Principles of financial accounting
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Principles of Financial Accounting. Chapter 2. GAAP. Relevance Predictive value Feedback value Must be timely Reliability Verifiable Faithful Representation Neutral (free of bias). GAAP (cont). Comparability Comparing different companies Consistency

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Principles of Financial Accounting

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Principles of financial accounting

Principles of Financial Accounting

Chapter 2


Principles of financial accounting

GAAP

  • Relevance

    • Predictive value

    • Feedback value

    • Must be timely

  • Reliability

    • Verifiable

    • Faithful Representation

    • Neutral (free of bias)


Gaap cont

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.


Gaap cont1

GAAP (cont)

  • Conservatism

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


Classified balance sheet

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


Classified balance sheet cont

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


Ratio analysis

Ratio Analysis

  • Profitability Ratios

    • Return on Assets

      • Net income / Average assets

    • Profit Margin

      • Net income /Net sales


Ratio analysis cont

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


Ratio analysis cont1

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


Assignment

Assignment

  • All brief exercises starting on page 77

  • BYP2-2 page 88

  • BYP2-10


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