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Accounting and basic financial statements


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accounting and accounting process. i explain basic financial statements.and i describe ratio analysis for measuring the current position of the business.and which steps are business have to taken for achieve maximum profit

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Accounting and basic financial statements

  1. 1. Financial Statements
  2. 2. BUSINESS ACTIVITIES INVOLVING ACCOUNTING activities provide necessary funds to start a business and expand it after it begins operating. activities provide valuable assets required to run a business. :-activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.
  3. 3. Set of activities involved in converting information about transactions into financial statements
  4. 4. FINANCIAL STATEMENTS o o o o Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flows
  5. 5. financial statements answer basic questions including: What is the company’s current financial status? What was the company’s operating results for the period? How did the company obtain and use cash during the period?
  6. 6. o What are the resources of the company? o What are the company’s existing obligations? o What are the company’s net assets?
  7. 7. THE BALANCE SHEET Summary of the financial position of a company at a particular date cash, accounts receivable, inventory, land, buildings, equipment and intangible items accounts payable, notes payable and mortgages payable net assets after all obligations have been satisfied
  8. 8. relationship that states that assets equal liabilities plus owners’ equity. process by which accounting transactions are entered; each individual transaction always has an offsetting transaction.
  9. 9. Inventories cash Current Assets Account Receivables Checks and money deposits Credit cards & receipt Short term investment prepaid insurance prepaid rent and supplies prepaid interest and property taxes
  10. 10. Land & Building Are not moveable Fixed Asset Finature Fixture Fixed assets Property Plant Equipment Natural resources
  11. 11. Have not physical existence Assets Not visible Intangible Assets Franchises Licenses Good will Patent trade mark
  12. 12. Current Liabilities Salaries Wages Payroll taxes Interest payable Advance from third party
  13. 13. Long Term liabilities Long Bond & term note liabilities payable Bank loan Account payable
  14. 14. Equity contributed (or paid in) capital stock Owners’ claims on the company assets accumulated profits/losses
  15. 15. Liabilities Cash $ 40 Accounts receivable 100 Land 200 Total assets $340 Accounts payable Notes payable $ 50 150 Owners’ Equity Capital stock Retained earnings Total liabilities and owners’ equity $200 $100 40 $140 $340
  16. 16. INCOME STATEMENT o financial record of a company’s revenues and expenses, and profits over a period of time. o Firm’s financial performance in terms of revenues, expenses, and profits over a given time period. o Reports profit or loss. o Focus on revenues and costs associated with revenues.
  17. 17. Assets (cash or AR) created through business operations Assets (cash or AP) consumed through business operations Revenues - Expenses
  19. 19. o Shows the results of a company’s operations over a period of time. o What goods were sold or services performed that provided revenue for the company? o What costs were incurred in normal operations to generate these revenues? o What are the earnings or company profit?
  20. 20. EPS AND DIVIDENDS PER SHARE = net income = dividends number of shares number of shares
  21. 21. STATEMENT OF RETAINED EARNINGS Beginning retained earnings +Net income –Dividends paid =Ending retained earnings
  22. 22. RETAINED EARNINGS o Increase in net assets o Increase in retained earnings o Increase in owners’ equity o Decrease in net assets o Decrease in retained earnings o Decrease in owners’ equity
  23. 23. RATIOS o Tool for measuring a firm’s liquidity, profitability, and reliance on debt financing, as well as the effectiveness of management’s resource utilization o Measure of leverage
  24. 24. compares current assets to current liabilities. measures the ability of a firm to meet its debt payments on short notice. current assets current liabilities current assets – inventory current liabilities
  25. 25. Cost of good sold inventory indicates the number of times merchandise moves through a business Sales Total Assets indicates how much in sales each dollar invested in assets generates
  26. 26. o Current ratio o Acid Test OR Quick ratio o Inventory turnover ratio o Total asset turnover ratio o Gross profit margin o Operating profit margin o Net profit margin o Debt to equity ratio o Debt to long term capital o Interest Coverage o Fixed Financial Ratio o Cash Flow Inters coverage o Return on Equity
  27. 27. Leverage ratios measure the extent to which a firm relies on debt financing. Total liabilities Total Asset Long Term Debt Owners Equity
  28. 28. Gross Profit Sales EBIT Net sale Net Profit Sales × 100 × 100 × 100
  29. 29. EBIT interest expense EBIT + ELIE gross interest expense + ELIE cash flow + interest expense + ELIE interest expense + ELIE ELIE = Estimated Lease Interest Expense
  30. 30. net sales avg. total net assets net sales avg. net fixed assets net sales avg. equity