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Rotman Commerce
John Oesch

Chapter 14: Accounting Solvency Ratios Ratios that estimate financial risk 1. Short-term Solvency RatioCurrent Ratio: Liquidity and ability to pay immediate debts (Usually 2:1 or greater than 2) 2. Long-term Solvency RatioDebt-to-owners-equity ratio: The extent to which a firm is financed through borrowed money (Usually less than 1) Profitability Ratios Measures potential earnings 1. Return on Equity: Net income for each dollar invested (higher the better, compared to previous years) 2. Return on Sales: Profit generated from sales revenue (higher the better) 3. Earnings per Share: size of the dividend the company can pay shareholders (higher the better) Activity Ratios Reflects managements use of assets 1. Inventory Turnover Ratio: measures average number of times inventory is sold and restocked, or how quickly inventory is produced and sold. Average inventory is the start-of-the-year inventory + end-year inventory divided by two. High ratio = good! www.notesolution.comAccounting is a comprehensive information system for collecting, analyzing, and communicating financial information, measuring business performance and translating them into management decisions. Bookkeeping, on the other had, is just the recording of accounting transactions. The Accounting Information System (AIS) is an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in statements and management reports. People who use this information include: 1. Business managers 2. Employees and unions 3. Investors and Creditors 4. Tax authorities 5. The government Controller is the head of AIS, someone who manages all of the accounting activities of the firm. Financial Accounting Notifies external users about the activities of the company as a whole Managerial Accounting Notifies internal users (managers) about the companys individual units, and projections and forecasts are often included in internal reports that look into the future Accounting Services: 1. Audit the examination of a companys financial record to determine if it used proper procedures; detecting fraud. This is required for loans or selling stock. 2. Tax preparing tax returns and planning, saving clients money. 3. Management Consulting help managers resolve problems in finance, production scheduling, and aother areas. CAs and CGAs must be independent of the firms they audit. Private accountants can also be hired to deal with day to day accounting needs. Asset any economic resource expected to benefit a firm who owns it. Liability debt that the firm owes to an outside party. Owners Equity amount of money owners would receive if they sold all assets and paid all liabilities. It consists of what the owners invest and the profits earned by and reinvested in the firm. A = L + OE Every transaction involves two accounts, and accountants use a double-entry accounting system.
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