A FURTHER LOOK AT FINANCIAL STATEMENTS 2

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A FURTHER LOOK AT FINANCIAL STATEMENTS 2

Peake, Tom, Host has reference to this Academic Journal, PHwiki organized this Journal A FURTHER LOOK AT FINANCIAL STATEMENTS Accounting, Fourth Edition 2 Identify the sections of a classified balance sheet. Identify in addition to compute ratios as long as analyzing a company’s profitability. Explain the relationship between a retained earnings statement in addition to a statement of stockholders’ equity. Identify in addition to compute ratios as long as analyzing a company’s liquidity in addition to solvency using a balance sheet. Use the statement of cash flows to evaluate solvency. Explain the meaning of generally accepted accounting principles. Discuss financial reporting concepts. Study Objectives

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Ratio analysis Using the income statement Using the statement of stockholders’ equity Using a classified balance sheet Using the statement of cash flows The Classified Balance Sheet Current assets Long-term investments Property, plant, in addition to equipment Intangible assets Current liabilities Long-term liabilities Stockholders’ equity The st in addition to ard-setting environment Qualities of useful in as long as mation Assumptions Principles Constraints Using the Financial Statements Financial Reporting Concepts A Further Look At Financial Statements The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Presents a snapshot at a point in time. To improve underst in addition to ing, companies group similar assets in addition to similar liabilities together. Illustration 2-1 St in addition to ard Classifications Illustration 2-2 The Classified Balance Sheet SO 1

Illustration 2-2 The Classified Balance Sheet SO 1 The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer. Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers. Current Assets The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Companies list current asset accounts in the order they expect to convert them into cash. Current Assets Illustration 2-3

Cash, in addition to other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called: Current assets. Intangible assets. Long-term investments. Property, plant, in addition to equipment. Review Question The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Investments in stocks in addition to bonds of other companies that are held as long as more than one year. Investments in long-term assets such as l in addition to or buildings not currently being used in operating activities. Long-Term Investments Illustration 2-4 Property, Plant, in addition to Equipment The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Long useful lives. Currently used in operations. Depreciation – allocating the cost of assets to a number of years. Accumulated depreciation – total amount of depreciation expensed thus far in the asset’s life.

The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Illustration 2-5 Property, Plant, in addition to Equipment Intangible Assets The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Assets that do not have physical substance. Illustration 2-6 Patents in addition to copyrights are Current assets. Intangible assets. Long-term investments. Property, plant, in addition to equipment. Review Question The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet.

The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Obligations the company is to pay within the coming year. Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude. Current Liabilities The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Illustration 2-7 Current Liabilities The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Obligations a company expects to pay after one year. Illustration 2-8 Long-Term Liabilities

Which of the following is not a long-term liability Bonds payable Current maturities of long-term obligations Long-term notes payable Mortgages payable Review Question The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet. Illustration 2-2 Common stock – investments of assets into the business by the stockholders. Retained earnings – income retained as long as use in the business. Stockholders’ Equity The Classified Balance Sheet SO 1 Identify the sections of a classified balance sheet.

Using the Financial Statements Ratio Analysis Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity in addition to another. Using the Financial Statements Using the Financial Statements Profitability ratios measure the operating success of a company as long as a given period of time. Using the Income Statement SO 2 Identify in addition to compute ratios as long as analyzing a company’s profitability. Illustration 2-10

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Using the Financial Statements Illustration: Earnings per share (EPS) measures the net income earned on each share of common stock. Profitability Ratio $1,003 (414 – $0 + 411) 2 = $2.43 $1,407 (411 – $0 + 481) 2 = $3.15 Illustration 2-11 Best Buy For 2010 Stonel in addition to Corporation reported net income $26,000; net sales $400,000; in addition to average shares outst in addition to ing 6,000. There were preferred stock dividends of $2,000. What was the 2010 earnings per share $4.00 $0.06 $16.67 $66.67 Review Question Using the Financial Statements SO 2 Identify in addition to compute ratios as long as analyzing a company’s profitability. $26,000 – $2,000 6,000 = $4.00 Using the Financial Statements Using the Statement of Stockholders’ Equity SO 3 Explain the relationship between a retained earnings statement in addition to a statement of stockholders’ equity. Most companies use a statement of stockholders’ equity, rather than a retained earnings statement, so that they can report all changes in stockholders’ equity accounts. Illustration 2-12

Using the Financial Statements SO 3 Explain the relationship between a retained earnings statement in addition to a statement of stockholders’ equity. Observations from this financial statement of Best Buy: Common stock decreased during the first year because the stock issuance was much smaller than the stock repurchase. Common stock increased in the second year as the result of an issuance of shares Best Buy paid dividends each year. Prior to 2003, Best Buy did not pay dividends, even though it was profitable in addition to could do so. Why didn’t Best Buy pay dividends prior to 2003 Using the Statement of Stockholders’ Equity The balance in retained earnings is not affected by: net income net loss issuance of common stock dividends Review Question SO 3 Explain the relationship between a retained earnings statement in addition to a statement of stockholders’ equity. Using the Financial Statements Using the Financial Statements Using a Classified Balance Sheet Illustration 2-13

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