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Generally accepted accounting principles (GAAP)
Largely determined by rule -making institutions, especially the Financial
Accounting Standards Board (FASB.)
Income statements (Statements of Financial Operations) have two forms.
Single-step simply subtracts all expenses from all revenues.
Multiple-step highlights important components of revenues and expenses.
Revenues xx
Cost of goods sold
Gross profit xx xx
Operating expenses
Income from operations xx xx
Other revenues and expenses xx
Income before tax xx
Tax expense
Net income xx xx
Decision tools
Return on assets =
Profit margin = net income / average assets net income / sales
Balance sheets (Statements of Financial Position) may be presented in classified format.
ASSETS
Current assets are either used up or converted to cash within one year.
Plant, property and equipment have lives exceeding one year.
Intangible assets are noncurrent but are without physical substance.
Long-term investments in stocks and bonds are held for more than one year.
LIABILITIES
Current liabilities must be paid within one year
Long-term liabilities - you guessed it!
STOCKHOLDERS' EQUITY
Paid-in capital (contributed capital) reports resources received from shareholders.
Retained earnings reports increases in net resources resulting from income.
Retained earnings is reduced by dividends. Dividends distribute resources to shareholders.
Decision Tools
Current ratio = current assets / current liabilities
Working capital = current assets- current liabilities
Debt to assets ratio = total liabilities / total assets
Statements of cashflows report cash from operating, financing and investing activities
Decision tools
Current cash debt coverage ratio = CFO/average current liabilities
Debt coverage ratio = CFO / average total liabilities
Depreciation
Depreciation expense expenses a portion of plant and equipment during the current year.
Accumulated depreciation (contra-asset) discloses all the depreciation pertaining to an asset since its purchase.