Assests = Liabilities+ Owner’s Equity

Assests-Liabilities = Owner’s Equity

Assests=Capital-Loss+Liabilities

Closing Capital = Assets-Liabilities

Creditors=Total Assests-Net Worth

Profit=Closing Capital-Opening Capital

Net Income= Revenue - Expenses.

Gross Margin= Revenue – Cost of Goods Sold

INCOME BEFORE TAX= GROSS MARGIN-OPERATING EXPENSES

NET INCOME= INCOME BEFORE TAX - INCOME TAX

Cost of goods sold = Starting inventory + purchases −

ending inventory

The gross margin percentage = (Revenue-COGS)/Revenue

The profit margin percentage = Net income/Net Sales

A balance sheet is a financial statement that reports a
company's assets, liabilities, and shareholder equity. It
provides a snapshot of its assets, liabilities, and owners'
equity.
Dual-aspect concept. The two aspects that this concept
refers to are (1) assets and (2) liabilities plus owners’
equity. The concept states that these two aspects are
always equal.

Dividends are deducted from Retained Earnings because

dividends are a distribution of earnings to owners. Dividends
are not an expense.

These 11 concepts are as follows:

1. Money measurement
2. Entity
3. Going concern
4. Cost
5. Dual aspect
6. Accounting period
7. Conservatism
8. Realization
9. Matching
10. Consistency
11. Materiality

MONEY MEASUREMENT- In financial accounting, a record

is made only of information that can be expressed in
monetary terms.

ENTITY-Accounts are kept for entities, as distinguished

from the persons who are associated with THESE
ENTITIES. AN ENTITY IS ANY ORGANIZATION OR
ACTIVITY FOR WHICH ACCOUNTING REPORTS ARE
PREPARED.
GOING CONCERN-Unless there is good evidence to the
contrary, accounting assumes that an entity is a going
concern—that it will continue to operate for an indefinitely
long period in the future.

COST- The economic resources of an entity are called its

assets. They consist of nonmonetary assets, such as land,
buildings, and machinery, and other similar assets whose
cash value is not fixed by contract, and monetary assets,
such as money and marketable securities and other similar
assets whose cash value is fixed by contract.

Goodwill- The amount by which the purchase price

exceeds the fair value of the acquired company’s net
assets is called goodwill

To illustrate the dual-aspect concept, suppose that Ms. Jones

starts a business and that her first act is to open a bank
account in which she deposits $40,000 of her own money. The
dual aspect of this transaction is that the business now has an
asset, cash, of $40,000, and Ms. Jones, the owner,3 has a
claim, also of $40,000, against this asset.

In other words,

Assets (cash), $40,000 = Equities (owner’s), $40,000

If, as its next transaction, the business borrowed $15,000 from

a bank, the business accounting records would change in two
ways: (1) They would show a $15,000 increase in cash, making
the amount $55,000, and (2) they would show a new claim
against the assets, the bank’s claim, in the amount of $15,000

Cash and other assets that are expected to be realized in

cash or sold or consumed during the normal operating
cycle of the entity or within one year, whichever is longer,
are called current assets.

Marketable securities are investments that are both readily

marketable and expected to be converted into cash within a
year

Accounts receivable are amounts owed to the entity by its

customers.

Prepaid expenses represent certain assets, usually of an

intangible nature, whose usefulness will expire in the near
future. An example is an insurance policy.

A business pays for insurance protection in advance. Its right to

this protection is an asset—an economic resource that will
provide future benefits. Since this right will expire within a fairly
short period of time, it is a current asset. The amount on the
balance sheet is the amount of the unexpired cost of the future
benefit

In general, liabilities are obligations to transfer assets or

provide services to outside parties arising from events that
have already happened.

Liabilities that are expected to be satisfied or extinguished

during the normal operating cycle or within one year, whichever
is longer, are called current liabilities.

Accounts payable represent the claims of suppliers arising

from their furnishing goods or services to the entity for which
they have not yet been paid. (Such suppliers often are called
vendors.)

