Companies prepare three financial statements according to GAAP rules: the income statement, the balance sheet, and the cash flow statement.
Profitability ratios are used to assess a business's ability to generate earnings.
Liquidity ratios measure how quickly assets can be turned into cash in order to pay the company's short-term obligations.
Debt ratios provide information about a company's long-term financial health.
Most financial ratios have no universal benchmarks, so meaningful analysis involves comparisons with competitors and industry averages.
Valuation ratios describe the value of shares to shareholders, and include the EPS ratio, the P/E ratio, and the dividend yield ratio.
Activity ratios measure how effectively the firm utilizes its resources.
Most of the ratios discussed can be calculated using information found in the three main financial statements.
Accounting is the vehicle for reporting financial information about a business entity to many different groups of people.
Managerial accounting focuses on internal users who use accounting information to make important decisions.
Financial Accounting is a process of summarizing recorded financial data and publishing it for people outside the organization to analyze.
Tax accounting is focused on providing the information needed by a business to comply with all government rules and regulations.
Governmental and nonprofit accounting follow different rules from those of commercial enterprises.
Most of a company's stakeholders consume its accounting information in one form or another.
The accounting equation is a general rule used in business transactions where the sum of liabilities and owners' equity equals assets.
A double-entry bookkeeping system requires that every transaction be recorded in at least two different nominal ledger accounts.
The accounting cycle includes analysis of transactions, transferring journal entries into a general ledger, revenue, and expense closed.
The balance sheet is a summary of the financial balances of a company.
Assets are resources as a result of past events and from which future economic benefits are expected to flow to the enterprise.
A "liability" is an obligation of an entity, the settlement of which may result in the yielding of economic benefits in future.
Shareholders' equity is the difference between total assets and total liabilities.
The income statement indicates how revenues were transformed into the net income or net loss during the period reported.
Revenue is cash inflows or other enhancements of assets derived by delivering or producing goods.
COGS refer to the inventory costs of those goods a business has sold during a particular period and includes all costs of purchase.
G&A represent expenses to manage the business, such as salaries, legal and professional fees, utilities, insurance, depreciation, etc.
Net income in accounting is an entity's income minus expenses for an accounting period.
The income statement displays the revenues recognized for a specified period and the costs and expenses charged against these revenues.
Since cash flows are vital to a company's financial health, the statement of cash flows provides useful information to many stakeholders.
In theory, either the "direct method' or "indirect method" can be used to calculate cash flows.