – Cash flows from financing activities
• Net change in cash (or “net cash flow”)
  – Added to beginning cash balance
  – To determine ending cash balance (or “free
    cash flow”)

                                                 7
 Evaluating Financial Statements
• Financial ratios (See Table 16.1)
   – Profitability ratios
      • Return on sales = net income (after taxes) ÷ net
        sales
      • Return on owners’ equity = net income (after taxes)
        ÷ owners’ equity
      • Earnings per share = net income (after taxes) ÷ no.
        of shares of common stock outstanding
   – Liquidity ratios
      • Current ratio = current assets ÷ current liabilities
      • Acid test ratio = (current assets - inventories) ÷
        current liabilities
                                                           8
 Evaluating Financial Statements
             (Cont.)
• Financial ratios (cont.)
  – Activity ratios
     • Accounts receivable turnover = net credit sales ÷
       accounts receivable
     • Inventory turnover = COGS ÷ average value of
       inventory
         – Average value of inventory = (beginning
           inventory value + ending inventory value) ÷ 2
  – Leverage ratio = total liabilities ÷ total assets
                                                           9

								
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