Accrued expenses represent amounts that have been earned

by outside parties but have not yet been paid by the entity.
Usually there is no invoice or similar document submitted by
the party to whom the money is owed. Interest earned by a
lender but not yet paid by the entity is an accrued expense.

Another example is the wages and salaries owed to employees

for work they have performed but for which they have not yet
been paid

Deferred revenues (also called unearned revenues)

represent the liability that arises because the entity has
received advance payment for a service it has agreed to render
in the future.

Paid-in capital or contributed capital, is the amount the

owners have invested directly in the business by purchasing
shares of stock as these shares were issued by the corporation

Retained earnings is the difference between the total earnings

of the entity from its inception to date and the total amount of
dividends paid out to its shareholders over its entire life.

Assets= Liabilities + Paid-in capital + Retained earnings

CURRENT RATIO- The ratio of current assets to current

liabilities is called the current ratio.

It is an important indication of an entity’s ability to meet its

current obligations because if current assets do not exceed
current liabilities by a comfortable margin, the entity may be
unable to pay its current bills.

As a rough rule of thumb, a current ratio of at least 2 to 1 is

believed to be desirable in a typical manufacturing company.

ACCOUNTING PERIOD- Accounting measures activities for a

specified interval of time, called the accounting period.
Conservatism concept- We state the conservatism concept’s
two aspects somewhat more formally:

1. Recognize revenues (increases in retained earnings) only

when they are reasonably certain.
2. Recognize expenses (decreases in retained earnings) as
soon as they are reasonably possible.

Accounts Receivable The converse of the above situation

is illustrated by sales made on credit:

Accrued Revenue When a bank lends money, it is providing a

service to the borrower, namely, the use of the bank’s money.
The bank’s charge for this service is called interest, and the
amount the bank earns is interest revenue. The bank earns
interest revenue on each day that the borrower is permitted to
use the money. For some loan transactions, the borrower does
not actually pay the interest in the year in which the money was
used but rather pays it next year. Even if this interest payment
is not made until next year, the bank has earned revenue this
year for a loan outstanding during the year. The amount earned
but unpaid as of the end of this year is an asset on the bank’s
balance sheet called accrued interest revenue or interest
receivable. It is similar to an account receivable.

In sum, accrued revenue is the reverse of precollected

revenue: Accrued revenues have been earned by the entity but
have not as yet been paid to the entity.

The Realization-The realization concept states that the amount

recognized as revenue is the amount that is reasonably certain
to be realized—that is, that customers are reasonably certain to
pay.

MATCHING CONCEPT-As noted earlier, the sale of

merchandise has two aspects: (1) a revenue aspect, reflecting
an increase in retained earnings equal to the amount of
revenue realized, and (2) an expense aspect, reflecting the
decrease in retained earnings because the merchandise (an
asset) has left the business.

In order to measure correctly this sale’s net effect on retained

earnings in a period, both of these aspects must be recognized
in the same accounting period. This leads to the matching
concept: When a given event affects both revenues and
expenses, the effect on each should be recognized in the same
accounting period.

The Consistency Concept-The consistency concept states

that once an entity has decided on one accounting method, it
should use the same method for all subsequent events of the
same character unless it has a sound reason to change
methods

The Materiality Concept-the accountant does not attempt to

record events so insignificant that the work of recording them is
not justified by the usefulness of the results.

The purpose of the cash flow statement is to provide

information about the cash flows associated with the
period’s operations and also about the entity’s investing
and financing activities during the period
Sources Uses
1. Operations 1. Cash dividends
2. New borrowings 2. Repayment of borrowings
3. New stock issues 3. Repurchase of stock
4. Sale of property, plant, 4. Purchase of property, plant,
and equipment and equipment
5. Sale of other noncurrent assets 5. Purchase of other noncurrent
assets

Operating activities are defined to be all transactions that are not investing
or financing activities. These transactions include the cash inflows
associated with sales revenues and the cash outflows associated with
operating expenses, including payments to suppliers of goods or services
and payments for wages, interest, and taxes.
Investing activities include acquiring long-lived assets such as property, plant,
equipment, and investments in securities that are not cash equivalents; and lending
money (i.e., loans receivable). Investing activities also include the opposites of these
transactions: disinvesting activities such as disposing of long-lived assets, and collecting
loans. Note that increases or decreases in accounts receivable and inventory are not
treated as investment activities; the changes in these current assets are included in
operating activities.

