accounting - a service activity public - enterprises affect members of the

● referred to as the “language of the public in a variety of ways

business”
financial statements - are written records
types of information provided by that convey the financial activities of a
accounting : company
quantitative information - information
expressed in numbers, quantities or units elements of financial statements :
qualitative information - information assets - a present economic resource
expressed in words or descriptive form controlled by the entity as a result of past
financial information - information events
expressed in money (also a quantitative liabilities - a present obligation of the entity
because monetary amounts is also to transfer and economic resource as a
expressed in numbers) result of past events
equity - the residual interest in the assets of
phase of accounting : the enterprise after deducting all its liabilities
recording - (bookkeeping) a systematic
and chronological recording of business accounting equation :
transactions assets = liabilities + owners equity
classifying - the sorting of business
transactions to their specific accounts the elements directly related to the
summarizing - data recorded are measurement in the income statement are
summarized through financial statements income and expenses
● income statement
● balance sheet title account used in balance sheet :
● statement of retained earnings assets :
● statement of cash flows current assets - short-term assets,
interpreting - (called analysis report) the converted into cash within 1 year or less
accountant’s interpretation on the financial parts of current assets :
statement cash - it is any medium of exchange that a
bank will accept for deposit at face value
users and their information needs : cash equivalents - a short-term, highly
investors - need information to help them liquid investments that are readily
determine whether they should buy, hold or convertible to known amounts of cash
sell notes receivable - a written pledge that the
employees - interested in information about customer will pay the business a fixed
the stability and profitability of their amount of money on a certain date
employers accounts receivable - these are claims
lenders - interested in information that against customers arising from sale of
enables them to determine whether their services or goods ln credit
loans will be paid in when due inventories - assets which are held for sale
suppliers and other trade creditors - in the ordinary course of business in the
interested in information that enables them process of production for such sale
to determine whether amounts owing to prepaid expenses - expenses paid for by
them will be paid when due the business in advance
customers - have an interest in information parts of non-current assets :
about the continuance of an enterprise, property, plant, and equipment (PPE) -
especially when they have a long-term these are tangible assets that are held by
involvement with or are dependent on the an enterprise for use in production or supply
enterprise of good or services or for rental to others
government and their agencies - accumulated depreciation - a contra
interested in the allocation of resources and account that contains the sum of the
the activities of the enterprises periodic depreciation charges
intangible assets - these are identifiable, expenses - it involves the outflow of money,
non-monetary assets without physical the use of other assets, or the incurring of a
substance held for use in the production liability
liabilities : cost of sales - the cost incurred to
current liabilities - short-term liabilities, purchase or to produce the products sold to
expected to be paid within 1 year or less customers during the period; also called
parts of current liabilities : cost of goods sold
accounts payable - reverse of accounts salaries/wages expenses - includes all
receivable, by accepting the goods or payments as a result of an
services, the buyer agrees to pay for them employer-employee relationship
in the near future telecommunications, electricity, fuels,
notes payable - the business entity is the and water expenses - expenses related to
maker of the note; the business entity is the use of related to use of telecommunications
party who promises to pay the other party a facilities, consumption of electricity, fuel and
specified amount of money on a specified water
future date supplies expense - expense of using
accrued liabilities - amounts owed to supplies
others for unpaid expenses rent expense - expense for space,
unearned revenues - when the business equipment, or other asset rentals
entity receives payment before providing its insurance expense - portion of premiums
customers with goods or services, the paid on insurance coverage which has
amounts received are recorded in the expired
unearned revenue account (liability depreciation expense - the portion of the
method) cost of a tangible asset (e.g. building and
current portion of long-term debt - these equipment) allocated or charged as
are portions of mortgage notes, bonds and expense during an accounting period
other long-term indebtedness which are to uncollectible account expense - the
be paid within one year from the balance amount of receivables estimated to be
sheet date doubtful of collection and charged as
parts of non-current liabilities : expense during an accounting period
mortgage payable - this account records interest expense - an expense related to
long-term debt of the business entity for use of borrowed funds
which the business entity has pledged
certain assets as security to the creditor the most basic tool of of accounting is the
bonds payable - business organizations accounting equation
often obtain substantial sums of money from
lenders to finance business transaction - the occurrence of
parts of owner’s equity : an event or a condition that affects financial
capital - this account is used to record the position and can be reliably recorded
original and additional investments of the financial transaction worksheet - the
owner of the business entity financial transactions will be analyzed by
withdrawals - when the owner of a means of a financial transaction worksheet
business entity withdraws cash or other which is a form used to analyze increases
assets, such are recorded in the drawing or and decreases in the assets, liabilities or
withdrawal account owners equity of a business entity

title account used in income statement : Financial statements and analysis

revenue/income - It is the inflow of money
or other (including claims to money, such as GENERAL ACCEPTED ACCOUNTING
sale made on credit) PRINCIPLES (GAAP) - The practice and
service income - revenues earned by procedure guideline used to prepare and
performing services for a customer maintain financial records and records;
sales - revenues earned as a result of sale authorized by the FASB
of merchandise
FINANCIAL ACCOUNTING STANDARDS operating performance in order to predict
BOARD (FASB) - The accounting the possible outcome of future operations
profession’s rule-setting body, which
authorizes GAAP ▪︎ liquidity - refers to the ability of the
business to pay current maturing
SECURITIES AND EXCHANGE financial obligations.
COMMISSION (SEC) - The federal ▪︎ solvency or stability - refers to the
regulatory body that governs the sale ability of an entity to settle long-term
and listing of securities debts when they mature and still remain
stable
STOCKHOLDER’S REPORT - Annual ▪︎ profitability - refers to the ability of an
report that publicly owned corporations entity to earn an income equal to or
must provide to stockholders; it above the industry and also reflects the
summarizes and documents the firm’s efficiency of the management in utilizing the
financial activities during the past year resources entrusted to them.

