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Beginners' Guide to Financial Statements
Beginners' Guide to Financial Statements
by U.S. Securities & Exchange Commission (SEC)
The Basics
If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements. If you can follow a recipe or apply for a loan, you can learn basic accounting. The basics aren’t difficult and they aren’t rocket science.
This information is designed to help you gain a basic understanding of how to read financial statements. Just as a CPR class teaches you how to perform the basics of cardiac pulmonary resuscitation, this brochure will explain how to read the basic parts of a financial statement. It will not train you to be an accountant (just as a CPR course will not make you a cardiac doctor), but it should give you the confidence to be able to look at a set of financial statements and make sense of them.
Let’s begin by looking at what financial statements do.
“Show me the money!”We all remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money!” Well, that’s what financial statements do. They show you the money. They show you where a company’s money came from, where it went, and where it is now.
There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a “statement of shareholders’ equity,” shows changes in the interests of the company’s shareholders over time.
Let’s look at each of the first three financial statements in more detail.
Balance Sheets
A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.
Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes.
Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.
Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.
The following formula summarizes what a balance sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
A company's assets have to equal, or "balance," the sum of its liabilities and shareholders' equity.
A company’s balance sheet is set up like the basic accounting equation shown above. On the left side of the balance sheet, companies list their assets. On the right side, they list their liabilities and shareholders’ equity. Sometimes balance sheets show assets at the top, followed by liabilities, with shareholders’ equity at the bottom.
Assets are generally listed based on how quickly they will be converted into cash. Current assets are things a company expects to convert to cash within one year. A good example is inventory. Most companies expect to sell their inventory for cash within one year. Noncurrent assets are things a company does not expect to convert to cash within one year or that would take longer than one year to sell. Noncurrent assets include fixed assets. Fixed assets are those assets used to operate the business but that are not available for sale, such as trucks, office furniture and other property.
Liabilities are generally listed based on their due dates. Liabilities are said to be either current or long-term. Current liabilities are obligations a company expects to pay off within the year. Long-term liabilities are obligations due more than one year away.
Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of retaining them. These distributions are called dividends.
A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period.
Income Statements
An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.
Income statements also report earnings per share (or “EPS”). This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. (Companies almost never distribute all of their earnings. Usually they reinvest them in the business.)
To understand how income statements are set up, think of them as a set of stairs. You start at the top with the total amount of sales made during the accounting period. Then you go down, one step at a time. At each step, you make a deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how much the company actually earned or lost during the accounting period. People often call this “the bottom line.”
At the top of the income statement is the total amount of money brought in from sales of products or services. This top line is often referred to as gross revenues or sales. It’s called “gross” because expenses have not been deducted from it yet. So the number is “gross” or unrefined.
The next line is money the company doesn’t expect to collect on certain sales. This could be due, for example, to sales discounts or merchandise returns.
When you subtract the returns and allowances from the gross revenues, you arrive at the company’s net revenues. It’s called “net” because, if you can imagine a net, these revenues are left in the net after the deductions for returns and allowances have come out.
Moving down the stairs from the net revenue line, there are several lines that represent various kinds of operating expenses. Although these lines can be reported in various orders, the next line after net revenues typically shows the costs of the sales. This number tells you the amount of money the company spent to produce the goods or services it sold during the accounting period.
The next line subtracts the costs of sales from the net revenues to arrive at a subtotal called “gross profit” or sometimes “gross margin.” It’s considered “gross” because there are certain expenses that haven’t been deducted from it yet.
The next section deals with operating expenses. These are expenses that go toward supporting a company’s operations for a given period – for example, salaries of administrative personnel and costs of researching new products. Marketing expenses are another example. Operating expenses are different from “costs of sales,” which were deducted above, because operating expenses cannot be linked directly to the production of the products or services being sold.
Depreciation is also deducted from gross profit. Depreciation takes into account the wear and tear on some assets, such as machinery, tools and furniture, which are used over the long term. Companies spread the cost of these assets over the periods they are used. This process of spreading these costs is called depreciation or amortization. The “charge” for using these assets during the period is a fraction of the original cost of the assets.
After all operating expenses are deducted from gross profit, you arrive at operating profit before interest and income tax expenses. This is often called “income from operations.”
Next companies must account for interest income and interest expense. Interest income is the money companies make from keeping their cash in interest-bearing savings accounts, money market funds and the like. On the other hand, interest expense is the money companies paid in interest for money they borrow. Some income statements show interest income and interest expense separately. Some income statements combine the two numbers. The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax.
Finally, income tax is deducted and you arrive at the bottom line: net profit or net losses. (Net profit is also called net income or net earnings.) This tells you how much the company actually earned or lost during the accounting period. Did the company make a profit or did it lose money?
Earnings Per Share or EPS
Most income statements include a calculation of earnings per share or EPS. This calculation tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period.
