Principles of Financial Accounting

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

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

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

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

Principles of Financial Accounting