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RSM100Y1 Study Guide - Telemarketing, Price Skimming

Rotman Commerce
Course Code
John Oesch

of 18
Chapter 14: Accounting
Solvency Ratios
Ratios that estimate financial risk
1.Short-term Solvency Ratio/Current Ratio: Liquidity and ability to pay
immediate debts (Usually 2:1 or greater than 2)
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2.Long-term Solvency Ratio/Debt-to-owners-equity ratio: The extent to which a
firm is financed through borrowed money (Usually less than 1)
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Profitability Ratios
Measures potential earnings
1.Return on Equity: Net income for each dollar invested (higher the better, compared
to previous years)
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2.Return on Sales: Profit generated from sales revenue (higher the better)
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3.Earnings per Share: size of the dividend the company can pay shareholders
(higher the better)
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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 =
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Accounting 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
Financial Accounting Notifies external users about the activities of the company as a
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 company’s 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
Financial Statements
1.Balance Sheet Statement of Financial Position (A snapshot of A, L and OE)
a.Current Assets: Liquid sources like cash, marketable securities (bonds,
stocks, govt securities, money market certificates); or Non-Liquid sources like
Accounts Receiable, merchandise inventory, and prepaid expenses
b.Fixed Assets: Long term loans like Buildings, Land, Equipment that often
c. Intangible Assets: Cost of obtaining rights or patents. Goodwill is the amount
paid for an existing business beyond the value of its other assets
d.Liabilities: Current must be paid within the year, while long-term is more
than a year
e.Owners Equity: Common Stock is the legal value of the shares, Paid-in
capital is the additional money invested by owners, and Retained Earnings
are net profits minus dividend payments (for use to the company)
2.Income Statement a profit and loss statement (Revenue Expenses =
b.Cost of Goods Sold
i.Gross Profit/Margin is a firms revenues minus cost of goods sold
c.Expenses SG&A (Selling, General & Administrative)
d.Operating Income gross profit compared to operating expenses
3.Statement of Cash Flows describes a firms generation and use of cash during a
given period
a.Cash flows from operations (main line of business)
b.Cash flows from investing (buying and selling stocks, bonds, property, and
other assets)
c.Cash flows from financing (borrowing/issuing stock, dividends and repayment
of debts)
The most important internal financial statement is the budget a detailed statement of
estimated receipts and expenditures for usually a year.
1.Revenue Recognition the formal recording and reporting of revenues, where
earnings are not reported until the earnings cycle is completed:
a.The sale is complete and product delivered
b.The sale price to the customer has been collected or is collectible (Accounts
2.Matching expenses will be matched with revenues to determine net income:
a.Revenue recognition is matched with expense recognition to determine net
income when the earnings cycle is completed. (Eg, if 20 wagons were sold in
December 2007 but not made/delivered until January 2008, both revenue and
expenses should count in 2008)
3.Full Disclosure financial statements should also include interpretations ad
explanations by management, and include everything like future lawsuits.