Accounting 201 Rephrase in own words

1.A classified balance sheet is asset, liabilities and stockholders’ equity were break down into subcategories. There are two sections, one is Assets, another one is Liabilities and Stockholders’ equity.

Two accounts that fit into Assets: current assets and long-term investments.

Two accounts that fit into Liabilities and Stockholders’ equity: current liabilities and long-term liabilities.

2.Profitability ratios measure how a company generates income for a given period of time. Earnings per share measure the net income earned on each share of common stock.

EPS=(Net Income—Preferred Dividends)/Weighted-average common shares outstanding

For example: A company’s net income is 15 million, divided by 3.6 million shares of stock the business has issued and compute its 3.17 earning per share. The higher the EPS, the better profitability.

3.Liquidity is the ability to covert liquid assets into cash easily, and could pay its liabilities due within the next year.

Liquidity ratios measure the ability of a company to pay its obligations in short-term.

· Liquidity ratios interpreted as: Current Assets divided by Current Liabilities

Solvency is the ability to pay interest and repay the balance of a debt when it’s due.

Solvency ratios measure the ability to cover its obligations in long-term, and financial stability of a company.

· Solvency ratios interpreted as: Total Liabilities(both current and long-term) divided by Total Assets.

4.The most important factor to evaluate solvency using statement of cash flow is the cash flows from operating activities. Free cash flow measure the amount of cash left over after a company pays for operations, expenditures, and dividends.

Free Cash Flow= Net Cash Provided by Operating Activities — Capital Expenditures — Cash Dividends

5. Generally accepted accounting principles(GAAP) are a set of accounting standards or rules that have authoritative support.

The U.S. standard-setting body is called Financial Accounting Standards Board(FASB).

The International standard-setting body is called International Accounting Standards Board(IASB).