Ayesha Khalil

Accounting

Financial Statements

Financing:- activities provide necessary funds to start a business and expand it after it begins operating.

Investing:-activities provide valuable assets required to run a business.

Operating:-activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.

BUSINESS ACTIVITIES INVOLVING ACCOUNTING

Set of activities involved in converting information about

transactions into financial statements

Accounting process

Basic financial statements:-o Balance Sheeto Income Statemento Statement of Retained Earningso Statement of Cash Flows

FINANCIAL STATEMENTS

financial statements answer basic questions including:What is the company’s current financial status?What was the company’s operating results for the period?How did the company obtain and use cash during the period?

o What are the resources of the company?

o What are the company’s existing obligations?

o What are the company’s net assets?

The Balance Sheet

THE BALANCE SHEET

Summary of the financial position of a company at a particular date

Assets:- cash, accounts receivable, inventory, land, buildings, equipment and intangible items

Liabilities:-accounts payable, notes payable and mortgages payable

Owners’ Equity:- net assets after all obligations have been satisfied

Basic accounting equation: - relationship that states that assets equal liabilities plus owners’ equity.

Double-entry bookkeeping: - process by which accounting transactions are entered; each individual transaction always has an offsetting transaction.

cashChecks and money deposits

Credit cards & receipt

Inventories

Current Assets

Short term investment

prepaid insuran

ce

prepaid rent and suppliesprepaid interest and property taxes

Account Receiva

bles

Land &

Building

Fixed assets

Fixed Asset

Are not moveable

PropertyPlant

Equipment

Natural

resources

Finature

Fixture

Assets

Have not physical existence

Intangible

Assets

Not visible

Good will

Patent trade mark

Franchises

Licenses

Current Liabilities

SalariesWagesPayrolltaxes

Interest payable

Advance from third party

Long Term liabilities

Long term

liabilities

Bond &

note payabl

e

Bank loan

Account

payable

Equity

contributed (or paid in)

capitalstock

Owners’ claims on

the company

assets

accumulated profits/losses

Sample Balance SheetAssetsCash $ 40Accounts receivable 100Land 200

Total assets $340

LiabilitiesAccounts payable $ 50Notes payable 150

$200

Owners’ EquityCapital stock $100Retained earnings 40

$140 Total liabilities and owners’ equity $340

o financial record of a company’s revenues and expenses, and profits over a period of time.

o Firm’s financial performance in terms of revenues, expenses, and profits over a given time period.

o Reports profit or loss.

o Focus on revenues and costs associated with revenues.

INCOME STATEMENT

Revenues:-Assets (cash or AR) created through business operationsExpenses:-Assets (cash or AP) consumed through business operationsNet Income or (Net Loss):-Revenues - Expenses

The Income Statement

INCOME STATEMENT

o Shows the results of a company’s operations over a period of time.

o What goods were sold or services performed that provided revenue for the company?

o What costs were incurred in normal operations to generate these revenues?

o What are the earnings or company profit?

Earnings per share:-= net income ÷ number of shares

Dividends per share:-

= dividends ÷ number of shares

EPS AND DIVIDENDS PER SHARE

Beginning retained earnings

+Net income

–Dividends paid

=Ending retained earnings

STATEMENT OF RETAINED EARNINGS

o Increase in net assets

o Increase in retained earnings

o Increase in owners’ equity

o Decrease in net assets

o Decrease in retained earnings

o Decrease in owners’ equity

Net income results in: Dividends result in:

RETAINED EARNINGS

o Tool for measuring a firm’s liquidity, profitability, and reliance on debt financing, as well as the effectiveness of management’s resource utilization

o Measure of leverage

RATIOS

LIQUIDITY RATIOS

measures the ability of a firm to meet its debt payments on short notice.

current assets – inventorycurrent liabilities

current assetscurrent liabilities

Current ratio:-

compares current assets to current liabilities.

Quick ratio:-

Activity RatiosInventory turnover

ratio:-indicates the number of times merchandise moves through a

business

Cost of good soldinventory

Total asset turnover ratio :-

indicates how much in sales each dollar invested in assets generates

SalesTotal Assets

Liquidity Ratios:-

o Current ratio o Acid Test OR Quick ratio

Activity Ratios:-o Inventory turnover ratio o Total asset turnover ratio

Profitability Ratios:-o Gross profit margino Operating profit margino Net profit margin

Leverage Ratios;-

o Debt to equity ratioo Debt to long term

capitalCoverage ratios;-o Interest Coverageo Fixed Financial

Ratioo Cash Flow Inters

coverageAsset Turnover :-o Return on Equity

Leverage RatiosLeverage ratios measure the extent to which a firm relies on

debt financing.

Debt Ratio:- Total liabilities Total Asset

Long Term Debt To Equity :- Long Term Debt Owners Equity

Profitability RatiosGross profit margin:-

Operating profit margin:-

Net profit margin:-

Gross ProfitSales

Net Profit Sales

EBIT Net sale

× 100

× 100

× 100

Coverage ratiosInterest Coverage:-

EBIT

interest expense

Fixed Financial Cost:-EBIT + ELIE

gross interest expense + ELIE

ELIE = Estimated Lease Interest Expense

Cash Flow Interest Coverage

cash flow + interest expense + ELIE

interest expense + ELIE

Asset Turn over RatioTotal asset turnover:-

Fixed asset turnover:-

Equity turnover:-

net salesavg. total net assets

net salesavg. net fixed assets

net salesavg. equity

Any Question???

Any Question?