Ratios
Measure the income or operating success of a company for a given period of time
Profitability ratio
requires that only those things that can be expressed in money are included in the accounting records
monetary unit assumption
dictates that companies record assets at their cost
Historical cost principle
2 fundamental qualities that information should possess
faithful representation (complete, neutral, free from error) and relevance (predictive value and confirmatory value)
a set of accounting standards that have authoritative support
GAAP (Generally Accepted Accounting Principles)
Measure short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
Liquidity ratio
states that every economic entity can be separately identified and accounted for
economic entity assumption
indicates that assets and liabilities should be reported at fair value
Fair value principle
a company uses the same accounting principles and methods from year to year
consistency
agency of the US government that oversees US financial markets and accounting standard setting bodies
What profitability ratio measures the net income earned on each share of common stock and what is the formula for it?
Earnings Per Share= net income-preferred dividends/average number of common shares outstanding
states that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business
periodicity assumption
requires the companies disclose all circumstances and events that would make a difference to financial statement users
full disclosure principle
Information is ___ when independent observers using the same methods obtain similar results
Verifiable
determines auditing standards and review the performance of auditing firms
Public Company Accounting Oversight Board (PCAOB)
Measure the ability of the company to survive over a long period of time
Solvency Ratio
states that the business will remain in operation for the foreseeable future
going concern assumption
Formula for Debts to Assets ratio and what does a higher number indicate?
total liabilities/total assets
higher Debts to Assets Ratio=higher risk
Information must be available to decision makers before it loses its capacity to influence decisions
Timely
issues standards called International Financial Reporting Standards
Computation of current ratio and working capital and what type of ratio do they fall under?
Current ratio= current assets/current liabilities
Working Capital= current assets-current liabilities
Liquidity ratios
What describes the net cash provided by operating activities after adjusting for capital expenditures and dividends paid
Free cash flow
Information is presented in a clear and concise fashion so that reasonably informed users of that information can interpret it and comprehends its meaning
Understandability