Intro to Financial Accounting

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

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

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

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

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

4. Ch 3: Accounting Cycle

4.1. Transactions

4.1.1. Definition- Measrable change in balance sheet

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

4.1.3. Internal - such as depreciation

4.1.4. External - paying to outside entity

4.2. Cycle Summary

4.3. Ledger Accounts

4.3.1. Accounts systematize accumulation of transactions

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

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

4.3.4. Accounting Conventions

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

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

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

4.4. Debits and Credits

4.4.1. Debit - left hand

4.4.2. Credit - right hand

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

4.5. Adjustments

4.5.1. Liquidity matters as well - investors and creditors use this.

4.5.1.1. Made for internal purposes, such as per-paid rent being used up.

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

5. Ch 2: Basic Financial Statements

5.1. Balance Sheet

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

5.1.2. Liabilities - debts of an enterprise

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

5.1.4. Assets = Liabilities + Owner's Equity

6. Ch 4: Cash Flow Analysis

6.1. Intro

6.2. Brief History

6.2.1. New node

6.3. Statement of Cash Flows

6.3.1. Basics

6.3.1.1. Net Income is not the same as a change i the company's cash - included are things such as depreciation.

6.3.1.1.1. Cash flow analysis shows the major sources and uses of cash.

6.3.1.2. Noncash expenses - amortization of intangibles, depreciation of plant assets, and depreciation of natural resources.

6.3.1.3. Noncash revenues - accrued revenues not collected.

6.3.1.4. Cash inflows / outflows - sources of cash coming in or out.

6.3.1.5. General rule:

6.3.1.5.1. If Noncash assets or liabilities increase, cash is flowing in. If noncash assets or liabilities decrease cash is flowing out.

6.3.1.6. Increase in Owner's Equity

6.3.1.7. Sources of Cash

6.3.1.7.1. Decreases in noncash assets

6.3.1.7.2. Increase in iabilities

6.3.1.8. Uses of Cash

6.3.1.8.1. Increase in noncash assets

6.3.1.8.2. Decrease in liabilities

6.3.1.8.3. Decreases in owner's equity

6.3.2. Indirect Method

6.3.2.1. Looks at changes in accounts to measure cash flow

6.3.2.2. From business operations - see note

6.3.2.3. From investing activities - purchases and sales of investments

6.3.2.3.1. purchase/sale of property, plant & equipment, long-term investemnts. Non-current assets

6.3.2.4. Financing Activities - effects of financing transactions

6.3.2.4.1. issuance/repaymetn of debt, issuance/repurchase of stock, payments of dividends

6.3.3. Direct Method

6.3.3.1. Looks at cash activity to measure cash flow

6.3.3.1.1. Cash collected from customers, paid to suppliers, employees, interest, taxes.

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

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

6.4.1.1. New node

7. Ch 5: Analysis of Financial Statements

7.1. Allows users to make predictions about performance.

7.2. Users and Objectives Statemt Analysis

7.2.1. Users of Statements

7.2.1.1. Investors - shareholders

7.2.1.1.1. Look at liquidity and financial strength

7.2.1.2. Creditors - suppliers of those who lend credit

7.2.1.2.1. look at long-term financial performance and financial strength

7.2.1.3. Managers - not primary users

7.2.2. Comparative Analysis

7.2.2.1. Consistancy is important - how does a company's performance compare over time?

7.2.2.2. What about against others in same industry?

7.2.2.3. Percentage Comparisons

7.2.2.3.1. horizontal - changes from year to year

7.2.2.3.2. vertical - compares compnents with a base item (total assets) and expresses components as percentage og the base

7.2.2.4. Ratio Analysis - expresses relationship of key balance sheet components and expresses them in ratio form.

7.3. Operating Performance

7.3.1. Profit Margin Ratio: Net Income/Net Sales

7.3.1.1. Primary measure of companies operating performance

7.3.2. Gross Margin Ratio: Gross Profit/Gross Sales

7.3.2.1. shows markup of price

7.3.3. Asset Turnover Ratio: Net Sales/Average Total Assets

7.3.3.1. depects investment efficiency. Sales dollars per dollar invested.

7.3.4. Return on Assets (ROA): Net Income / Average Total Assets = (Net Income/Sales) X (Sales/ Average Total Assets)

7.3.4.1. Best overall indicator of efficiency of investment in and use of assets.

7.3.5. Return on Equity (ROE): Net Income / Average Shareholders' Equity

7.3.5.1. Show income earned for every dollar invested by owners

7.3.6. Earnings per Share (EPS): Net Income Available for Common Shares / Average # of Common Shares Outstanding

7.3.6.1. How many dividends to each share of stock?

7.3.7. Price - Earnings Ratio (P/E): Market Price per Share / Earnings per Share

7.3.7.1. How much in excess of current earnings are investors willing to pay for share?

7.3.8. Payout Ratio: Dividends / Net Income

7.3.8.1. What perportion of net income goes to shareholders

7.3.9. Times Interest Earned: Profit before Taxes and Interest / Interest

7.3.9.1. How many times a company's earnings cover its interest - assess probability of meeting interest obligations

7.4. Liquidity

7.4.1. Working Capitol: Current Assets - Current Liabilities

7.4.1.1. Guage ability to meet short term obligations

7.4.2. Current Ratio: Current Assets / Current Liabilities

7.4.2.1. Higher the ration, the more buffer

7.4.3. Quick Ratio: Cash, MktSecurities, Accts Rec. / Current Liabilities

7.4.3.1. Current Ratio but excludes inventories and prepaid expenses.

7.4.4. Recievables Turnover: Net Sales / Average Accounts Receivable

7.4.4.1. how fast accounts recievable are turned into cash

7.4.5. Inventory Turnover: Cost of Goods Sold / Average Inventory

7.4.5.1. How fast inventory is sold and replaced.

7.4.6. Operating Cycle: Days Inventory + Days Recievable

7.4.6.1. How Fast it takes to complete cycle of cash to Inventory to Accounts Recievable to Cash.

7.4.7. Accounts Payable Turmover: Purchases / Average Accounts Payable

7.4.7.1. companies in cahs binds will stretch their credits owed.

7.5. Financial Strength

7.5.1. Stockholders' Equity to Assets: Stck Eq / Total Assets

7.5.1.1. Opposite of Debt / Assets

7.5.2. Debt to Equity: Deby / Equity

7.5.2.1. How much debt in perportion to its equity

7.5.3. Debt to Total Assets Ratio: Total Liabilities / Total Assets

7.5.3.1. What portion of assets are supplied by creditors?