To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company.
Cash Flow Statements
Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.
A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time. It uses and reorders the information from a company’s balance sheet and income statement.
The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities: (1) operating activities; (2) investing activities; and (3) financing activities.
Operating Activities
The first part of a cash flow statement analyzes a company’s cash flow from net income or losses. For most companies, this section of the cash flow statement reconciles the net income (as shown on the income statement) to the actual cash the company received from or used in its operating activities. To do this, it adjusts net income for any non-cash items (such as adding back depreciation expenses) and adjusts for any cash that was used or provided by other operating assets and liabilities.
Investing Activities
The second part of a cash flow statement shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant and equipment, as well as investment securities. If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash. If the company decided to sell off some investments from an investment portfolio, the proceeds from the sales would show up as a cash inflow from investing activities because it provided cash.
Financing Activities
The third part of a cash flow statement shows the cash flow from all financing activities. Typical sources of cash flow include cash raised by selling stocks and bonds or borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash flow.
Read the Footnotes
A horse called “Read The Footnotes” ran in the 2004 Kentucky Derby. He finished seventh, but if he had won, it would have been a victory for financial literacy proponents everywhere. It’s so important to read the footnotes. The footnotes to financial statements are packed with information. Here are some of the highlights:
Significant accounting policies and practices – Companies are required to disclose the accounting policies that are most important to the portrayal of the company’s financial condition and results. These often require management’s most difficult, subjective or complex judgments.
Income taxes – The footnotes provide detailed information about the company’s current and deferred income taxes. The information is broken down by level – federal, state, local and/or foreign, and the main items that affect the company’s effective tax rate are described.
Pension plans and other retirement programs – The footnotes discuss the company’s pension plans and other retirement or post-employment benefit programs. The notes contain specific information about the assets and costs of these programs, and indicate whether and by how much the plans are over- or under-funded.
Stock options – The notes also contain information about stock options granted to officers and employees, including the method of accounting for stock-based compensation and the effect of the method on reported results.
Read the MD&A
You can find a narrative explanation of a company’s financial performance in a section of the quarterly or annual report entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” MD&A is management’s opportunity to provide investors with its view of the financial performance and condition of the company. It’s management’s opportunity to tell investors what the financial statements show and do not show, as well as important trends and risks that have shaped the past or are reasonably likely to shape the company’s future.
The SEC’s rules governing MD&A require disclosure about trends, events or uncertainties known to management that would have a material impact on reported financial information. The purpose of MD&A is to provide investors with information that the company’s management believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. It is intended to help investors to see the company through the eyes of management. It is also intended to provide context for the financial statements and information about the company’s earnings and cash flows.
Financial Statement Ratios and Calculations
You’ve probably heard people banter around phrases like “P/E ratio,” “current ratio” and “operating margin.” But what do these terms mean and why don’t they show up on financial statements? Listed below are just some of the many ratios that investors calculate from information on financial statements and then use to evaluate a company. As a general rule, desirable ratios vary by industry.
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
Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity
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 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
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 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
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 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
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 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.
Working Capital = Current Assets – Current Liabilities
Bringing It All Together
Although this information discusses each financial statement separately, keep in mind that they are all related. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And so on. No one financial statement tells the complete story. But combined, they provide very powerful information for investors. And information is the investor’s best tool when it comes to investing wisely.
by U.S. Securities & Exchange Commission (SEC)
The Basics
If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements. If you can follow a recipe or apply for a loan, you can learn basic accounting. The basics aren’t difficult and they aren’t rocket science.
This information is designed to help you gain a basic understanding of how to read financial statements. Just as a CPR class teaches you how to perform the basics of cardiac pulmonary resuscitation, this brochure will explain how to read the basic parts of a financial statement. It will not train you to be an accountant (just as a CPR course will not make you a cardiac doctor), but it should give you the confidence to be able to look at a set of financial statements and make sense of them.
Let’s begin by looking at what financial statements do.
“Show me the money!”We all remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money!” Well, that’s what financial statements do. They show you the money. They show you where a company’s money came from, where it went, and where it is now.
There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a “statement of shareholders’ equity,” shows changes in the interests of the company’s shareholders over time.
Let’s look at each of the first three financial statements in more detail.
Balance Sheets
A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.
Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes.
Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.
Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.
The following formula summarizes what a balance sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
A company's assets have to equal, or "balance," the sum of its liabilities and shareholders' equity.
A company’s balance sheet is set up like the basic accounting equation shown above. On the left side of the balance sheet, companies list their assets. On the right side, they list their liabilities and shareholders’ equity. Sometimes balance sheets show assets at the top, followed by liabilities, with shareholders’ equity at the bottom.
