Download - Accounting and basic financial statements
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Ayesha Khalil
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Financial Statements
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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
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Set of activities involved in converting information about
transactions into financial statements
Accounting process
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Basic financial statements:-o Balance Sheeto Income Statemento Statement of Retained Earningso Statement of Cash Flows
FINANCIAL STATEMENTS
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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?
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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
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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
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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.
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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
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Land &
Building
Fixed assets
Fixed Asset
Are not moveable
PropertyPlant
Equipment
Natural
resources
Finature
Fixture
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Assets
Have not physical existence
Intangible
Assets
Not visible
Good will
Patent trade mark
Franchises
Licenses
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Current Liabilities
SalariesWagesPayrolltaxes
Interest payable
Advance from third party
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Long Term liabilities
Long term
liabilities
Bond &
note payabl
e
Bank loan
Account
payable
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Equity
contributed (or paid in)
capitalstock
Owners’ claims on
the company
assets
accumulated profits/losses
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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
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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
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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
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INCOME STATEMENT
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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?
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Earnings per share:-= net income ÷ number of shares
Dividends per share:-
= dividends ÷ number of shares
EPS AND DIVIDENDS PER SHARE
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Beginning retained earnings
+Net income
–Dividends paid
=Ending retained earnings
STATEMENT OF RETAINED EARNINGS
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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
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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
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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:-
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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
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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
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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
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Profitability RatiosGross profit margin:-
Operating profit margin:-
Net profit margin:-
Gross ProfitSales
Net Profit Sales
EBIT Net sale
× 100
× 100
× 100
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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
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Asset Turn over RatioTotal asset turnover:-
Fixed asset turnover:-
Equity turnover:-
net salesavg. total net assets
net salesavg. net fixed assets
net salesavg. equity
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Any Question???
Any Question?
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