- investing

- financing

- operating

- securities and exchange committee regulates the securities markets and ensure public disclosure of accounting information. Set the accounting rules for publicly traded companies

- financial accounting standards board has the power to set standards by the SEC

- consistency is the application of the same accounting principles by a single company over time

- comparability is if the info allows comparisons to be made between companies

- material: the idea that accounting info in financial statements should be able to influence a decision

-conservatism: when more than one equally acceptable accounting method exists, the one that results in lower revenue and assets or higher liabilities and expenses should be used

- a company's ability to pay obligations as they become due

Short - term liquidity Ratios:

current ratio = current assets / current liabilities

quick ratio = cash + short term investments + receivables / current liabilities
cash ratio - cash + short term investments / current liabilities

operating cash flow ratio = cash flows from operating activities / current liabilities

ratios that measure 2 aspects of a corporation's profits:

1) those elements of operations that contribute to profit

2) the relationship of profit to total investment and investment by stockholders

- gross profit percentage, operating margin percentage, net profit margin percentage, return on assets, return on equity

beginning inventory

- purchases

= goods available for sale

- ending inventory

= cost of goods sold

FOB shipping: goods belong to the customer once they are loaded on the truck. customer must pay shipping costs

FOB destination: goods belong to the customer when they are delivered. seller must pay for the shipping

- First in, First out - more accurate balance sheet & inventory

- Last in, First out - better matching of revenues and expenses - pay less taxes

- weighted average: average cost of goods sold

1) Clearly defined authority & responsibility

              - individuals are assigned certain responsibilities

            - have the authority to authorize transactions

 2) Segregation of duties

                - accounting & administrative duties should be performed by separate individuals

                - reduces likelihood of fraud, theft

             - separate record keeping & physical control of assets – ex. Movie theater

                3) Adequate documents & records

                                - provide info about specific company activities

                                - pre-numbered – used as verification

                4) Safeguards over assets & records

                                - physical / mechanical / electronically

                                - cash register / safe

                5) Checks on recorded amounts

                                - bank statements & financial statements should be checked by an independent person

                                - protect against theft & find discrepancies

1) bank reconciliaton                

2) Cash over and short

                                - cash overage – credit

                                - cash shortage – debit

                                - do a journal entry entitled cash over and short

                3) Petty Cash

                                - petty cash custodian

                                - employees pay for small purchases & are reimburse from petty cash fund

                                - at the end of the month all of the receipts are documented & expense is recorded

when a receivable is considered uncollectible:

- increase bad debt expense

- decrease accounts receivable

* inconsistent with the matching principle

- Allowance for doubtful accounts:

when receivable is uncollectible - debit allowance for doubtful accounts and credit accounts receivable

- percentage of credit sales method:

estimate what % of receivables with default

- aging method:

bad debt expense is estimated by determining of the accounts receivable

- revenue: expenditures that do not increase the future economic benefits of the asset - expensed in the same period the expenditure is made

- added to an asset account

capital - expenditures that extend the life of the asset, expand the productive capacity, increase efficiency, or improve the quality of the product

- reported in total on the income statment

a permanent decline in the future benefit or service potential of an asset

- due to numerous factors including too little depreciation expense recorded

represent future economic benefit to the company, but lack physical presence

- patents, copyrights, trademarks, leaseholds, organization costs, franchises, and goodwill

obligations that must be paid within one year or one operating cycle

- accounts payable, accrued liabilities, tax payables

take over a year or operating cycle to pay back

- notes payable, bonds payable, 

- notes/bonds:

must pay back face value & interest through periodic payments

- secured & unsecured/debenture bonds:

secured bonds provide collateral

- junk bonds

unsecured risky bonds that offer a high interest rate

- callable bonds

give the borrower the option to pay off the debt prior to maturity

- convertible bonds

lender has the option to turn the bond into other securities such as common stock