Assets are generally listed based on how quickly they will be converted into cash. Current assets are things a company expects to convert to cash within one year. A good example is inventory. Most companies expect to sell their inventory for cash within one year. Noncurrent assets are things a company does not expect to convert to cash within one year or that would take longer than one year to sell. Noncurrent assets include fixed assets. Fixed assets are those assets used to operate the business but that are not available for sale, such as trucks, office furniture and other property.
Liabilities are generally listed based on their due dates. Liabilities are said to be either current or long-term. Current liabilities are obligations a company expects to pay off within the year. Long-term liabilities are obligations due more than one year away.
Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of retaining them. These distributions are called dividends.
A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end of the reporting period. It does not show the flows into and out of the accounts during the period.
Income Statements
An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.
Income statements also report earnings per share (or “EPS”). This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. (Companies almost never distribute all of their earnings. Usually they reinvest them in the business.)
To understand how income statements are set up, think of them as a set of stairs. You start at the top with the total amount of sales made during the accounting period. Then you go down, one step at a time. At each step, you make a deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how much the company actually earned or lost during the accounting period. People often call this “the bottom line.”
At the top of the income statement is the total amount of money brought in from sales of products or services. This top line is often referred to as gross revenues or sales. It’s called “gross” because expenses have not been deducted from it yet. So the number is “gross” or unrefined.
The next line is money the company doesn’t expect to collect on certain sales. This could be due, for example, to sales discounts or merchandise returns.
When you subtract the returns and allowances from the gross revenues, you arrive at the company’s net revenues. It’s called “net” because, if you can imagine a net, these revenues are left in the net after the deductions for returns and allowances have come out.
Moving down the stairs from the net revenue line, there are several lines that represent various kinds of operating expenses. Although these lines can be reported in various orders, the next line after net revenues typically shows the costs of the sales. This number tells you the amount of money the company spent to produce the goods or services it sold during the accounting period.
The next line subtracts the costs of sales from the net revenues to arrive at a subtotal called “gross profit” or sometimes “gross margin.” It’s considered “gross” because there are certain expenses that haven’t been deducted from it yet.
The next section deals with operating expenses. These are expenses that go toward supporting a company’s operations for a given period – for example, salaries of administrative personnel and costs of researching new products. Marketing expenses are another example. Operating expenses are different from “costs of sales,” which were deducted above, because operating expenses cannot be linked directly to the production of the products or services being sold.
Depreciation is also deducted from gross profit. Depreciation takes into account the wear and tear on some assets, such as machinery, tools and furniture, which are used over the long term. Companies spread the cost of these assets over the periods they are used. This process of spreading these costs is called depreciation or amortization. The “charge” for using these assets during the period is a fraction of the original cost of the assets.
After all operating expenses are deducted from gross profit, you arrive at operating profit before interest and income tax expenses. This is often called “income from operations.”
Next companies must account for interest income and interest expense. Interest income is the money companies make from keeping their cash in interest-bearing savings accounts, money market funds and the like. On the other hand, interest expense is the money companies paid in interest for money they borrow. Some income statements show interest income and interest expense separately. Some income statements combine the two numbers. The interest income and expense are then added or subtracted from the operating profits to arrive at operating profit before income tax.
Finally, income tax is deducted and you arrive at the bottom line: net profit or net losses. (Net profit is also called net income or net earnings.) This tells you how much the company actually earned or lost during the accounting period. Did the company make a profit or did it lose money?
Earnings Per Share or EPS
Most income statements include a calculation of earnings per share or EPS. This calculation tells you how much money shareholders would receive for each share of stock they own if the company distributed all of its net income for the period.
To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the company.
Cash Flow Statements
Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.
A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time. It uses and reorders the information from a company’s balance sheet and income statement.
The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities: (1) operating activities; (2) investing activities; and (3) financing activities.
Operating Activities
The first part of a cash flow statement analyzes a company’s cash flow from net income or losses. For most companies, this section of the cash flow statement reconciles the net income (as shown on the income statement) to the actual cash the company received from or used in its operating activities. To do this, it adjusts net income for any non-cash items (such as adding back depreciation expenses) and adjusts for any cash that was used or provided by other operating assets and liabilities.
Investing Activities
The second part of a cash flow statement shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets, such as property, plant and equipment, as well as investment securities. If a company buys a piece of machinery, the cash flow statement would reflect this activity as a cash outflow from investing activities because it used cash. If the company decided to sell off some investments from an investment portfolio, the proceeds from the sales would show up as a cash inflow from investing activities because it provided cash.
Financing Activities
The third part of a cash flow statement shows the cash flow from all financing activities. Typical sources of cash flow include cash raised by selling stocks and bonds or borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash flow.
