0
Financial Statements
A financial statement is a record of the financial activities of a person or business entity where all related financial information are presented in an orderly manner and can be easily understood.
5,583 Questions
Where are key financial ratios?
Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:
Liquidity ratios
Asset turnover ratios
Financial leverage ratios
Profitability ratios
Dividend policy ratios
Liquidity Ratios
Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.
The current ratio is the ratio of current assets to current liabilities:
Current Ratio = Current Assets/Current Liabilities
Short-term creditors prefer a high current ratio since it reduces their risk. Shareholders may prefer a lower current ratio so that more of the firm's assets are working to grow the business. Typical values for the current ratio vary by firm and industry. For example, firms in cyclical industries may maintain a higher current ratio in order to remain solvent during downturns.
One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. The quick ratio is defined as follows:
Quick Ratio = (Current Assets - Inventory)/Current Liabilities
The current assets used in the quick ratio are cash, accounts receivable, and notes receivable. These assets essentially are current assets less inventory. The quick ratio often is referred to as the acid test.
Finally, the cash ratio is the most conservative liquidity ratio. It excludes all current assets except the most liquid: cash and cash equivalents. The cash ratio is defined as follows:
Cash Ratio = (Cash + Marketable Securities)/Current Liabilities
The cash ratio is an indication of the firm's ability to pay off its current liabilities if for some reason immediate payment were demanded.
Asset Turnover Ratios
Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios. Two commonly used asset turnover ratios are receivables turnover and inventory turnover.
Receivables turnover is an indication of how quickly the firm collects its accounts receivables and is defined as follows:
Receivables Turnover = Annual Credit Sales/Accounts Receivable
The receivables turnover often is reported in terms of the number of days that credit sales remain in accounts receivable before they are collected. This number is known as the collection period. It is the accounts receivable balance divided by the average daily credit sales, calculated as follows:
Average Collection Period = Accounts Receivable/Annual Credit Sales / 365
The collection period also can be written as:
Average Collection Period = 365/Receivables Turnover
Another major asset turnover ratio is inventory turnover. It is the cost of goods sold in a time period divided by the average inventory level during that period:
Inventory Turnover = Cost of Goods Sold/Average Inventory
The inventory turnover often is reported as the inventory period, which is the number of days worth of inventory on hand, calculated by dividing the inventory by the average daily cost of goods sold:
Inventory Period = Average Inventory/Annual Cost of Goods Sold / 365
The inventory period also can be written as:
Inventory Period = 365/Inventory Turnover
Other asset turnover ratios include fixed asset turnover and total asset turnover.
Financial Leverage Ratios
Financial leverage ratios provide an indication of the long-term solvency of the firm. Unlike liquidity ratios that are concerned with short-term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt.
The debt ratio is defined as total debt divided by total assets:
Debt Ratio = Total Debt/Total Assets
The debt-to-equity ratio is total debt divided by total equity:
Debt-to-Equity Ratio = Total Debt/Total Equity
Debt ratios depend on the classification of long-term leases and on the classification of some items as long-term debt or equity.
The times interest earned ratio indicates how well the firm's earnings can cover the interest payments on its debt. This ratio also is known as the interest coverage and is calculated as follows:
Interest Coverage = EBIT/Interest Charges
where EBIT = Earnings Before Interest and Taxes
Profitability Ratios
Profitability ratios offer several different measures of the success of the firm at generating profits.
The gross profit margin is a measure of the gross profit earned on sales. The gross profit margin considers the firm's cost of goods sold, but does not include other costs. It is defined as follows:
Gross Profit Margin = (Sales - Cost of Goods Sold)/Sales
Return on assets is a measure of how effectively the firm's assets are being used to generate profits. It is defined as:
Return on Assets = Net Income/Total Assets
Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm's stock. Return on equity is defined as follows:
Return on Equity = Net Income/Shareholder Equity
Dividend Policy Ratios
Dividend policy ratios provide insight into the dividend policy of the firm and the prospects for future growth. Two commonly used ratios are the dividend yield and payout ratio.
