Intro Chapter 14

External Uses

Managers also use accounting statements to report the business's financial performance to outsiders. Such statements are used for filing income taxes, obtaining credit from lenders, and reporting results to the firm's stockholders.

profitability ratios

Profitability ratios measure how much operating income or net income an organization is able to generate relative to its assets, owners' equity, and sales. The numerator (top number) used in these examples is always the net income after taxes. Common profitability ratios include profit margin, return on assets, and return on equity.

The balance sheet

The second basic financial statement is the balance sheet, which presents a "snapshot" of an organization's financial position at a given moment

Accounting or bookkeeping

The terms accounting and bookkeeping are often mistakenly used interchangeably. Much narrower and far more mechanical than accounting, bookkeeping is typically limited to the routine, day-to-day recording of business transactions.

The statement of cash flows

The third primary financial statement is called the statement of cash flows, which explains how the company's cash changed from the beginning of the accounting period to the end.

Accountants

Two kinds, CPA (certified public accountants) and private accounts

The Nature of Accounting

accounting is the recording, measurement, and interpretation of financial information. Large numbers of people and institutions, both within and outside businesses, use accounting tools to evaluate organizational operations.

The Income statement

income statement is a financial report that shows an organization's profitability over a period of time, be that a month, quarter, or year

High Liquidity ratios...

may satisfy a creditor's need for safety, but ratios that are too high may indicate that the organization is not using its current assets efficiently.

Assests

Current assets, also called short-term assets, are those that are used or converted into cash within the course of a calendar year. Cash is followed by temporar

Liquidity ratios

Liquidity ratios compare current (short-term) assets to current liabilities to indicate the speed with which a company can turn its assets into cash to meet debts as they fall due.

Assest utilization ratios

Asset utilization ratios measure how well a firm uses its assets to generate each $1 of sales. Obviously, companies using their assets more productively will have higher returns on assets than their less efficient competitors.

The Accounting equation

Assets = Liabilities + Owners' equity

Liabilities

Current liabilities include a firm's financial obligations to short-term creditors, which must be repaid within one year, while long-term liabilities have longer repayment terms.