Read the Footnotes
A horse called “Read The Footnotes” ran in the 2004 Kentucky Derby. He finished seventh, but if he had won, it would have been a victory for financial literacy proponents everywhere. It’s so important to read the footnotes. The footnotes to financial statements are packed with information. Here are some of the highlights:
Significant accounting policies and practices – Companies are required to disclose the accounting policies that are most important to the portrayal of the company’s financial condition and results. These often require management’s most difficult, subjective or complex judgments.
Income taxes – The footnotes provide detailed information about the company’s current and deferred income taxes. The information is broken down by level – federal, state, local and/or foreign, and the main items that affect the company’s effective tax rate are described.
Pension plans and other retirement programs – The footnotes discuss the company’s pension plans and other retirement or post-employment benefit programs. The notes contain specific information about the assets and costs of these programs, and indicate whether and by how much the plans are over- or under-funded.
Stock options – The notes also contain information about stock options granted to officers and employees, including the method of accounting for stock-based compensation and the effect of the method on reported results.
Read the MD&A
You can find a narrative explanation of a company’s financial performance in a section of the quarterly or annual report entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” MD&A is management’s opportunity to provide investors with its view of the financial performance and condition of the company. It’s management’s opportunity to tell investors what the financial statements show and do not show, as well as important trends and risks that have shaped the past or are reasonably likely to shape the company’s future.
The SEC’s rules governing MD&A require disclosure about trends, events or uncertainties known to management that would have a material impact on reported financial information. The purpose of MD&A is to provide investors with information that the company’s management believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. It is intended to help investors to see the company through the eyes of management. It is also intended to provide context for the financial statements and information about the company’s earnings and cash flows.
Financial Statement Ratios and Calculations
You’ve probably heard people banter around phrases like “P/E ratio,” “current ratio” and “operating margin.” But what do these terms mean and why don’t they show up on financial statements? Listed below are just some of the many ratios that investors calculate from information on financial statements and then use to evaluate a company. As a general rule, desirable ratios vary by industry.
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
Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity
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 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
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 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
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 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
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 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.
Working Capital = Current Assets – Current Liabilities
Bringing It All Together
Although this information discusses each financial statement separately, keep in mind that they are all related. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related, but not equivalent, to net income shown on the income statement. And so on. No one financial statement tells the complete story. But combined, they provide very powerful information for investors. And information is the investor’s best tool when it comes to investing wisely.
Friday, September 24, 2010
Wednesday, July 7, 2010
Interview Questions & Prep
Brian Krueger, President of CollegeGrad.com, presents "The Most Important Aspect of Successful Interviewing and response to common questions.
Monday, July 5, 2010
Five Tough Interview Questions
The five toughest questions are discussed in these five videos.
You need to also prepare for behavioral questions. Behavioral questions are commonly used to select the best candidate. Here are just a few examples.
Why do you think you will be successful at this job?
The interviewer is concerned as to whether you see this as a career move, or stop-gap employment. As my resume reflects, I have been successful at each of my previous places of employment. My research of your company, the job description outlined, and the information we've exchanged today, lead me to believe I have the skills and experience for which you are looking; and I'm eager to be a contributing employee.
Tell me about a time that you participated in a team, what was your role?
Companies, for the most part, do not want "Lone-Rangers" - - they are looking for employees who will adapt to the company culture and get along with others.
In high school, I enjoyed playing soccer and performing with the marching band. Each required a different kind of team play, but the overall goal of learning to be a member of a group was invaluable. I continued to grow as team member while on my sorority's debate team and through my advanced marketing class where we had numerous team assignments.
Tell me about a time when you had to deal with a co-worker who wasn't doing his/her fair share of the work. What did you do and what was the outcome?
I worked closely with Ann who, for the most part, always carried her fair share of the work load. During a stressful time, working on a project with a deadline, I realized Ann's contributions to the project were almost minimal. I made the decision to wait until after the project to speak with her. I'm glad I did, because I learned she'd been going through a very tough time in her personal life and she appreciated my willingness to go the extra mile so the project was completed on time. As a result, our ability to work well together significantly increased.
Give me an example of a time when you took the time to share a co-worker's or supervisor's achievements with other?
At my most recent position, one of my co-workers, Dan, did an outstanding job of calming an irate customer, solving the customer's problem and completing a sale. When our boss asked me how things were going, I told him everything was going fine and that Dan had just completed calming an irate customer and closing a sale. It was a win-win-win- for our boss, Dan and the customer.
Tell me about a time that you didn't work well with a supervisor. What was the outcome and how would you have changed the outcome?
Early in my career, I had a supervisor (Judy) who was in a fairly good mood on Monday, but it deteriorated each day until by Friday, the supervisor was finding fault with everything I did. I didn't realize, until I left that position, that I had been a contributor to the decline in her mood. Judy would ask me how my weekend was (on Monday) and during the week she would ask how it was going. I would tell her how much fun I was having (I was single) and how I was looking forward to the weekend plans. After I left, I realized my life was in complete contrast to hers and I reminded her of it almost daily. When she asked the questions, I should have had a quick answer, and then asked her how she was doing!!!!
