Purpose of Financial Accounting

• Financial Accounting is the process of recording, summarizing, and reporting a company's financial transactions over a period. It produces standardized reports for managers, investors, and creditors.
• Management Accounting is a related field focused on internal costs and benefits to aid managerial decision-making.

Core Financial Statements

Balance Sheet

Snapshot of a company's financial position at a specific point in time.

$$ \text{Assets = Liabilities + Owners' Equity} $$

• Assets: What the company owns (e.g., Cash, Inventory, Equipment, Buildings).
  • Current Assets: Can be converted to cash within a year.
  • Long-Term (Fixed) Assets: Have a useful life of more than one year.
• Liabilities: What the company owes (e.g., Loans, Accounts Payable).
  • Current Liabilities: Due within a year.
  • Long-Term Liabilities: Due after one year.
• Owners' Equity: The net worth of the company; what remains for the owners after all liabilities are paid. It consists of Stock (owner investments) and Retained Earnings (cumulative profits reinvested in the business).

Income Statement

Summary of a company’s revenues and expenses over a period. Shows how the company arrived at its profit or loss

$$ \text{Revenues - Expenses = Net Income} $$

• Key Components: Revenues, Cost of Goods Sold, Operating Expenses, Interest, Taxes, and finally, Net Income (the "bottom line").
• EBIT (Earnings Before Interest and Taxes): A key metric that measures operating profit from core business operations, excluding the effects of financing and taxes.

Financial Ratio Analysis

Liquidity Ratios

Measure the ability to meet short-term obligations

• Current Ratio = Current Assets / Current Liabilities (A ratio of 2 is considered good).
• Acid-Test (Quick) Ratio = (Cash + Accts. Receivable + Marketable Securities) / Current Liabilities (A ratio of 1 is considered good). It's a more stringent test as it excludes inventory.

Debt Management Ratios