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Chapter 2

MGT 11A Chapter Notes - Chapter 2: Accounting Equation, Retained Earnings, Common Stock

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When assessing company results, use 4 standards/benchmarks
- Intracompany = compare company results across 2+ periods
- Intercompany = compare results across competitors
- Industry = compare results to industry norms
- Guidelines (rule of thumb) = compare results to standards based on experience
4 basic building blocks of (financial statement) analysis
- Liquidity = ability to meet short-term obligations & generate revenues
- Current ratio = current assets/current liabilities
- Solvency = ability to generate future revenues & meet long-term obligations
- Debt ratio = total liabilities/total assets
- Profitability = able to provide good financial rewards to get & keep financing
- Profit margin ratio = net income/net sales
- Market prospects = able to create pos. Market expectations
- price -to-earnings ratio = price per share/earnings per share
Account = record of increases & decreases in specific asset, liability, equity, revenue, or expense
- Items from account can be analyzed, summarized, presented in reports & financial
- General Ledger (ledger) = record containing all accounts used by a company, usually in
electronic form
Asset Accounts = are resources owned/controlled by company, these usually have expected
future benefits
- Cash = records all increases & decreases in cash. Includes money & any medium of
exchange that a bank accepts, like coins, checks, money orders, checking acct balances.
- Accounts receivable = held by seller, refers to promise of payment from customer to
sell. The transaction is called credit sales/sales on account/on credit. Are increased by
credit sales, decreased by customer payments
- Note Receivable= aka promissory note, is written promise of another entity to pay
definite sum on specific future date to holder of the note
- Prepaid Accounts= aka prepaid expenses, are assets that represent prepayments of
future expenses (not current). When the expense is incurred at later date, the amt in the
prepaid account gets moved to the expense account. Assets are increased with a debit.
- Supplies Accounts= are assets until used up. When used up, its cost will be reported as
- Costs of unused supplies recorded in supplies asset account.
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