Exam Review PDF

Exam Review 1. Financial Statements a. GAAP- generally accepted accounting principles – used to ensure consistency and objectivity b. FASB – financial accuracy standards board – board in charge of making sure everything accurate and true c. Cash / accrual Cash – money counted when it is in th...

Exam Review 1. Financial Statements a. GAAP- generally accepted accounting principles – used to ensure consistency and objectivity b. FASB – financial accuracy standards board – board in charge of making sure everything accurate and true c. Cash / accrual Cash – money counted when it is in the hand Accrual – money counted when transaction occurs – the handshake d. General Information 2. The three basic financial statements Balance sheet, Income statement, Statement of cash flows a. Information contained in each of the statements b. Balance Sheet – what a business owns and owes at a specific point in time i. Assets, liabilities, owner’s equity Assests are something a business has that contributes to their business. Liabilities are what others own – like a tractor, so debts the company owes. Owners' equity is what they own in their business, %. c. Income Statement – statement of the money you are bringing in i. Expenditures vs. Expenses Expenditures are when an asset is acquired that contributes to their business. An expense is something that deducts from their account from operation costs – such as diesel bills for your tractor. ii. Net Sales (Gross sales – Returns) is the money you make after allowances and returns were made. iii. Cost of Goods Sold Expenses put in to produce good – water for crops iv. Gross Margin (Net Sales – COGS) is the money you make back after operation expenses were subtracted. v. Operating Expenses Money you spent keeping your operation alive vi. Operating Income (Gross Margin – Operating Expenses) Money made after ALL sales and operation expenses vii. Nonoperating income and Expenses Money made and spent not pertaining to your business viii. Income before taxes Operation income – nonoperation income ix. Net Income (Income before taxes – income taxes) Money made after taxes d. Cash Flow Statement – increase and decrease in cash based on your balance sheet i. Why measure the cash flow? To determine if they're making money and if they can continue to do so. & seeing if they can meet their debts ii. Operating Activities – cash in and out due to operation iii. Investing Activities – buying and selling items to help your business – selling old tractor or buying a new one iv. Financing Activities – distributing funds to shareholders e. Formulas calculated from each f. Time covered for each statement Calendar years / seasons 3. Analysis of (Integrating) Financial Statements a. What values from each financial statement provide information to the other financial statements – ratios! b. The three C’s Compare analysis – comparing one business to another Change – showing changes that have occurred over time – comparing one year to another Common size – comparing your business to ones of common size c. Ratio Analysis (Four main types) Widely used as it compares numbers Profitability ratios – is the business making a profit? Activity ratios – does business use its resources effectively? Liquidity ratios – if business liquidized assets, could it pay off short term debts Solvency ratios – can a business pay off long term debts d. ROE Return on equity – or return on investment – did you make money off investment? Net income / owners equity e. ROA Return on assets – return of money put in Net income / firms assets f. BEP Basic earning power – like ROA but does not consider taxes – see how they really used their assets Operating income / total assets g. GMP Gross margin percentage - How much of sales goes to pay for the goods sold Gross margin / net sales h. ROS Return on sales – how much profit is made off of every good sold Net income / net sales i. AT Asset turnover – how much of your assets are turned over in a year If its close to or higher than the industry average, you are at capacity and should expand Net sales / total assets j. OEP Operating expense percent – how much of your sales is going to administration Selling, general, and administrative expenses / net sales k. IT Inventory turnover – how long inventory is held – can be good and bad. Good – things are selling quickly Bad – youre holding into stuff too long Cost of goods sold / net sales l. ART Accounts receivable turnovers – money that is owed to you – better if the amount of time between the transaction and the money received is short. Net sales / average accounts receivable inventory m. Current Ratio – should always be greater than 1 – does what you own outweigh what you owe? Current assets / current liabilities n. Quick Ratio – ratio of if you liquidized everything you own, not what you could own, can you cover what you owe? (Current assets – inventory) / current liabilities o. Debt-to-Equity – do you own more than what you owe? want number small Total liabilities / owners' equity p. Debt Ratio –how much of what you have is borrowed Total liabilities / total assets q. Coverage Ratio – firms' ability to service debt – can you pay your debts? Operating income / interest expense r. Evaluating Ratios vs. the industry average (weak, median, strong) s. Decomposition Analysis – separate ratios into individually and analyze them t. Breakeven Analysis / CTO – understanding costs, price, and volume. Revenue, costs, and profits to changes in sales volume. i. Variable costs / Fixed Costs Variable costs – costs that vary with production volume – labor, materials used Fixed costs – costs owed no matter what's produced – land costs, electricity bill. ii. Per unit CTO / Overall CTO (CTO – Fixed cost) Per unit price – variable cost per unit Per unit cto is amount left to pay fized costs once variable price is subtracted from per unit price. Overall CTO per unit CTO * units sold – should always be positive