Have you worked with someone you didn't like? If so, how did you handle it?
Yes, I've worked with someone whom I found difficult to like as a person. However, when I focused on the skills they brought to the job, their ability to solve problems and the two things I did appreciate, slowly my attitude towards them changed. We were never friends, but we did work well together.
Tell me about a time that you helped someone.
Most recently, we had a new hire (Paul) that was really struggling with getting to work on time, and I knew the boss (Harry) was getting irritated. Over lunch one day I explained to Paul how important it was to our boss for everyone to be there at least 10 minutes early. It was personal with the Harry, but you could really get on his bad side when you were frequently late. The new employee was grateful for the advice. At his previous employment, the boss was only concerned about the work getting done on time;
What led you to this point in your life?
The interviewer wants to know if you are unhappy, frustrated, or lost?
My "road of life" has been interesting, sometimes challenging and always rewarding. The steps along the way that have led to this point in my life are, in some ways, very different than I had imagined; however, I like who I am today in part because of my past. An example is when the second company on my resume suddenly closed their doors during a down-turn in the economy. For a very brief time, the road ahead was unknown; however, I discovered I had previously untapped strengths such as perseverance.
Tuesday, June 8, 2010
Resume Writting A to Z
Ten Easy Ways to Improve Your Resume
by Katharine Hansen, Ph.D.
In my line of work, I see hundreds of resumes, and I often see the same patterns over and over again. I frequently observe resume tendencies that are not necessarily mistakes, yet the jobseekers behind these resumes could have much nicer, cleaner, more readable resumes if they just tweaked a few things. And none of these tweaks are hard to accomplish. Even if your resume has other problems, you'll see significant improvements if you make these 10 easy fixes.
Use a bulleted style to make your resume more reader-friendly. Given that employers screen resumes for between 2.5 and 20 seconds, they will find your resume a lot more readable if you use bullet points instead of paragraph style. It's just easier to read.
Follow "The Resume Ingredients Rule." Set forth by Donald Asher, author of numerous resume books (see our Q&A with him), the rule says that information on a resume should be listed in order of importance to the reader. Therefore, in listing your jobs, what's generally most important is your title/position. So list in this preferred order: Title/position, name of employer, city/state of employer, dates of employment. I can't tell you how many resumes I've seen that list dates first. Dates can be important to some employers, but they're generally not as important as what your position was and whom you worked for. Education follows the same principle; thus, the preferred order for listing your education is: Name of degree (spelled out: Bachelor of _____) in name of major, name of university, city/state of university, graduation year, followed by peripheral information, such as minor and GPA. If you haven't graduated yet, list your information the same way. Simply by virtue of the fact that the graduation date you've listed is in the future, the employer will know you don't have the degree yet.
By the way, the Resume Ingredients Rule is also the reason that experience and education are listed in reverse chronological order on your resume; it's assumed that your most recent education and experience are most important and relevant to the reader.
Eliminate "responsibilities" words from your resume vocabulary. Never use expressions like "Duties included," "Responsibilities included," or “Responsible for” on your resume. Why? Because your resume should be accomplishments-driven, not responsibilities-driven. Anyone (well, maybe not anyone…) can perform the duties listed in a job description. Job-description language is not what sells in a resume. Accomplishments-oriented language tells employers how you've gone above and beyond in your jobs, what makes you special, how you've taken initiative and made your jobs your own.
Eliminate clutter from your resume. Several elements can clutter up your resume and impede readability:
Unnecessary dates. Don't list dates that don't add anything to your resume; for example, dates you spent involved in college extracurricular activities. If you were involved in these activities during college, the reader can pretty much guess your dates of involvement, and listing the dates will just clutter up your document. Same with dates of involvement in professional or civic organizations; ask yourself if those dates will be meaningful to the employer reading your resume.
Parentheses. Jobseekers have a particular tendency to set off dates of employment with parentheses. It's easier on the reader if you just use commas.
The line "References: Available upon request." This statement is highly optional because it is a given that you will provide references upon request. If you couldn't, you would have no business looking for a job. The line can serve the purpose of signaling: "This is the end of my resume," but if you are trying to conserve space, leave it off.
Articles. Those little words "a," "an," and "the." Generally speaking, resumes aren't written in sentence form, but in concise phrases that have become an accepted shorthand that employers understand. Articles tend to clutter up that shorthand; your resume will read in a more streamlined manner without them. Consider these "before" and "after" examples:
BEFORE:
Recruited to manage the women's division and oversee the opening of the Madison Avenue Store. Recruited to manage women's division and oversee Madison Avenue store opening.
