Intermediate Financial Accounting

(Intermediate Financial Accounting)Edit

Financial statements

  1. Balance sheet
    • The balance sheet in its simplest form is covers the accounting equation (Asset=liabilities + Equity) at a specific point in time ex. Dec. 31 20XX.
  2. Income Statement
    • The income statement covers the profit and loss over a period of time such as year 20XX. With the Goal of finding the net income with the equation ( Net Income = Revenue+ Gain) -(expenses + losses)
  3. Cash Flow Statement
    • the statement of cash flows is primarily concerned with the changes in specific assets and liabilities over a period of time. the four areas the the cash flow statement reports on are operating activities (primary source business income), investing activities ( Changes in Porperty, plant and equipment and long term investments), Financing activities (Changes in Equity) and Supplemental information (Changes in signficant items that do not involve cash such as exchanges)

Useful Ratios

      1. Liquidity Ratios
        • Current
        • Acid test
      2. Activity Ratios
        • Turnover tests
      3. Profitability Ratios
        • Return on Assets
        • Return on Equity
        • Profit Margin
      4. Coverage Ratios

(Example Balance Sheet and Income Statement)Edit

Current assets Year 2 Year 1
Cash and Cash Equivalents $55 $60
Receivables $100 $85
Inventory $75 $50
Total Current Assets $220 $190
Non current assets
Property, Plant, and Equipment $200 $200
Investments $20
Intangible Assets: Goodwill and Other $5
Total Assets $455 $395
Liabilities
Accounts Payable $25 15
Notes payable $75 $30
Current Liabilities $100 $45
Long-Term Debt $200 $200
Stockholders Equity
Common stock $145 $145
Retained earnings $10 $5
Total Liabilities and Equity $455 $395
Income Statement
Sales 300
Cost of Goods sold 200
Selling, general and adminstrative 40
Interest expense 10
Total expense 250
Income before income taxes 50
Income tax expense (30%) 15
Net income 35

Liquidity Ratios Liquidity ratios these ratios measure a firms’ efficiency and ability to meet obligations to other lenders

Working capital current assets minus current liabilities
Current ratio Current assets divided by current liabilities
Acid or quick ratio Cash plus accounts receivable plus marketable securities divided by current liabilities
Time interest earned ratio Net income plus interest expense plus income tax expense. Divide by interest expense
Account receivable turnover Net credit sales divided by average accounts receivable
Number of days in Accounts Receivable 365 divided by Accounts Receivable turnover
Inventory turnover Cost of goods divided by average inventory
Numbers of days in inventory 365 divided by inventory turnover

Probability and equity ratio’s these measure operation results and measure sources of equity

Profit margin Net income divided by sales
Return on assets Net income divided by average total assets
Return on equity Net income divided by average common stockholder equity
Earning per share Net income minus preferred dividends divided by weighted average common shares
Price to earnings ratio Stock price per share divided by earnings per share

See alsoEdit