ASSETS
-An asset is a resource with economic value that an individual, corporation, or country owns or controls with
the expectation that it will provide a future benefit. Assets can be classified as current, fixed, financial, or
intangible.
Examples of Assets
Personal assets can include a home, land, financial securities, jewelry, artwork, gold and silver, or your
checking account. Business assets can include such things as motor vehicles, buildings, machinery, equipment,
cash, and accounts receivable.
TYPE AND EXAMPLE OF ASSETS
Current assets -cash and cash equivalents, accounts receivable, inventory, and prepaid expenses.
Fixed assets - plants, equipment, and buildings
Financial assets - investments in the assets and securities of other institutions.
Intangible assets are economic resources that have no physical presence. They include patents, trademarks,
copyrights, and goodwill.
LIABILITIES
is something a person or company owes, usually a sum of money. Liabilities are settled over time through the
transfer of economic benefits including money, goods, or services.
Current (Near-Term) Liabilities
-which are due within a year, with cash
Example: payroll expenses and accounts payable, which include money owed to vendors, monthly utilities,
and similar expenses.
Non-Current (Long-Term) Liabilities
- expected to be paid in 12 months or more.
Example: bonds payable, rent, deferred taxes, payroll, and pension obligations, Warranty Liability
EQUITY
Equity represents the value that would be returned to a company’s shareholders if all of the assets were
liquidated and all of the company's debts were paid off
Shareholders’ Equity=Total Assets−Total Liabilities
Capital refers to the money or assets invested into a business by its owners. On contrary
Drawings refer to the money withdrawn from a business by its owners for their personal use. Drawings can be
made in the form of cash or assets or goods produced by an entity.
REVENUE
is the money generated from normal business operations, calculated as the average sales price times the
number of units sold. It is the top line (or gross income) figure from which costs are subtracted to determine
net income. Revenue is also known as sales on the income statement.
Net Revenue = (Quantity Sold * Unit Price) - Discounts - Allowances – Returns
EXPENSES
An expense is the cost of operations that a company incurs to generate revenue. It is simply defined as the cost
one is required to spend on obtaining something.
Common expenses include payments to suppliers, employee wages, factory leases, and
equipment depreciation. Businesses are allowed to write off tax-deductible expenses on their income tax
returns to lower their taxable income and thus their tax liability
ALORE ACCOUNTING EQUATION
Balance Sheet P & L (Profit and Loss)
To Increase -A (Dr) -L (Cr) = O (Cr) R(Cr) – E (Cr)
To Decrease – A (Cr) – L(Dr) = O(Dr) R (Dr) – E (Cr)
COMMON FINANCIAL STATEMENTS
(1) balance sheets - Balance sheets show what a company owns and what it owes at a fixed point in time.
(2) income statements - Income statements show how much money a company made and spent over a period
of time.
3) cash flow statements- Cash flow statements show the exchange of money between a company and the
outside world also over a period of time.
(4) statements of shareholders’ equity- statement of shareholders’ equity,” shows changes in the interests of
the company’s shareholders over time.
Financial Statement Ratios and Calculations
If a company has a debt-to-equity ratio of 2 to 1, it means that the company has two dollars of debt to every one
dollar shareholders invest in the company. In other words, the company is taking on debt at twice the rate that
its owners are investing in the company.
Inventory Turnover Ratio = Cost of Sales / Average Inventory for the Period
If a company has an inventory turnover ratio of 2 to 1, it means that the company’s inventory turned over twice
in the reporting period.
Operating Margin = Income from Operations / Net Revenues
Operating margin is usually expressed as a percentage. It shows, for each dollar of sales, what percentage was
profit.
P/E Ratio = Price per share / Earnings per share
If a company’s stock is selling at $20 per share and the company is earning $2 per share, then the company’s
P/E Ratio is 10 to 1. The company’s stock is selling at 10 times its earnings.
Working Capital = Current Assets – Current Liabilities
Debt-to-equity ratio compares a company’s total debt to shareholders’ equity. Both of these numbers
can be found on a company’s balance sheet. To calculate debt-to-equity ratio, you divide a company’s
total liabilities by its shareholder equity, or
Inventory turnover ratio compares a company’s cost of sales on its income statement with its
average inventory balance for the period. To calculate the average inventory balance for the period,
look at the inventory numbers listed on the balance sheet. Take the balance listed for the period of the
report and add it to the balance listed for the previous comparable period, and then divide by two.
(Remember that balance sheets are snapshots in time. So the inventory balance for the previous
period is the beginning balance for the current period, and the inventory balance for the current
period is the ending balance.) To calculate the inventory turnover ratio, you divide a company’s cost
of sales (just below the net revenues on the income statement) by the average inventory for the
period, or
Operating margin compares a company’s operating income to net revenues. Both of these numbers
can be found on a company’s income statement. To calculate operating margin, you divide a
company’s income from operations (before interest and income tax expenses) by its net
revenues, or
P/E ratio compares a company’s common stock price with its earnings per share. To calculate a
company’s P/E ratio, you divide a company’s stock price by its earnings per share, or
Working capital is the money leftover if a company paid its current liabilities (that is, its debts due
within one-year of the date of the balance sheet) from its current assets.