AFTER:
Promoted within five months to Vice-President and General Manager of the Beverly Hills store. Promoted within five months to Vice-President and General Manager of Beverly Hills store.
BEFORE:
Managed and controlled all aspects of the company's presence on the West Coast. Managed and controlled all aspects of company's West Coast presence.
Coordinated and supervised all aspects of the opening of the Beverly Hills Store. Coordinated and supervised all aspects of Beverly Hills store opening.
Facilitated the development of management and staff to ensure store growth and minimize turnover. Facilitated management and staff development to ensure store growth and minimize turnover.
AFTER:
Created a high profile for the store through effective personal relations with the entertainment community, Chamber of Commerce, the City of Beverly Hills and charity organizations. Created high profile for store through effective personal relations with entertainment community, Chamber of Commerce, the City of Beverly Hills and charity organizations.
Aren't the "After" versions a lot more streamlined?
Use strong, concrete verbs to describe your jobs, and don't mix noun and verb phrases. Let's look at this example:
Managed and controlled all aspects of company's West Coast presence. [verb]
Complete ownership of inventory and financial standards. [noun]
Full P&L responsibilities. [noun]
Analyzed market and forecast sales, prepared corporate budgets and monitored results to achieve ROI objectives. [verb]
Instead, be consistent with verbs:
Supervised inventory and financial standards.
Completely oversaw profit and loss aspects of operation.
Also avoid the weak verbs, “to be,” “to do,” and "to work." Everyone works. Be more specific. "Collaborate(d)" is often a good substitute. Instead of: “Worked with Marketing Department to launch promotional campaign,” say “Collaborated with Marketing Department to launch promotional campaign.”
Focus on describing past job activities that highlight the skills you most like to use and want to use in your next job. Don't spend a lot of time, for example, describing all that clerical stuff you did in a past job if you have no intention of doing clerical work again. Even if you've mastered skills that are in great demand, don't emphasize them if they're not the skills you want to use in the future.
Don't fret about the one-page resume rule. Sure, it's nice to keep your resume to one page if you can, but don't go to extraordinary lengths, such as by using tiny type. If you have significant experience, you'll probably need more than one page. What you should avoid is having one full page with just a little bit of text on your second page. If you fill a third or less of the second page, consider condensing to one page. Ways to condense:
Narrow your margins. The margins in Microsoft Word are set very wide by default. You can have margins as narrow as .75” all around and still have a nice-looking document.
Use a smaller point size, but not too small. A font size of 11-point is good; don't go too much smaller than 10.5-point.
Many jobseekers use a two-column format with headings in the left-hand column. To conserve space, narrow or even eliminate the left-hand column and simply stack your headings on top of each section.
Make sure your resume has a sharp focus. Again, given the microscopic amount of time that employers spend screening resumes, you need a way to show the employer at a glance what you want to do and what you're good at. One way to sharpen your focus is through an objective statement. Another way is to add a section called something like "Summary of Qualifications," or "Profile." To see an example of such a section, go to sample resume.
Don't list too much experience on your resume. The rule of thumb for someone at the senior level is to list about 15 years worth of jobs. Age discrimination, unfortunately, is a reality, and even more likely, employers may think you're too expensive if you list too much experience on your resume. Similarly, don't give the date of your college graduation if it was more than about 10 years ago.
Be sure the reader will understand all the acronyms and jargon you use in your resume. Resumes in the high-tech field are notorious for these mysterious terms. We recently received a resume containing the following acronyms and jargon: MCSE, MCP+I, TCP/IP, CCA, CCNA, token ring and PCMCIA network interface cards for LAN connectivity, NT Service Packs, Ethernet cards, Server 4.0, SQL 6.5, 7.0, Red Hat Linux 6.1, Turbo Linux 4.0 and Caldera 2.3, Cisco 2500 routers and switches. Now, chances are that employers in this jobseeker's field understand all these terms. Just be sure that's the case. Spell out any acronyms you think could be questionable, and explain any terms you think some readers of your resume might not understand.
College students, too, need to be aware of "inside" jargon. At Stetson University, my alma mater, for example, we have an annual charity fundraiser called "Greenfeather;" freshman-orientation leaders called "FOCUS" advisers; and a volunteer organization called "Into the Streets." The school's graduates routinely use those terms on their resumes without any explanation, as though everyone knows what Greenfeather, FOCUS, and Into the Streets mean. Look at your resume from an outsider's perspective -- and explain (or eliminate) any unfamiliar terms or acronyms.
Bonus tip: Be sure to list locations (city and state) for all your past employers. It's resume protocol to do so, and employers expect to see that information. I'm constantly amazed at all the resumes I see that list names of past employers, but don't tell where those employers are located.
Questions about some of the terminology used in this article? Get more information (definitions and links) on key college, career, and job-search terms by going to our Job-Seeker's Glossary of Job-Hunting Terms.