- discounts:

if the interest level is lower than market value

debit discount on bonds payable

- premium

credit premium on bonds payable

interest payment = face amount x contract rate

ammortization = interest payment - cash payment

1) authorized stock

- the maximum number of shares the business may issue in each class of stock

2) issued stock

- number of shares actually sold to stockholders

3) treasury stock

- issued stock the corporation buys back

4) outstanding stock

- issued stock actually in the stockholders' possesion

- par value

monetary amount printed on each share of stock that establishes a minimum price for the stock when issued

- market value

purchase dependent on creditors

if paid more than value:

- credit paid - on Capital in excess of par

- common:

owner's have voting rights, receive dividends when they are paid out, always have the same percentage, share assets in liquidation

- preferred:

pays a regular dividend, less risky investment than common stock, usually doesn't give voting rights

- cumulative dividend:

requires the eventual payment of all preferred dividends - both in arrears and current dividends - before any dividends are paid to common stockholders

- dividends in arrears:

preferred stock dividends remaining unpaid for more than one year

1) declaration date:

date when the corporation announces they will be paying out dividends

2) date of record:

date on which the stockholder must own one or more shares of stock in order to receive the dividend

3) payment date:

the date on which the dividend will actually be paid

1) inflows

- cash sales & collection of accounts receivable that arise from credit sales

- cash dividends or interest

2) outflows

- payments for goods or services purchased

- payments for wages & salaries

- taxes and interest payments

- acquiring & disposing of operating assets

- acquiring & selling investments

- lending money & collecting loans

1) inflows:

- sale of property, plant, & equipment

- collection of principle amounts of loans

- sale of investments to other companies

2) outflows:

- payments to acquire property, plant, & equipment

- purchase the debt or equity securities of another company

- make loans to borrowers

1) inflows:

- cash received for stock & issuance of debt (bonds or notes payable)

2) outflows:

 - cash payments to repay the principle amount borrowed

- repurchase company's own stock

- pay dividends

- begins with net income and then adjusts it for noncash items to produce net cash flow from operating activities

- add and subtract cash transactions

*current ratio - if a company can meet its current obligations

current assets / current liabilities

*quick ratio - include prepaids & receivables

cash + short term investments + receivables / current liabilities

*cash ratio - doesn't make the assumption that receivables will be collected

cash + short term investments / current liabilities

*operating cash flow ratio - ability of operations to generate cash

cash flows from operating activities / current liabilities

*times interest earned ratio - gauge company's ability to repay debt

EBIT / interest expense

*long-term debt-to-equity ratio - provides info on capital provided by debt & by stockholders

long-term debt / total equity

*debt-to-equity ratio - see if a company could afford their liabilities if they didn't have current liabilities

total liabilities / total equity

*long-term debt or debt-to-total assets

long-term / total assets

total liabilities / total assets

*accounts receivable turnover ratio - how many times accounts receivables are turned over in one year

net sale / average accounts receivable

*inventory turnover ratio - number of times inventory will be turned over

cost of goods / average inventory

*asset turnover ratio - efficiency with which a corporation's assets are used to produce sales revenues

net sales / average total assets

*gross profit - proportion of sales dollars that is available to pay other expenses & provide profit for owners

gross profit / net sales

*operating margin percentage - profitability of a company's operations in relation to its sales

income from operations / net sales

*net profit margin percentage - measures the proportion of each sales dollar that is profit

net income / net sales

*return on assets - profit earned through use of all its capital

net income + [interest expensex(1-tax rate)] / average total assets

*return on equity - profit earned through the use of capital provided by stockholders

net income / average equity

*earnings per share - income available for common stockholders on a per-share basis

net income - preferred dividends / average number of common shares outstanding

*return on common equity - same as return on equity

net income / average common equity

*dividend yield - measures rate at which dividends provide a return to stockholders

dividends per common share / closing market price per share for the year

*dividend payout ratio - measures the proportion of a corporation's profits that are returned to the stockholders as dividends

common dividends / net income

*total payout ratio - adds stock repurchases to common dividends and compares this to net income

common dividends + common stock repurchases / net income

*stock repurchase payout ratio

common stock repurchases / net income

or

total payout ratio - dividend payout ratio