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Accounting Principles and Ratios

Terms in this set (20)

Accrual Basis
Revenue recognized when realized, at point of sale
Expenses recognized when incurred
numerous year end adjustments required
more complex than cash basis
Going Concern
the presumption that the entity will continue to operate in the future
Historical cost
transactions are recorded at historical cost to entity
Objectivity
Try to have the same transactions recorded the same way in all situations
Consistency
Same treatment given to comparable transactions period to period (inventory, depreciation, etc.)
Full Disclosure
Financial statements and notes should include all necessary information to prevent a reasonably astute user of the financial statements from being misled
Materiality
Absolute exactness is not necessary in amounts shown on financial statements
Conservatism
select judgments and estimates resulting in lower profits and asset valuation
Limitations of Financial Statements
Don't show qualitative traits (morale, etc.)
Balance sheet doesn't show current market value
Estimates
2 firms in same industry may use differing methods
Don't account for inflation
Don't reflect opportunity cost
Net ROI
Net Income/Average total Assets
Operating ROI
Operating Income/ Average total assets
ROI (DuPont)
(Net Income/Sales) * (Sales/Average Total Assets)
Margin * Turnover
Margin
Net Income/Sales
Turnover
Sales/Average Total Assets
Return on Common Equity
Net Income / Average Common Equity
Working Capital
current assets - current liabilities
Liquidity
firm's ability to meet current obligations
3 Measures of Liquidity
working capital, current ratio, acid-test ratio
Current Ratio
Current Assets/Current Liabilities
Acid-Test Ratio
(Current Assets - Inventory) / Current Liabilities
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