MOR 331 - Funeral Home Management 5.4 - Financial Statements and Analysis - DMACC

In what order are the three financial statements prepared?

1. Income statement 2. Statement of Owner's Equity 3. Balance sheet

Balance sheet

A formal financial statement illustrating the assets, liabilities, and owner's equity of a business as of a specific date.

Income statement

A formal financial statement which presents the income, expenses, and resulting net profit or net loss for a given period.

Liquidity

A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this.

ratio analysis.

A quantitative evaluation of information contained in a company's financial statements to determine the overall financial strength of a business.

What is the purpose of a post-closing trial balance?

A work paper prepared after all temporary owner's equity accounts have been closed and all permanent accounts have been balanced and ruled, proving the equality of the debits and credits.

A second funeral home you are considering for purchase has $56,000 in cash on hand and $19,000 in accounts receivable. In addition, they have $62,000 in accounts payable. What is the acid-test ratio for this firm and how would you interpret this?

Acid Test Ratio= Quick assets (Cash + Marketable securities + accounts receivable + notes receivable) / current liabilities. $56,000+ $19,000=$75,000 $75,000/$62,000 Acid Test Ratio = 1.2 Interpreted the same way as current assets.

Accrual accounting.

An accounting method that records in an accounting period any applicable expenses, whether paid or not, and any earned income, whether collected or not.

What is a permanent account and why is it considered so? Provide an example.

Balance sheets are considered permanent accounts. They do not close at the end of the fiscal year.

What information is found on the Statement of Owner's Equity?

Beginning owners capital Investments Net Income (Loss) Withdraws Ending owners capital

Average age of inventory.

Calculates the average time that is required to sell inventory.

How does a calendar year differ from a fiscal year

Calendar year - A year (12-month period) from January 1 to December 31. Fiscal year - The 12-month period of time for which a business summarizes and reports financial information.

What is the difference between the current ratio and the acid-test ratio?

Current Ratio- Shows a companies ability to pay its current liabilities from its current assets Acid-test Ratio- Is a measure of how well a company can meet its short term obligations with its most liquid assets .

What are some ratios commonly used in activity analysis?

Current ratio acid test ratio

A funeral home you are considering purchasing has current assets totaling $268,000 and current liabilities totaling $300,00. What is the firm's current ratio and how would you interpret this?

Current ratio= current assets / current liabilities $268,000/$300,00 Current ratio = .89 If current ratio is less than 1, the company would have difficulty paying off its loans. If current ratio is 1 or above the company would most likely be able yo pay off its loans.

Operating expenses

Expenses incurred in the normal operation of a business; aka Overhead.

What is a pro-forma financial statement?

Future or projected financial statements.

What is the difference between horizontal and vertical analysis?

Horizontal analysis - An analysis which compares the same item reported on two or more comparative statements with a focus on year to year changes. Vertical analysis- An analysis with a focus on individual items expressed as a percentage of a specific item reported on the same statement.

Describe the matching principle used in accounting.

In any one given accounting period, revenue that is reported should be matched with the expenses it took to generate that revenue in the same time period (or over the period in which you will be receiving benefits from that expenditure.)

What are the three common financial statements

Income statement Statement of Owner's Equity Balance sheet

How is gross profit figured?

Net sales minus the cost of goods sold; also known as Gross profit.

Give an example of an adjusting entry.

Office supplies

By what other names is the income statement known

Profit and loss statement (P&L) Statement of operations Operating statement.

Financial statement

Records that outline the financial activities of a business, an individual, or any other entity; meant to present financial information of the entity as clearly and concisely as possible for both the entity and for readers.

What are the two general formulas used to prepare an income statement?

Single step and Multi step

For what purpose is a liquidity analysis used?

So lenders can be certain that a company will pay back its loans

By what other names is the balance sheet known?

Statement of financial position or Statement of financial condition.

How does the balance sheet differ from the other two financial reports?

The balance sheet summarizes a company's assets, liabilities, and the owners financial interests. Shows financial health of the company.

Inventory turnover?

The number of times the average inventory has been sold or used up (i.e. turned over) during a period.

Give an example of a temporary account. Why is it considered "temporary"?

When an account has a zero balance at the end of a fiscal year. it is considered a temporary account.