Katharine Hansen, Ph.D., creative director and associate publisher of Quintessential Careers, is an educator, author, and blogger who provides content for Quintessential Careers, edits QuintZine, an electronic newsletter for jobseekers, and blogs about storytelling in the job search at A Storied Career. Katharine, who earned her PhD in organizational behavior from Union Institute & University, Cincinnati, OH, is author of Dynamic Cover Letters for New Graduates and A Foot in the Door: Networking Your Way into the Hidden Job Market (both published by Ten Speed Press), as well as Top Notch Executive Resumes (Career Press); and with Randall S. Hansen, Ph.D., Dynamic Cover Letters, Write Your Way to a Higher GPA (Ten Speed), and The Complete Idiot's Guide to Study Skills (Alpha). Visit her personal Website or reach her by e-mail at kathy(at)quintcareers.com.
Sunday, May 9, 2010
Wednesday, March 24, 2010
Financial Ratio Analysis 101
Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.
Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs.
Current ratio. The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities.
This ratio indicates the company has more current assets than current liabilities. Different industries have different levels of expected liquidity. Whether the ratio is considered adequate coverage depends on the type of business, the components of its current assets, and the ability of the company to generate cash from its receivables and by selling inventory.
Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities.
The traditional rule of thumb for this ratio has been 1:1. Anything below this level requires further analysis of receivables to understand how often the company turns them into cash. It may also indicate the company needs to establish a line of credit with a financial institution to ensure the company has access to cash when it needs to pay its obligations.
Receivables turnover. The receivable turnover ratio calculates the number of times in an operating cycle (normally one year) the company collects its receivable balance. It is calculated by dividing net credit sales by the average net receivables. Net credit sales is net sales less cash sales. If cash sales are unknown, use net sales. Average net receivables is usually the balance of net receivables at the beginning of the year plus the balance of net receivables at the end of the year divided by two. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly.
Profitability ratios measure a company's operating efficiency, including its ability to generate income and therefore, cash flow. Cash flow affects the company's ability to obtain debt and equity financing.
Profit margin. The profit margin ratio, also known as the operating performance ratio, measures the company's ability to turn its sales into net income. To evaluate the profit margin, it must be compared to competitors and industry statistics. It is calculated by dividing net income by net sales.
Asset turnover. The asset turnover ratio measures how efficiently a company is using its assets. The turnover value varies by industry. It is calculated by dividing net sales by average total assets.
Return on assets. The return on assets ratio (ROA) is considered an overall measure of profitability. It measures how much net income was generated for each $1 of assets the company has. ROA is a combination of the profit margin ratio and the asset turnover ratio. It can be calculated separately by dividing net income by average total assets or by multiplying the profit margin ratio times the asset turnover ratio.
Return on common stockholders' equity. The return on common stockholders' equity (ROE) measures how much net income was earned relative to each dollar of common stockholders' equity. It is calculated by dividing net income by average common stockholders' equity. In a simple capital structure (only common stock outstanding), average common stockholders' equity is the average of the beginning and ending stockholders' equity.
Earnings per share. Earnings per share (EPS) represents the net income earned for each share of outstanding common stock. In a simple capital structure, it is calculated by dividing net income by the number of weighted average common shares outstanding.
Price-earnings ratio. The price-earnings ratio (P/E) is quoted in the financial press daily. You simply divide the current share price by the earnings per share. Keep in mind their are two types: Trailing (based upon past earnings)and forward (based upon future earnings)P/Es. A P/E ratio greater than 15 has historically been considered high. But this by itself is a far to simplistic measure. One must consider other variables like revenue and earnings growth, the sector and industry, inflation and the economy.
Solvency ratios are used to measure long-term risk and are of interest to long-term creditors and stockholders.
Debt to total assets ratio. The debt to total assets ratio calculates the percent of assets provided by creditors. It is calculated by dividing total debt by total assets. Total debt is the same as total liabilities.
Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs.
Current ratio. The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities.
This ratio indicates the company has more current assets than current liabilities. Different industries have different levels of expected liquidity. Whether the ratio is considered adequate coverage depends on the type of business, the components of its current assets, and the ability of the company to generate cash from its receivables and by selling inventory.
Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities.
The traditional rule of thumb for this ratio has been 1:1. Anything below this level requires further analysis of receivables to understand how often the company turns them into cash. It may also indicate the company needs to establish a line of credit with a financial institution to ensure the company has access to cash when it needs to pay its obligations.
Receivables turnover. The receivable turnover ratio calculates the number of times in an operating cycle (normally one year) the company collects its receivable balance. It is calculated by dividing net credit sales by the average net receivables. Net credit sales is net sales less cash sales. If cash sales are unknown, use net sales. Average net receivables is usually the balance of net receivables at the beginning of the year plus the balance of net receivables at the end of the year divided by two. If the company is cyclical, an average calculated on a reasonable basis for the company's operations should be used such as monthly or quarterly.
