FIANACIAL ACCOUNTING FOR MBAs
FINANCIAL STATEMENT INFORMATION: DEMAND AND SUPPLY
The following broad classes of users possess a demand for financial accounting information:
1. Managers and Employees â€“ for their own well-being and future earning potential and for use in compensation and bonus
2. Investment Analysts and Information Intermediaries â€“ to predict companyâ€™s future performance and to provide stock recommendations/commentaries.
3. Creditors and Suppliers â€“ to monitor and adjust their contracts and commitments with the company.
4. Shareholders and Directors â€“ to access the profitability and risk of companies.
5. Customers and Strategic Partners â€“ to ...view middle of the document...
Revenues - Expenses = Net Income (loss)
Manufacturing and merchandising companies include Costs of Goods Sold (COGS).
= Gross Profit
=Net Income (loss)
Statement of Stockholders Equity:
Reports on changes in key types of equity over a period of time.
Statement of Cash Flows:
Reports on the change (either an increase or decrese) in a companyâ€™s cash balance over a period of time.
ANALYSIS OF FINANACIAL STATEMENTS:
Is crucial in assessing prior strategic decisions and evaluating strategic alternatives.
Return On Assets (ROA):
ROA = Net Income / Average Assets
Components of ROA:
Profitability = Net Income / Sales
Productivity = Sales / Average Assets
Return on Equity (ROE):
ROE = Net Income / Average Stockholders â€˜equity
Where, Average Equity = (Beginning year equity + ending-year equity)/2
INTRODUCING FINANCIAL STATEMENTS AND TRANSACTION ANALYSIS
â€¢ Is divided into three sections: assets, liabilities, and shareholdersâ€™ equity
â€¢ Balance sheet accounts are called â€permanent accountsâ€ and carry over from period to period.
â€¢ When a cost creates a immediate benefit, such as gasoline, the company records the cost in the income statement as an expense.
â€¢ When a cost creates future economic benefit, such as inventory to be resold, the company records the cost on the balance sheet as an asset.
â€¢ When there is no asset left, the costs of the assets are transferred to the income statement, where it is labeled as an expense.
â€¢ In case of inventories, when it is sold it is recorded as COGS.
â€¢ All costs are held either on the balance sheet or transferred to the income statement.
â€¢ Tracking the flow of costs from the balance sheet to the income statement is an important part of accounting.
â€¢ When the company buys an equipment, it is recorded in the balance sheet as an assetcalled equipment(often PPE). When the equipment are used in operations, a portion of that is transferred to income statement as â€œdepreciation expenseâ€.
ïƒ¼ Assets are expected to produce economic benefits in the form of revenues, either directly such as with inventory or indirectly such as PPE that produces inventories for sale.
An asset must possess two characteristics:
1. It must be owned/controlled by the company.
2. It must confer expected future economic benefits.
The balance sheet lists assets in order of decreasing liquidity, which refers to the ease of converting assets to cash.
The most liquid assets(Current assets) are listed first.
Cash â€“ Currency, abnk deposits, and investments with an original maturity of 90 days or less.
Short â€“ term investments â€“ marketable securities and other investments
Accounts receivable, net â€“ due from customers from the sale of product/services on credit. (net refers to subtraction of uncollectible accounts)
Inventories â€“ Goods purchased or produced for sale
Prepaid expenses â€“...