Intro to Financial Accounting

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

1. New node

2. Brief History

3. Ledger Accounts

3.1. Accounts systematize accumulation of transactions

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

3.3. Definition- Measrable change in balance sheet

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

3.5. Accounting Conventions

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

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

4. Decreases in owner's equity

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

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

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

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

8. Ch 3: Accounting Cycle

8.1. Transactions

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

8.1.2. Internal - such as depreciation

8.1.3. External - paying to outside entity

8.2. Cycle Summary

8.3. Debits and Credits

8.3.1. Debit - left hand

8.3.2. Credit - right hand

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

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

8.4. Adjustments

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

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

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

9. Ch 2: Basic Financial Statements

9.1. Balance Sheet

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

9.1.2. Liabilities - debts of an enterprise

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

9.1.4. Assets = Liabilities + Owner's Equity

10. Ch 4: Cash Flow Analysis

10.1. Intro

10.2. Statement of Cash Flows

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

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

10.2.2. Basics

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

10.2.2.2. Noncash revenues - accrued revenues not collected.

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

10.2.2.4. General rule:

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

10.2.2.5. Increase in Owner's Equity

10.2.2.6. Uses of Cash

10.2.2.6.1. Increase in noncash assets

10.2.2.6.2. Decrease in liabilities

10.2.3. Sources of Cash

10.2.3.1. Decreases in noncash assets

10.2.3.2. Increase in iabilities

10.2.4. Indirect Method

10.2.4.1. Looks at changes in accounts to measure cash flow

10.2.4.1.1. From business operations - see note

10.2.4.2. From investing activities - purchases and sales of investments

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

10.2.4.3. Financing Activities - effects of financing transactions

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

10.2.4.3.2. Looks at cash activity to measure cash flow

10.2.5. Direct Method

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

10.3.1. New node

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

11. Ch 5: Analysis of Financial Statements

11.1. Allows users to make predictions about performance.

11.2. Users and Objectives Statemt Analysis

11.2.1. Users of Statements

11.2.1.1. Investors - shareholders

11.2.1.1.1. Look at liquidity and financial strength

11.2.1.2. Creditors - suppliers of those who lend credit

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

11.2.1.3. Managers - not primary users

11.2.2. Comparative Analysis

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

11.2.2.2. What about against others in same industry?

11.2.2.3. Percentage Comparisons

11.2.2.3.1. horizontal - changes from year to year

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

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

11.3. Operating Performance

11.3.1. Profit Margin Ratio: Net Income/Net Sales

11.3.1.1. Primary measure of companies operating performance

11.3.2. Gross Margin Ratio: Gross Profit/Gross Sales

11.3.2.1. shows markup of price

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

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

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

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

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

11.3.5.1. Show income earned for every dollar invested by owners

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

11.3.6.1. How many dividends to each share of stock?

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

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

11.3.8. Payout Ratio: Dividends / Net Income

11.3.8.1. What perportion of net income goes to shareholders

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

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

11.4. Liquidity

11.4.1. Working Capitol: Current Assets - Current Liabilities

11.4.1.1. Guage ability to meet short term obligations

11.4.2. Current Ratio: Current Assets / Current Liabilities

11.4.2.1. Higher the ration, the more buffer

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

11.4.3.1. Current Ratio but excludes inventories and prepaid expenses.

11.4.4. Recievables Turnover: Net Sales / Average Accounts Receivable

11.4.4.1. how fast accounts recievable are turned into cash

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

11.4.5.1. How fast inventory is sold and replaced.

11.4.6. Operating Cycle: Days Inventory + Days Recievable

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

11.4.7. Accounts Payable Turmover: Purchases / Average Accounts Payable

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

11.5. Financial Strength

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

11.5.1.1. Opposite of Debt / Assets

11.5.2. Debt to Equity: Deby / Equity

11.5.2.1. How much debt in perportion to its equity

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

11.5.3.1. What portion of assets are supplied by creditors?