Intro to Financial Accounting

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Intro to Financial Accounting by Mind Map: Intro to Financial Accounting

1. Current Ratio: Current Assets / Current Liabilities

1.1. Higher the ration, the more buffer

2. New node

3. Brief History

4. Ledger Accounts

4.1. Accounts systematize accumulation of transactions

4.2. Each account corresponds to and summarizes changes in a balance sheet Item

4.3. Definition- Measrable change in balance sheet

4.4. T-account - Title of account, 2 columns.

4.5. Accounting Conventions

4.5.1. In asset accounts, increases on left and decreases on right

4.5.2. In liability accounts, increases on right, decreases on left.

5. Decreases in owner's equity

6. Cash flow (simplistically) is net income mnus depreciation expense

6.1. More precisely - sum of net income plus noncash expenses minus noncash revenues

7. Relates to Assets = liabilities + owners equity. Assets on left, liability and owners equity on right.

8. Financial Statements only tell part of the story - cash flow analysis tells the rest.

9. Ch 3: Accounting Cycle

9.1. Transactions

9.1.1. Money must change hands. Signing lease as opposed to paying first month's rent.

9.1.2. Internal - such as depreciation

9.1.3. External - paying to outside entity

9.2. Cycle Summary

9.3. Debits and Credits

9.3.1. Debit - left hand

9.3.2. Credit - right hand

9.3.3. Avoid thinking in terms of up or down. Gets confusing.

9.3.4. Owner's equity accounts - increases on right decreases on left.

9.4. Adjustments

9.4.1. Liquidity matters as well - investors and creditors use this. Made for internal purposes, such as per-paid rent being used up.

9.4.2. Identify what, how much, and from which accounts.

10. Ch 2: Basic Financial Statements

10.1. Balance Sheet

10.1.1. Assets - Economic resources of a firm, generally used to produce cash inflow for firm

10.1.2. Liabilities - debts of an enterprise

10.1.3. Owner's equity - residual claim of owners on Assets of firm

10.1.4. Assets = Liabilities + Owner's Equity

11. Ch 4: Cash Flow Analysis

11.1. Intro

11.2. Statement of Cash Flows

11.2.1. Net Income is not the same as a change i the company's cash - included are things such as depreciation. Cash flow analysis shows the major sources and uses of cash.

11.2.2. Basics Noncash expenses - amortization of intangibles, depreciation of plant assets, and depreciation of natural resources. Noncash revenues - accrued revenues not collected. Cash inflows / outflows - sources of cash coming in or out. General rule: If Noncash assets or liabilities increase, cash is flowing in. If noncash assets or liabilities decrease cash is flowing out. Increase in Owner's Equity Uses of Cash Increase in noncash assets Decrease in liabilities

11.2.3. Sources of Cash Decreases in noncash assets Looks at changes in accounts to measure cash flow From business operations - see note Increase in iabilities

11.2.4. Indirect Method From investing activities - purchases and sales of investments purchase/sale of property, plant & equipment, long-term investemnts. Non-current assets Financing Activities - effects of financing transactions issuance/repaymetn of debt, issuance/repurchase of stock, payments of dividends Looks at cash activity to measure cash flow

11.2.5. Direct Method

11.3. Reflects all accounts recievable, but accounts recievable cannot be used to buy things.

11.3.1. New node

11.4. Used to be working capital statement, not cash flow

12. Ch 5: Analysis of Financial Statements

12.1. Allows users to make predictions about performance.

12.2. Users and Objectives Statemt Analysis

12.2.1. Users of Statements Investors - shareholders Look at liquidity and financial strength Creditors - suppliers of those who lend credit look at long-term financial performance and financial strength Managers - not primary users

12.2.2. Comparative Analysis Consistancy is important - how does a company's performance compare over time? What about against others in same industry? Percentage Comparisons horizontal - changes from year to year vertical - compares compnents with a base item (total assets) and expresses components as percentage og the base Ratio Analysis - expresses relationship of key balance sheet components and expresses them in ratio form.

12.3. Operating Performance

12.3.1. Profit Margin Ratio: Net Income/Net Sales Primary measure of companies operating performance

12.3.2. Gross Margin Ratio: Gross Profit/Gross Sales shows markup of price

12.3.3. Asset Turnover Ratio: Net Sales/Average Total Assets depects investment efficiency. Sales dollars per dollar invested.

12.3.4. Return on Assets (ROA): Net Income / Average Total Assets = (Net Income/Sales) X (Sales/ Average Total Assets) Best overall indicator of efficiency of investment in and use of assets.

12.3.5. Return on Equity (ROE): Net Income / Average Shareholders' Equity Show income earned for every dollar invested by owners

12.3.6. Earnings per Share (EPS): Net Income Available for Common Shares / Average # of Common Shares Outstanding How many dividends to each share of stock?

12.3.7. Price - Earnings Ratio (P/E): Market Price per Share / Earnings per Share How much in excess of current earnings are investors willing to pay for share?

12.3.8. Payout Ratio: Dividends / Net Income What perportion of net income goes to shareholders

12.3.9. Times Interest Earned: Profit before Taxes and Interest / Interest How many times a company's earnings cover its interest - assess probability of meeting interest obligations

12.4. Liquidity

12.4.1. Working Capitol: Current Assets - Current Liabilities Guage ability to meet short term obligations

12.4.2. Quick Ratio: Cash, MktSecurities, Accts Rec. / Current Liabilities Current Ratio but excludes inventories and prepaid expenses.

12.4.3. Recievables Turnover: Net Sales / Average Accounts Receivable how fast accounts recievable are turned into cash

12.4.4. Inventory Turnover: Cost of Goods Sold / Average Inventory How fast inventory is sold and replaced.

12.4.5. Operating Cycle: Days Inventory + Days Recievable How Fast it takes to complete cycle of cash to Inventory to Accounts Recievable to Cash.

12.4.6. Accounts Payable Turmover: Purchases / Average Accounts Payable companies in cahs binds will stretch their credits owed.

12.5. Financial Strength

12.5.1. Stockholders' Equity to Assets: Stck Eq / Total Assets Opposite of Debt / Assets

12.5.2. Debt to Equity: Deby / Equity How much debt in perportion to its equity

12.5.3. Debt to Total Assets Ratio: Total Liabilities / Total Assets What portion of assets are supplied by creditors?