the four key financial statements : ▪︎ horizontal analysis - analytical tool that
evaluates the present performance of an
▪︎ income statement - (called Statement of entity compared to that of last year.
Operations, Statement of Comprehensive
Income) formula : current year - base year ×100
▪︎ Provides a financial summary of the base year
firm’s operating results during a specified
period. ▪︎ vertical analysis - analytical tool that
determines the size or proportion of an
▪︎ balance sheet - (called Statement of item in the financial statements in relation
Financial Position) to the total.
▪︎ Presents a summary statement of the
firm’s financial position at a given point in formula : current year ÷ total amount (base)
time = x 100

▪︎ statement of retained earnings - balance sheet - the total of assets and

Reconciles the net income earned during liabilities + owners equity (base)
a given year and any cash dividends paid, Income statement - the 100% (base)
with the change in retained earnings
between the start and the end of that year ▪︎ ratio analysis - Involves methods of
calculating and interpreting financial
▪︎ statement of cash flow - Provides a ratios to analyze and monitor the firm’s
summary of the firm’s operating, performance.
investment and financing cash flows and
reconciles them with changes in its cash types of ratio comparison :
and marketable securities during the period
▪︎ Cross sectional analysis - involves the
▪︎ notes to the financial statements - comparison of different firm’s financial
These footnotes detailing information on ratios at the same point in time
the accounting policies, procedures, ▪︎benchmarking - type of cross-sectional
calculations and transactions underlying analysis in which the firm’s ratio values
entries in the financial statements are compared to those of a key
competitor or group of competitors that it
▪︎ financial statement analysis - the wishes to emulate.
process of selecting related data from
financial statements for evaluating an ▪︎ time-series analysis - evaluation of the
entity’s past financial position and firm’s financial performance over time
using financial ratio analysis.
Financial ratios Debt ratios
Financial leverage
Categories of financial ratios : ▪︎ the magnification of risk and return
▪︎ liquidity ratios introduced through the use of fixed-cost
▪︎ activity ratios financing, such as debt and preferred
▪︎ debt ratios stock.
▪︎ profitability ratios
▪︎ market ratios 2 general types of of debts measures :
▪︎ degree of indebtedness - measures the
Liquidity ratios amount of debt relative to other
▪︎ The liquidity of a firm is measured by its significant balance sheet amounts.
ability to satisfy its short term ▪︎ ability to service debts - reflects a firm’s
obligations as they come due. ability to make the payments required on
▪︎ two basic measures of liquidity are the a scheduled basis over the life of a debt.
working capital,current ratio, and quick
(acid-test) ratio. Coverage ratios - measure the firm’s
ability to pay certain fixed charges.
Working capital - It is calculated from the
assets and liabilities on a corporate Debt ratio - measures the proportion of
balance sheet, focusing on immediate total assets financed by the firm’s
debts and the most liquid assets. creditors.

Current ratio - one of the most commonly Time interest earned ratios - sometimes
cited financial ratios, measures the firm’s called the interest coverage ratio,
ability to meet its short-term obligations. measures the firm’s ability to make
contractual interest payments.
Quick (acid-test) ratio - similar to the
current ratio except that it excludes Fixed-payment coverage ratio - the firm’s
inventory, which is generally the least liquid ability to meet all fixed-payment
current asset. obligations.

Activity ratios Profitability ratios

▪︎ measure the speed with which various ▪︎ As a group, these measures enable the
accounts are converted into sales or analyst to evaluate the firm’s profits with
cash—inflows or outflows. respect to a given level of sales, a certain
level of assets, or the owners’ investment.
Inventory turnover - commonly measures ▪︎ A popular tool for evaluating profitability in
the activity, or liquidity, of a firm’s relation to sales is the common-size
inventory. income statement.

Average collection period - or average Gross profit margin - measures the

age of accounts receivable, is useful in percentage of each sales dollar
evaluating credit and collection policies. remaining after the firm has paid for its
goods.
Average payment method - or average
age of accounts payable, the average Operating profit margin - the percentage
amount of time needed to pay accounts of each sales dollar remaining after all
payable. costs and expenses other than interest,
taxes, and preferred stock dividends are
Total asset turnover - indicates the deducted.
efficiency with which the firm uses its
assets to generate sales. Net profit margin - the percentage of
each sales dollar remaining after all
costs and expenses, including interest,
taxes, and preferred stock dividends, have
been deducted.

Earnings per share (EPS) - represents

the dollar amount earned on behalf of
each share— not the amount of earnings
actually distributed to shareholders.

Return on total assets (ROA) - often

called the return on investment (ROI),
measures the overall effectiveness of
management in generating profits with
its available assets.

Return on common equity (ROE) -

measures the return earned on the
common stockholders’ investment in the
firm.

Market ratios
▪︎ Market ratios relate the firm’s market
value, as measured by its current share
price, to certain accounting values.

Price/Earnings/(P/E) ratio - commonly

used to assess the owners’ appraisal of
share value. The P/E ratio measures the
amount that investors are willing to pay for
each dollar of a firm’s earnings.

Market/Book/(M/B) ratio - provides an

assessment of how investors view the
firm’s performance.