• designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. It was created in 1973.
• The mission of SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation

• an independent, privately funded accounting standard-setter based in London, England founded in 2001.
• successor to IASC, which developed International Financial Reporting Standards.

• If the left side (DEBIT) of the balance sheet increases (decreases), then the right side (CREDIT) must increase (decrease) by the exact same amount
• Owners (also called residual claimants) get whatever is left over after creditors have been paid: Equity = Assets - Liabilities

1. Recording transactions (accounting function)
2. Recording adjusting entries (accounting function)
3. Preparing the financial statements (finance function)

• A debit increases an asset or reduces a liability
• A credit increases a liability or reduces an asset
• Every debit has to have an offsetting credit.

Permanent

Assets: Debit (+) Credit (-)

Liabilities: Debit (-) Credit (+)

Equity: Debit (-) Credit (+)

Temporary

Revenues, Gains Expenses, Losses Dividends

• Temporary statement
• Lists income and expenses over a fiscal period (quarter or year)
• Note that the amounts shown do not necessarily represent cash flows

• The only permanent financial statement
• Represents what a firm owns (Assets) and own (Liabilities) at the end of a fiscal period
• Assets are listed in order of liquidity
• Claims are listed in order due
• balance sheet values generally represent book or historical amounts, not necessarily current market values
• Assets represent uses of funds; claims represent sources of funds

• Required due to the widespread use of accrual accounting
• Divided into 3 parts: Operating, Investing, and Financing.
• The three parts are added up to equal the change in cash from the end of one fiscal period to the end of the next

• Details the change in shareholders equity from the end of one fiscal period to the end of the next fiscal period
• Formula: Equity (end of this year) = Equity (end of prior year + Net income - Cash dividends +new shares sold - shares repurchased

• The selling company has completed most of the activities associated with producing and selling the product
• The selling company has incurred the costs associated with producing and selling the product or can reasonably measure those costs
• The company can measure the amount of revenue it has earned
• The company can reasonably be sure that it is going to collect cash from the sale.

• Product category
• Geographic
• Marketing channel

• Cost of the product being sold
• Cost of goods may include wages as well as the cost of raw materials and direct production expenses
• Some types of firms (such as airlines, railroad, and utilities) dont have any cost of goods sold
• Some companies include "unusual" items in cost of goods sold
• Revenue - Cost of goods = Gross Profit (income)

• Operating expenses include selling, administrative and general expenses
• Gross profit - operating expenses = operating income

• Depreciation and amortization
• Interest expense
• Operating income - Depreciation - Net interest expense - Other expenses (income) = Earnings before taxes

• What is shown on the income statement is probably not the exact cash amount paid in taxes
• The amount shown on the income statement usually overstates the cash amount
• Additional information on income taxes can be found in footnotes

• Extraordinary income (charges) are added (subtracted) from net income
• Cash dividends are subtracted from net income

• Probable future economic benefits obtained or controlled by the firm as a result of past transactions or events
• Divided into: Current Assets and Long-Term Assests
• Represents uses of funds

• Cash and assets that will be (or are expected to be) converted into cash during the operating cycle within a year, whichever is longer
• Presented in order of liquidity
• Major Items: cash and equivalents, marketable securities, accounts receivable, inventories, and prepaid expenses

• Debt or equity securities of other firms or governments
• Intention to convert into cash during the current period

• U.S. Treasury bills and other money market instruments are carried at face value (value at maturity)
• Long term debt and equity securities are generally carried at current market values

• Accounts Receivable: Amounts due from sales or services 
• Inventories: Carried at lower of cost or market. Categories: Goods on Hand, Raw Materials, Work in process, Finished goods

• Expenditures made in advance of the use of the service or goods
• Examples: Insurance and Advertising

• Land
• Buildings
• Machinery
• Construction in Progress

• Accumulated Depreciation: carries the to-date depreciation of pant assets
• Depreciation methods: Straight Line and Accelerated
• Balance sheet presentation: Book Value = Cost of asset - Accumulated depreciation
• Non-cash expense
• Public reporting uses straight line depreciation
• Tax purposes uses accelerated depreciation

• If a firm sells an asset for anything other than its book value, there is a tax implication
• Recapture of depreciation is taxed as ordinary income
• Capital gains are often taxed at a lower rate

• Capital Lease: Long term, asset earns revenue, Leasee usually responsible for maintenance, recorded as both a long-term asset and long term liability.
• Operating Lease: short term, asset doesnt earn revenue, Lessor pays maintenance, not reported on the balance sheet.

• Debt or equity securities: held to maintain business relationship, to exercise control, or simply as investments
• Debt classification: held to maturity carried at amortized cost. Available for sale at market value.
• Equity securities: carried at market value

• Patents
• Trademarks
• Franchises
• Copyrights

• probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
• Types: Current Liabilities and Long-Term Liabilities

• Preferred stock: senior claim to assets relative to common stockholders
• Common stock: residual claimants and legal owners of a corporation

• Common Stock (at par)
• Paid in surplus
• Retained Earnings
• Treasury stock
• all of these add up to shareholder's equity (the most relevant number)

• Net Income: Increase
• Cash Dividends: Decrease
• Repurchase of shares: Decrease
• Sale of new shares: Increase

• pays shareholders additional shares rather than cash

• Liquidity Ratios
• Activity or Efficiency Ratios
• Leverage and Coverage Ratios
• Profitability Ratios

• Current Ratio: Current Assets/ Current Liabilities
• Quick Ratio: Current Assets (minus inventory)/ Current Liabilities
• Cash Ratio: Cash & Short Term Investments/ Current Liabilities
• Free Cash Flow Ratio: Cash flow from operations-Capital Expenditures-Cash dividends/ Current Liabilities

• Accounts Receivable Turnover: Credit Sales/Accounts Receivable
• Average Age of Accounts Receivable: 365/Accounts Receivable Turnover
• Inventory Turnover: Sales/Inventory
• Average age of inventory: 365/Inventory Turnover
• Fixed Assets Turnover: Sales/Net fixed Assets
• Total Assets Turnover: Sales/Total Assets

• Debt Ratio: Total Liabilities/Total Assets
• Long term debt to equity: LT debt/Total equity
• Equity Multiplier: Assets/Equity
• Times interest Earned: Operating Income/Interest

• Gross Margin: Gross income/Sales
• Operating margin: Operating income/Sales
• Net Margin or Return on Sales: Net income/Sales
• Return on Assets: Net income/Total Assets
• Return on Equity: Net income/ Total Equity

• Earnings per shares: Net Income/Number of Shares
• Dividend per shares: Dividend/Number of Shares
• Dividend payout ratio: Dividend/Net Income
• Retention Rate: 1-dividend payout ratio
• Sustainable growth rate: Return on Equity * Retention Rate
• Price to earning ratio: Stock Price/Earnings per share
• Dividend Yield: Dividend per shares/Stock price
• Market value of equity: stock price * number of shares
• Q: Market value of equity/book value of equity