ACG FINAL CHAPTER 2: AF FURTHER LOOK AT FINANCIAL STATEMENTS

C2 LEARNING OBJECTIVE 6 6. Explain the meaning of generally accepted accounting principles. • Standard setting (e.g., GAAP, SEC, FASB, IASB, IFRS, PCAOB)

-All U.S. companies get guidance from a set of rules and practices that have authoritative support, referred to as generally accepted accounting principles (GAAP). Standard-setting bodies, in consultation with the accounting profession and the business community, determine these accounting standards. -Generally accepted accounting principles, or "GAAP" have substantial authoritative support, and are recognized as a general guide for financial reporting purposes. -The Financial Accounting Standards Board, or the "FASB," is the primary accounting standard-setting body in the U.S.

C2 LEARNING OBJECTIVE 2 2. Identify tools for analyzing financial statements and compute ratios for analyzing a company's profitability. • Earnings per share

-Earnings per share is determined by dividing net income less preferred stock dividends by the average common shares outstanding. It represents the amount a company earned for each common share of stock outstanding. -Earnings per Share = (Net Income - Preferred Stock Dividends)/Average Common Shares Outstanding -The earnings per share ratio is a measure of profitability.

C2 LEARNING OBJECTIVE 3 3. Explain the relationship between a retained earnings statement and a statement of stockholders' equity.

-Ending retained earnings equals beginning retained earnings plus net income minus dividends. -The issuance of common stock increases the common stock account; it does not affect retained earnings. -Most companies use a statement of stockholders' equity instead of the retained earnings statement because the statement of stockholders' equity reports the changes in all of the stockholders' accounts. A statement of retained earnings reports only the changes in retained earnings.

C2 LEARNING OBJECTIVE 1 1. Identify the sections of a classified balance sheet.

-Stockholders' equity equals common stock plus retained earnings. Alternatively, assets equals liabilities plus stockholders' equity. -Trademarks like the Nike swoosh package design are intangible assets. The trademark makes it easier for customers to recognize Nike swoosh products. -Land is classified as property, plant, and equipment on a classified balance sheet. -Land or a building which is currently not used in operation is considered to be a long-term investment. -Since patents have lives as long as 20 years, they are not usually classified as current assets.

C2 LEARNING OBJECTIVE 4 4. Identify and compute ratios for analyzing a company's liquidity and solvency using a balance sheet. • Liquidity: Working capital, Current ratio • Solvency: Debt to assets ratio

-The current ratio measures liquidity. Higher current ratios indicate higher liquidity. -Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). (Liquidity) -Liquidity is the ability to pay short-term obligations. Notice that the questions asks about obligations being paid within one year or operating cycle. -The debt to asset ratio is total liabilities divided by total assets. It is a measure of solvency. -Debt to Asset Ratio = Total Liabilities(Total Assets - Stockholders' Equity)/Total Assets. (Solvency) -Solvency ratios are good indicators of a company's ability to survive over an extended period of time. -Working capital is current assets minus current liabilities. (Liquidity)