Principles of Financial Accounting

1
Principles of Financial Accounting

• Chapter 2

2
GAAP

• Relevance
• Predictive value
• Feedback value
• Must be timely
• Reliability
• Verifiable
• Faithful Representation
• Neutral (free of bias)

3
GAAP (cont)

• Comparability
• Comparing different companies
• Consistency
• Comparing different years for the same company
• Materiality
• When its size or significance can influence a
  decision of an investor or creditor.

4
GAAP (cont)

• Conservatism
• When in doubt choose a method of reporting that
  would avoid overstating assets and income.

5
Classified Balance Sheet

• Assets
• Current assets are intended to be converted into
  cash or consumed in one year or the operating
  cycle (whichever is longer).
• Long-Term Investments
• Property, Plant Equipment
• Intangible Assets

6
Classified Balance Sheet (cont)

• Liabilities
• Current liabilities are intended to paid within
  one year with a current asset.
• Long-term liabilities
• Stockholders Equity
• Common Stock
• Retained Earnings

7
Ratio Analysis

• Profitability Ratios
• Return on Assets
• Net income / Average assets
• Profit Margin
• Net income /Net sales

8
Ratio Analysis (cont)

• Liquidity the ability of the company to pay its
  bills on time.
• Working capital
• Current assets current liabilities
• Current Ratio
• Current assets / current liabilities

9
Ratio Analysis (cont)

• Solvency the measure of the company to survive
  over a long period of time.
• Debt to Total Assets Ratio
• Total liabilities / Total assets
• Availability of Cash
• Current cash debt coverage ratio
• Cash provided by operations/average current
  liabilities
• Cash debt coverage ratio
• Cash provided by operations/average total
  liabilities

10
Assignment

• All brief exercises starting on page 77
• BYP2-2 page 88
• BYP2-10