CHAPTER 8: Accounting. DECISION MAKING BY THE NUMBERS. Market Information. How can you tell how well you are doing? Measure individual transactions Put them all together – How much “stuff” (acquired wealth) do you have Where did it come from? (assets = liabilities + owners equity)
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DECISION MAKING BY THE NUMBERS
Liabilities + Owner’s Equity
Balance Sheet – summarizes a firm’s financial position at a specific point in time.
the firm owes to
the firm owns
the claims owners
Liabilities and Owners Equity
Long Term Debt
Total Liability & Owner’s Equity
Income Statement – summarizes a firm’s operations over a given period of time in terms of profit and loss.
Revenue – Expenses =
the cash the firm
spends or other
assets it uses to
the increase in
the amount of
assets the firm
Net Income –
the profit or loss
the firm earns
Statement of Retained Earnings – reports how retained earnings have changed.
Stockholder’s Equity Statement – reports how net income and dividends affect retained earnings.
Horizontal Analysis – compares information in a firm’s financial statement over a period of 2 years or more.
Vertical Analysis – expresses items on the balance sheet and income statement as a percentage of a key value.
Ratio Analysis – compares selected items by computing percentages, rates or proportions.
Evaluates the financial impact of different alternatives
in a decision-making situation.
An electronics firm produces high definition LCD televisions at a rate of 10,000 per month. It currently makes its own speaker sets for the televisions.
A supplier offers to sell the firm similar speakers at a cost of $23 per television. The firm could lower costs by buying the speakers, $23 is less than $26. Right?