The dividend yield is defined as follows:
Dividend Yield = Dividends Per Share/Share Price
A high dividend yield does not necessarily translate into a high future rate of return. It is important to consider the prospects for continuing and increasing the dividend in the future. The dividend payout ratio is helpful in this regard, and is defined as follows:
Payout Ratio = Dividends Per Share/Earnings Per Share
Does a purchases journal record sales on account?
Purchase journal only records and deals in with purchases and don't deal with sales items.
the income balance is the amount of income earned at the end of the accounting period.
Statement of Cash Flows
What is the journal entry to write off a fully depreciated asset that was sold?
dr a/d---xxx
dr loss --xxx
dr cash--xxx
cr---equipment xxx
(If at a loss; if sold at a gain then credit gain on disposal)
What is effect of posting errors on a trial balance?
Depends on the error. Either assets will be over/understated and liabilities/stockholders' equity will be over/understated.
What is going-concern Assumption?
Going concern is the assumption that the company will be around for the foreseeable future. If an auditor has a going concern issue, he/she may fear that the company will go bankrupt, etc.
Balance Statement
Income statement in financial reporting is different in this sense that in that income statement all expenses and incomes are shown as incomes and expenses and there is no classification of fixed expenses or variable expense while in contribution margin income statement expenses are shown in this way that separate the fixed expenses from variable portion of expenses.
What is the role of pricing in by product pricing?
Product Prices perform various functions in the marketing program. Here are the 4 major roles of price in marketing.
1) Signal To The Buyer - Price offers a fast and very direct way of communicating with your customers. The price is visible to your buyer and provides a basis of comparison between brands. Price also can be used to position your brand as a high quality product.
2) Instrument of Competition - Price offers you a way to quickly attack competitors, or alternatively to position your business away from direct competition.
3) Improving Financial Performance - Because Prices determine financial performance, pricing strategies will impact a business's financial statements both in the short and long term.
4) Marketing Program Considerations - Prices can also substitute for advertising and sales promotion, in addition to being used to reinforce these activities in the marketing program. For example, pricing strategy can be used as an incentive to channel members as the focus of promotional strategy and as a signal of value.
It is a statement which call again and again by him self is known as recurrtion statement
Does year end cash balances count against net income?
Cash balances do not affect net income. The year end cash balance will be reflected on the Balance Sheet and Statement of Cash Flows.
Is rent a capital or revenue expenditure?
Rent received or paid both are revenue expenditures as it is to be received or paid at every month time.
What causes the profit for the year not to equal the net cash inflow?
You have several components that would cause changes in Cash flow and Net income. The first, and usually most intrusive is the way that capital asset (machines, buildings, etc.) are recorded. Purchasing a machine worth $50,000 causes an instant outflow of cash, however, you are able to amortize that same machine over it's useful life on the balance sheet. This means that if the machine has a useful life of 10 years, the amortization expense in the same year your purchased the machine (which remember was a $50,000 outflow of cash) will only be $5,000 (assuming straight-line amortization). This gives you a difference of $4,500 for the year. In subsequent years, the amortization expense will still be present at $5,000 (which counts towards your Net Income), however you did not have any cash transaction associated with the asset. This causes a $5,000 affect in the opposite direction.
What is the difference between out standing expense and prepaid expenses?
Outstanding Expenses are expenses which are due at a specific point of time for example if the actual date to pay the rent is 1st july and we don't pay the rent till august end, then it is called the outstanding Expenses (outstanding rent)
prepaid Expenses are expenses which are paid in advance for example if we paid the premium of Insurance in advance i.e before due date, then it calls the prepaid expenses.
True
What revenue measures how effectively a firm manages assets to generate revenue?
_____ measure how effectively a firm manages assets to generate revenue.
What is the difference between accrued income and income in advance?
Accrued income is that where income is earned but amount is not received while income in advance is reverse of accrued income where amount is received in advance but services not provided yet.
Does interest revenue go on income statement?
Yes all revenues are part of income statement and interest revenue also that’s why it is shown in income statement as other income.
