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1、七 Investment Tools: Financial Statement Analysis: Basic Concepts1.A: Preliminary Reading Measuring Business Incomea: Explain why financial statements are prepared at the end of the regular accounting period, why accounts must be adjusted at the end of each period, and why the accrual basis of accoun
2、ting produces more useful income statements & balance sheets than the cash basis.To be relevant, information must be reliable. This means information must beconsistent and comparable over time and be provided on a timely basis. According to the relevancy principle, a firm needs to identify its activ
3、ities in a timely fashion within a specific period, such as a quarter or year.Normal accounting procedure is to record during the accounting period those economic events that occurred as the result of external transactions. At the end of the period after all the external transactions have been recor
4、ded, several of the accounts in the ledger need to be updated before their balances can be posted to the financial statements.The adjusting process is consistent with two important accounting principles:1. The revenue recognition principle, which requires that revenue be reported in the income state
5、ment only when it is earned, not before and not after. 2. The matching principle reports expenses on the income statement in the same accounting period as the revenues that were earned as a result of the expenses. Accrual basis accounting assigns revenues to the accounting period in which they are e
6、arned and matches expenses with the revenues generated by those expenses. The objective of the accrual basis is to report the economic effects of revenues and expenses when they are earned or incurred, not when cash is received or paid.Cash basis accounting recognizes revenues when cash is received
7、and expenses when cash is paid. Under the cash basis net income for the period is the difference between revenues received in cash and expenses paid with cash.Accrual accounting generally provides a better indication of performance than information based on the receipt and disbursement of cash. Accr
8、ual accounting increases the comparability of income statements and balance sheets from one period to another period. The accrual basis reflects the understanding that the economic effect of revenue generally occurs when it is earned and not when cash is received. The revenue recognition principle i
9、s the basis for making adjusting entries that pertain to unearned and accrued revenues. Adjusting entries are necessary to better match revenues and expenses that occurred during the accounting period. Adjusting entries are used to record the effects of internal economic events.1.B: Preliminary Read
10、ing Financial Reporting and Analysisa: Define each asset and liability category on the balance sheet and prepare a classified balance sheet.Assets category on the balance sheetCurrent assets are assets which will be sold, collected, or consumed within one year or the firms operating cycle, whichever
11、 is longer. The operating cycle is the average time between paying for inventory or the employees who perform services and receiving cash payment back from the firms customers.1. Cash is currency or demand deposits. 2. Short-term investments are debt or equity investments for which a ready market ex
12、ists and management intends to sell within one year or operating cycle. 3. Accounts receivable are amounts owed to the firm by its customers for goods and services delivered. 4. Notes receivable are amounts owed, usually by customers, which will not be collected within the typical collection period.
13、 5. Inventory represents products that will be sold in the normal course of business. 6. Prepaid expenses (e.g., rent) are services paid for but not yet used. Investments are land, debt securities, or equity securities which management does not intend to sell within the year.1. Property, plant, and
14、equipment: Land is the real estate upon which the firms buildings sit. 2. Intangible assets are economic resources lacking tangible existence such as patents, copyrights, trademarks, and goodwill. Liability categories on the balance sheetLiabilities are responsibilities (amounts owed) which must be
15、met in the future, usually by the payment of cash. Current liabilities are those liabilities that will be paid within one year or operating cycle.1. Accounts payable are the amounts owed to suppliers for goods or services received but not yet paid for. 2. Wages, rent, etc. payables are the amounts o
16、wed to employees, landlord, etc. for services used but not yet paid for. 3. Notes payable are the amounts owed creditors usually with explicit interest expense. 4. Dividends payable are owed to owners for dividends declared but not yet paid. 5. Current portion of long-term debt is that portion of long-term debt that will be paid within the year. Long-term liabilities are the amounts owed creditors that will not be paid within one year. Stockholders equity is the owners investment