Financing activities include the borrowing of cash (notes payable, mortgages, bonds,
and other noncurrent borrowings) and the issuance of equity securities (common or
preferred stock). Repayments of borrowings are also financing activities, as are
dividend payments to shareholders and the use of cash to repurchase and retire issued
stock. Changes in accounts payable, wages payable, interest payable, and taxes payable
are not treated as financing activities; they are operating activities.

Return on investment (ROI) is broadly defined as net income divided by investment.

Three different ROI ratios: return on assets, return on owners’ equity, and return on
invested capital

Return on assets (ROA) reflects how much the firm has earned on the investment
of all the financial resources committed to the firm. Thus, the ROA measure is
appropriate if one considers the investment in the firm to include current liabilities,
longterm liabilities, and owners’ equity, which are the total sources of funds invested in
the assets.

Return on owners’ equity (ROE) reflects how much the firm has earned on the
funds invested by the shareholders (either directly or through retained earnings). This
ROE ratio is obviously of interest to present or prospective shareholders, and is also of
concern to management because this measure is viewed as an important indicator of
shareholder value creation.

The third ROI ratio is return on invested capital (ROIC). Invested capital (also
called permanent capital) is equal to noncurrent liabilities plus shareholders’ equity
and hence represents the funds entrusted to the firm for relatively long periods of time.
ROIC focuses on the use of this permanent capital.

It is presumed that the current liabilities will fluctuate more or less automatically with
changes in current assets and that both will vary with the level of current operations. Invested
capital is also equal to working capital plus noncurrent assets.

Tariff is based on the capital cost incurred for a specific power plant and
primarily comprises two components: capacity charge i.e., a fixed charge
that includes depreciation, return on equity, interest on working capital,
operating & maintenance expenses, interest on loan and energy charge
i.e., a variable charge primarily based on fuel costs.

Return on assets= Net Income + Interest (1-Tax Rate)

 Total Assets

Return on invested capital= Net Income +Interest (1-Tax Rate)/long term

liabilities+Shareholders equity.

Return on Shareholder’s Equity= Net Income/Shareholder’s Equity.

Return on assets (ROA) reflects how much the firm has earned on the
investment of all the financial resources committed to the firm.

Return on owners’ equity (ROE) reflects how much the firm has earned on
the funds invested by the shareholders (either directly or through retained
earnings).

These ratios can be grouped into four categories: overall measures,

profitability measures, tests of investment utilization, and tests of financial
condition

Net income divided by sales is called profit margin or return on sales (ROS);
it is an overall ratio for profitability.
Sales divided by investment is called investment turnover; it is an overall ratio
for investment utilization.
Investment turnover is called, more specifically, asset turnover, invested
capital turnover, or equity turnover, depending on which definition of
investment is being used.

Price/Earnings Ratio= Market price per share/Net Income per

share
The P/E ratio is the best indicator of how investors judge the firm’s
future performance.

The profit margin is a measure of overall profitability.

Assests turnover= Sales Revenue/Total assests.

Invested capital turnover= Sales Revenue/Invested Capital

Equity turnover= Sales Revenue/Shareholder’s equity.

Capital Asset Intensity = Sales Revenue/Property Plant, &

Equipment.

Working capital turnover = Sales Revenue/Working capital

Current Ratio = Current Assest/Current Liability

Acid test (quick ratio)= Monetary Current assests/ Current Liability

Financial leverage ratio= Assests/Shareholders equity.

Debt/Equity Ratio= Total liabilities/ Shareholders equity.

ROI measures overall performance,