Midterm notes (ppt notes) PDF

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Business Activities can be divided into these categories: Financing, Investing, and Operating. Basic ways to finance your business: 1. Equity Investors: a. Owners; for a corporation, these are the stockholders b. Hope to receive dividends and for the stock price to increase, but they have no guarantee of either c. Public versus private company 2. Debt Investors a. Creditors of the business, such as a bank b. Principal must be repaid c. Interest must be paid Securities and Exchange Commission (SEC) 1. Established in 1934 2. Only applies to public companies 3. Requires public companies to file the following: a. Form 10-K (annually) b. Form 10-Q (quarterly) c. Annual financial statements audited by an “independent auditor” Financial Statements 1. The financial “picture” of the company 2. May be prepared anytime, but always at the end of the year 3. Prepared by management to go to any interested parties 4. For public companies, annual financial statement must be audited by outside, independent auditors Independent Auditors 1. Independent of the company they are auditing 2. Examine the financial statements that management has prepared 3. Issue their opinion of the financial statements to give assurance to stockholders, creditors, and any other interested parties Big 4 Accounting Firms 1. PricewaterhouseCoopers (PwC) 2. Deloitte 3. Ernst & Young (EY) 4. KPMG Generally Accepted Accounting Principles (GAAP) 1. The accounting standards that companies based in the United States are required to use. 2. Standards give the statements credibility and allow reports of different companies to be comparable. 3. The responsibility of the Financial Accounting Standards Board (FASB). International Financial Reporting Standards (IFRS) 1. Accounting standards used in more than 100 other countries. 2. The responsibility of the International Accounting Standards Board (IASB). 3. Becoming more accepted in the United States.

Both GAAP and IFRS require every publicly-held company to present four financial statements annually: 1. Balance Sheet 2. Income Statement 3. Statement of Retained Earnings 4. Statement of Cash Flows Balance Sheet: 1. Assets = Liabilities + Equity (Stockholders) 2. Assets - Liabilities = Stockholders’ Equity a. Assets are what your company owns i. Typical current assets 1. Cash 2. Accounts Receivable 3. Inventory 4. Short-term investments 5. Prepaid Items ii. Typical long-term investments 1. Stock investments 2. Bond investments iii. Typical fixed assets: 1. Equipment 2. Buildings 3. Land iv. Typical intangible assets 1. Patents 2. Copyrights 3. Trademarks b. Liabilities are what your company owes i. Typical current liabilities: 1. Accounts Payable 2. Wages Payable 3. Utilities Payable 4. Short-term Notes Payable ii. Typical long-term liabilities: 1. Notes Payable 2. Bonds Payable c. (Stockholders’) Equity is the owners’ portion the assets i. Common Stock ii. Retained Earnings 3. The Balance Sheet is called a “snapshot” because it a picture of the business at a point in time. 4. The ending balances on the Balance Sheet always become the beginning balances at the start of the next period. Income Statement:

Revenues -Expenses = Net Income 1. Revenue is what was earned during the period. 2. Expenses are the cost of earning the revenue. 3. The Income Statement covers a period of time. 4. At the end of the period, the ending balances on the Income Statement are zeroed out, so the next period will start with a clean slate. Statement of retained earnings: Beginning retained earnings +Net income -Dividends = Ending retained earnings 1. This statement always stays these same four lines. 2. Explains how the retained earnings account changed during the period. Income Statement: Revenue -Cost of goods sold = Gross Profit -All the other expenses = Net income from operations +/- Gain or loss on sale of other assets = Net Income Every time a company sells its “inventory” (also called “merchandise”), it must make two balancing entries: 1. Record the sale by increasing Revenue and increasing either Cash or Accounts Receivable. 2. Transfer the cost of the inventory sold from the balance sheet to the income statement. Inventory (on the balance sheet) is reduced and “Cost of Goods Sold” (on the income statement) is increased. When a company sells an asset other than its inventory (such as land), only one entry is needed: 1. Remove the asset 2. Record the cash received 3. Recognize any gain or loss on the sale Statement of Cash Flows divided into these categories: 1. Financing a. Transactions with stockholders’ and bankers (only of the principal amount) 2. Investing a. Buying and selling fixed assets: land, buildings, and equipment 3. Operating a. All other cash transactions Beginning cash +/- Cash flows from operations

+/- Cash flows from investing +/- Cash flows from financing = Ending cash Analyzing Financial Information: 1. Across time 2. Within the industry 3. Within the financial statements a. Common-size financial statements i. Balance Sheet 1. For example, compare each account balance with total assets to determine its percent of the total. ii. Income Statement 1. For example, compare each income and expense item with total revenue to determine its percent of total revenue. b. Ratio Analysis i. Profitability 1. Compares net income to a number on the balance sheet. a. Ex. return on equity: Net income/ Average stockholders’ equity ii. Leverage 1. A measure of the extent to which the company uses debt. a. Ex. debt to equity ratio: Average total liabilities/ Average stockholders’ equity iii. Solvency 1. A measure of the company’s ability to pay its debt. a. Ex. current ratio: Current assets/ Current liabilities iv. Asset turnover 1. A measure of the speed that assets move through operations. a. Ex. inventory turnover ratio: Cost of goods sold/ Average inventory v. Other ratios 1. The most important of all ratios is earning per share: a. Net income/ Number of shares outstanding...