From Chapter 1
A. The Annual Report
1. About past performance & future prospects
2.Form 10-K (SEC: Securities and Exchange Commission) publicly-traded stock
3.Core part: financial statement
remark: also contains a letter from management, management discussion & analysis(MD&A), footnotes, independent auditor's report, a statement of management's responsibility for preparation of the financial statements,...
B.Financial Statements
1.Income statement
summary of expenses & revenue specific period of time
2.Statement of owner's equity
changes in the owner's equity specific period of time
3.Balance sheet
list of the assets, liabilities, and owner’s equity as of a specific date
picture-like
4.Statement of cash flows
summary of the cash receipts and disbursements specific period of time
remark:income statement:net income -> retained earnings:the statement of owner's equity ->equity: balance sheet:cash -> Statement of cash flows
C.Statement of owner's equity
remark: title part includes 1) name of entity 2)title of statement 3)specific period of time 4)unit of measure
1. Three types of business organization:
a. Proprietorship
Ad: Ease in organizing; Low cost of organizing;
Dis: Limited source of financial resources; Unlimited liability;
b.Partnership
Ad:More financial resources; More management skill;
Dis:Unlimited liability
remark:Special ordinary partnership
c.Corporation
Ad:obtain large amounts of resources by issuing stocks
Dis:Double taxation
remark: shareholders , common stock
Characteristics:
Prop. Part. Corp.
Business entity Y Y Y
Legal entity N N Y
Limited liability N* N* Y
Unlimited life N N Y
Business taxed N N Y
One owner allowed Y N Y
remark: 合伙制可通过股权转让来延长生命
*Proprietorships and partnerships that are set up as LLCs provide limited liability
2.Accounting Differences Between Proprietorship, Partnership, and Corporation
Differences lies in Reporting Owners’ Equity
a.Proprietorships and Partnerships
Owners’ equities = “Capital”
Owners’ equities are recorded in the capital account
b.Corporations
Paid-in capital=total capital investment=par value+paid in capital in excess of par value
Retained Earnings=income-dividend
D.Balance Sheet
remark: title part includes 1) name of entity 2)title of statement 3)specific date 4)unit of measure
remark:Assets are listed by their ease of conversion into cash
B/S vs I/S
E.Statement of cash flows
remark: title part includes 1) name of entity 2)title of statement 3)specific period of time 4)unit of measure
1.Cash Flows from Operating Activities—Day-to-day activities. Cash flows directly related to earning income.
2.Cash Flows from Investing Activities—Buying and selling long-term assets. Cash flows related to the acquisition or sale of productive assets.
3.Cash Flows from Financing Activities—Raising fund and repayment. Cash flows from or to investors or creditors.
from chapter 2
A. Popular Ratios
1.Earnings Per Share (EPS) 每股收益
EPS=Net Income/Weighted-average number of common shares outstanding
Used For:Predicting future EPS+Making investment decisions
remark:net income->during a specific period
remark:EPS tells investors how much of a period’s net income “belongs to” each share of common stock
remark:Only financial ratio required on the financial statements
remark:
Shares: Preferred(between liability and equity; classified as equity) vs Common
Outstanding(held by shareholders)
Basic EPS vs Diluted EPS
2.Price-Earning (P-E) Ratio 市盈率
P-E Ratio=Market price per share of common stock/Earnings per share of common stock
Remark:The P-E ratio measures how much the investing public is willing to pay for a chance to share the company’s potential earnings
Conceptually, a higher than normal ratio suggests investors predict the company’s net income will grow
Factually, a higher ratio has proven to be good and bad news
Used for: IPO pricing, Investment criteria (growth potential?bubble?)
3.Dividend-Yeild Ratio 红利收益率比例
Dividend-Yield Ratio=Common dividends per share/Current market price of stock
remark:The dividend-yield ratio gauges dividend payouts
Shows relationship between cash dividends and current market price
Investors who seek regular cash returns of their investments pay particular attention to dividend-yield ratios
Growth companies typically have conservative dividend policies
4.Dividend-Payout Ratio 红利支付率比例
Dividend-Payout Ratio=Common dividends per share/Earnings per share
Remark:The dividend-payout ratio shows what proportion of net income a company elects to pay in cash dividends to its shareholders
Many companies elect to pay a reasonably constant dollar amount in dividends, even if this means variations in its dividend-payout ratio
from Chapter 4
Format of Financial Statement
A. Balance Sheet
1. classified balance sheet:
Assets are classified into: current asset & non-current(long term) asset
Liabilities are classified into: current liability & non-current(long term) liability
Current assets will be used up or be converted into cash in a year
Non-current assets will be used up or be converted into cash after more than one year
Current liabilities will be paid in one year (or within the operating cycle if longer)
Non-current liabilities will be paid after one year
Working capital is the excess of current assets over current liabilities
2. current ratio
Liquidity is a company’s ability to pay its immediate financial obligations with cash and near-cash assets
The current ratio evaluates a company’s liquidity
current ratio= total current asset/ total current liability
The quick ratio removes Inventory (and other less liquid assets such as Prepaid Expenses) from the numerator
3. formats of balance sheet
report form & account form
The report format presents the accounts vertically
The account format puts the assets at the left and liabilities and owners’ equity at the right
Either format is acceptable
B. Income statement format
single-step & multiple step
multiple step:
GS/GM(sales-COGS<product cost>)-operating expense<period cost>=operating income
operating income-other revenue&expense=income before taxes
income before taxes-taxes=income
C. Profitability Evaluation Ratios
1. Gross Profit Margin
gross profit margin=gross profit/sales
Gross profit percentages vary greatly by industry
2. Return on Sales (ROS)
ROS=net income/ sales
gauges a company’s ability to control the level of all its expenses relative to the level of its sales
The ROS percentage tends to vary by industry
3.Return on Common Stockholders’ Equity (ROE or ROCE)
ROE=net income/ average common stockholder's equity
compares net income with invested capital
4. return on asset (ROA)
ROA=net income/ average total asset
es net income with invested capital as measured by average total assets
Measures how effectively those assets generate profits
