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1. Identify the people who use accounting information and possible careers
in the accounting industry.
2. Discuss the accounting process.
3. Read and interpret a balance sheet.
4. Read and interpret an income statement.
5. Describe business activities that affect a firm’s cash flow.
6. Summarize how managers evaluate the financial health of a business.
Accounting
A Definition
Examples of Financial
Information
The process of systematically How much profit did a
collecting, analyzing, and business earn last year?
report financial information
How much tax did a business
pay?
•• Planning
Confirm and
Evaluatetax Setting
credit
financial Goalsbeforeofcommitting
applicants
performance
liabilities firm beforeto short-term
buying stocksor long-term
• Organizing
financing
•• Leading
Evaluateand
Approve themotivate
new risk of aofcompany’s
issues stocks andsecurities
bonds (stocks or bonds)
• Control
Evaluate risk of nonpayment before selling products to firm
Balance Sheet
A summary of the dollar amounts of a firm’s assets,
liabilities, and owners’ equity
Income Statement
A summary of a firm’s revenues and expenses during a
specified accounting period
a company has to pay for all the things it has (assets) by either borrowing money
(liabilities) or getting it from shareholders (shareholders' equity)
Assets
money and other valuables belonging to
an individual or business.
Types 1: Current Assets
can quickly be converted into cash or that
will be used in one year or less
Type 2: Fixed (Non-current) Assets
will be held or used for a period longer than
one year
Liabilities
debts of the business, represent creditors
claim on business assets
Types 1: Current Liability
debts to be repaid in one year or less
Type 2: Long-term (Non-current) Liability
debts that need not be repaid for at least one
year
Equity
funds "owing" to shareholders
Amount of fund (money) invested by owners
?
Total Liabilities
? 40,000
Liabilities = Current Liabilities + 106,000 Liabilities
+ Non-current
Accounting Equation
Financial Ratio
Measuring Firm’s Financial Performance
Financial Ratio
Measuring Firm’s Financial Performance
1. Liquidity Ratio
Financial Ratios
100
2009
0.5
Current Ratio
200
Current assets are half of current liabilities
Measures
400
2010
ability to pay back its short-term liabilities with its short-term 2
assets. 200 liabilities
Current assets are two times of current
In 2010,
The higher the current ratio, the more capable the company’s ability to pay for
company is of paying its obligations. short-term debt is improving from 2009
MGT1101 Introduction to Business Chapter 15
See chapter supplement
2. Profitability Ratios
To analyze firm's ability to control expenses and earn profits through the
use of company's resources. Cross-sectional
50
Co. A
0.25
Net Profit Margin
200
25%
Profit is 25% of sales
Measures
120
Co. B
how much out of every dollar of sales a company actually 0.20
keeps in earnings. (How many %Profit
of sales
is is
20%profit?)
of sales 600 20%
A higher profit margin indicates a more profitable company
Co.A has ability to control cost
that has better control over its costs and make profit than Co.B has
MGT1101 Introduction to Business Chapter 15
See chapter supplement
3. Operating Performance
Or Asset Management Ratios
Co. A
0.20
Total Asset Turnover 500
20%
Each dollar of total asset investment can generate 0.23 dollar of profit
Measures 90
Co. B
measures a firm's efficiency at using its assets in
0.23
generating sales or revenue - the higher the number 400 23%
the better.
Co. B is better than Co.A in using its total assets to
generate sales
MGT1101 Introduction to Business Chapter 15
See chapter supplement
Co. A
1
Debt to Equity Ratio 250
The total assets are financed by equity more than by debt
Measures 200
Co. B
0.5
Indicates the relationship between the debt financing and
equity financing.
400
A high ratio generally means that a company has been
Co. A is more aggressive in financing its growth
aggressive in financing its growth with debt.
with debt than Co. B is
MGT1101 Introduction to Business Chapter 15
See chapter supplement
The Summary