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Ayesha Khalil
Financial Statements
Financing:- activities provide necessary funds to start a business and expand it after it begins operating.
Investing:-activities provide valuable assets required to run a business.
Operating:-activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.
BUSINESS ACTIVITIES INVOLVING ACCOUNTING
Set of activities involved in converting information about
transactions into financial statements
Accounting process
Basic financial statements:-o Balance Sheeto Income Statemento Statement of Retained Earningso Statement of Cash Flows
FINANCIAL STATEMENTS
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?
o What are the resources of the company?
o What are the company’s existing obligations?
o What are the company’s net assets?
The Balance Sheet
THE BALANCE SHEET
Summary of the financial position of a company at a particular date
Assets:- cash, accounts receivable, inventory, land, buildings, equipment and intangible items
Liabilities:-accounts payable, notes payable and mortgages payable
Owners’ Equity:- net assets after all obligations have been satisfied
Basic accounting equation: - relationship that states that assets equal liabilities plus owners’ equity.
Double-entry bookkeeping: - process by which accounting transactions are entered; each individual transaction always has an offsetting transaction.
cashChecks and money deposits
Credit cards & receipt
Inventories
Current Assets
Short term investment
prepaid insuran
ce
prepaid rent and suppliesprepaid interest and property taxes
Account Receiva
bles
Land &
Building
Fixed assets
Fixed Asset
Are not moveable
PropertyPlant
Equipment
Natural
resources
Finature
Fixture
Assets
Have not physical existence
Intangible
Assets
Not visible
Good will
Patent trade mark
Franchises
Licenses
Current Liabilities
SalariesWagesPayrolltaxes
Interest payable
Advance from third party
Long Term liabilities
Long term
liabilities
Bond &
note payabl
e
Bank loan
Account
payable
Equity
contributed (or paid in)
capitalstock
Owners’ claims on
the company
assets
accumulated profits/losses
Sample Balance SheetAssetsCash $ 40Accounts receivable 100Land 200
Total assets $340
LiabilitiesAccounts payable $ 50Notes payable 150
$200
Owners’ EquityCapital stock $100Retained earnings 40
$140 Total liabilities and owners’ equity $340
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.
INCOME STATEMENT
Revenues:-Assets (cash or AR) created through business operationsExpenses:-Assets (cash or AP) consumed through business operationsNet Income or (Net Loss):-Revenues - Expenses
The Income Statement
INCOME STATEMENT
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?
Earnings per share:-= net income ÷ number of shares
Dividends per share:-
= dividends ÷ number of shares
EPS AND DIVIDENDS PER SHARE
Beginning retained earnings
+Net income
–Dividends paid
=Ending retained earnings
STATEMENT OF 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
Net income results in: Dividends result in:
RETAINED EARNINGS
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
RATIOS
LIQUIDITY RATIOS
measures the ability of a firm to meet its debt payments on short notice.
current assets – inventorycurrent liabilities
current assetscurrent liabilities
Current ratio:-
compares current assets to current liabilities.
Quick ratio:-
Activity RatiosInventory turnover
ratio:-indicates the number of times merchandise moves through a
business
Cost of good soldinventory
Total asset turnover ratio :-
indicates how much in sales each dollar invested in assets generates
SalesTotal Assets
Liquidity Ratios:-
o Current ratio o Acid Test OR Quick ratio
Activity Ratios:-o Inventory turnover ratio o Total asset turnover ratio
Profitability Ratios:-o Gross profit margino Operating profit margino Net profit margin
Leverage Ratios;-
o Debt to equity ratioo Debt to long term
capitalCoverage ratios;-o Interest Coverageo Fixed Financial
Ratioo Cash Flow Inters
coverageAsset Turnover :-o Return on Equity
Leverage RatiosLeverage ratios measure the extent to which a firm relies on
debt financing.
Debt Ratio:- Total liabilities Total Asset
Long Term Debt To Equity :- Long Term Debt Owners Equity
Profitability RatiosGross profit margin:-
Operating profit margin:-
Net profit margin:-
Gross ProfitSales
Net Profit Sales
EBIT Net sale
× 100
× 100
× 100
Coverage ratiosInterest Coverage:-
EBIT
interest expense
Fixed Financial Cost:-EBIT + ELIE
gross interest expense + ELIE
ELIE = Estimated Lease Interest Expense
Cash Flow Interest Coverage
cash flow + interest expense + ELIE
interest expense + ELIE
Asset Turn over RatioTotal asset turnover:-
Fixed asset turnover:-
Equity turnover:-
net salesavg. total net assets
net salesavg. net fixed assets
net salesavg. equity
Any Question???
Any Question?