Profitability ratios measure a company's operating efficiency, including its ability to generate income and therefore, cash flow. Cash flow affects the company's ability to obtain debt and equity financing.
Profit margin. The profit margin ratio, also known as the operating performance ratio, measures the company's ability to turn its sales into net income. To evaluate the profit margin, it must be compared to competitors and industry statistics. It is calculated by dividing net income by net sales.
Asset turnover. The asset turnover ratio measures how efficiently a company is using its assets. The turnover value varies by industry. It is calculated by dividing net sales by average total assets.
Return on assets. The return on assets ratio (ROA) is considered an overall measure of profitability. It measures how much net income was generated for each $1 of assets the company has. ROA is a combination of the profit margin ratio and the asset turnover ratio. It can be calculated separately by dividing net income by average total assets or by multiplying the profit margin ratio times the asset turnover ratio.
Return on common stockholders' equity. The return on common stockholders' equity (ROE) measures how much net income was earned relative to each dollar of common stockholders' equity. It is calculated by dividing net income by average common stockholders' equity. In a simple capital structure (only common stock outstanding), average common stockholders' equity is the average of the beginning and ending stockholders' equity.
Earnings per share. Earnings per share (EPS) represents the net income earned for each share of outstanding common stock. In a simple capital structure, it is calculated by dividing net income by the number of weighted average common shares outstanding.
Price-earnings ratio. The price-earnings ratio (P/E) is quoted in the financial press daily. You simply divide the current share price by the earnings per share. Keep in mind their are two types: Trailing (based upon past earnings)and forward (based upon future earnings)P/Es. A P/E ratio greater than 15 has historically been considered high. But this by itself is a far to simplistic measure. One must consider other variables like revenue and earnings growth, the sector and industry, inflation and the economy.
Solvency ratios are used to measure long-term risk and are of interest to long-term creditors and stockholders.
Debt to total assets ratio. The debt to total assets ratio calculates the percent of assets provided by creditors. It is calculated by dividing total debt by total assets. Total debt is the same as total liabilities.
Saturday, March 13, 2010
Business Communications
Communication is one of the basic functions of management in any organization and its importance can hardly be overemphasized. It is a process of transmitting information, ideas, thoughts, opinions and plans between various parts of an organization.
It is not possible to have human relations without communication. However, good and effective communication is required not only for good human relations but also for good and successful business. Effective communication is required at all of an organization.
For manager – employee relations:
Effective communication of information and decision is an essential component for management-employee relations. The manager cannot get the work done from employees unless they are communicated effectively of what he wants to be done? He should also be sure of some basic facts such as how to communicate and what results can be expected from that communication. Most of management problems arise because of lack of effective communication. Chances of misunderstanding and misrepresentation can be minimized with proper communication system.
For motivation and employee morale:
Communication is also a basic tool for motivation, which can improve morale of the employees in an organization. Inappropriate or faulty communication among employees or between manager and his subordinates is the major cause of conflict and low morale at work. Manager should clarify to employees about what is to be done, how well are they doing and what can be done for better performance to improve their motivation. He can prepare a written statement, clearly outlining the relationship between company objectives and personal objectives and integrating the interest of the two.
For increase productivity:
With effective communication, you can maintain a good human relation in the organization and by encouraging ideas or suggestions from employees or workers and implementing them whenever possible, you can also increase production at low cost.
For employees:
It is through the communication that employees submit their work reports, comments, grievances and suggestions to their seniors or management. Organization should have effective and speedy communication policy and procedures to avoid delays, misunderstandings, confusion or distortions of facts and to establish harmony among all the concerned people and departments.
Importance of written communication:
Communication may be made through oral or written. In oral communication, listeners can make out what speakers is trying to say, but in written communication, text matter in the message is a reflection of your thinking. So, written communication or message should be clear, purposeful and concise with correct words, to avoid any misinterpretation of your message. Written communications provides a permanent record for future use and it also gives an opportunity to employees to put up their comments or suggestions in writing
Communication expert Dr. Bill Lampton explains how to adjust your communication style to match the styles of those who differ--so you will communicate more clearly and persuasively.
Are you HEARING or LISTENING ?
One Minute Business Ideas
Understanding people and persuading people to understand your points of view are skills not often learned in Business Schools. Yet, as your career progresses they will become of greater importance to you than most finance equations and accounting principles.
If you wish to be more than just a business cubical dweller you'll need to add these skills to your business toolbox.
One Minute Motivations are quick motivational videos to motivate you to be your best, and to help you deal with some of life's most challenging problems. From relationships to fitness tips.
Tuesday, March 9, 2010
Debit & Credit Memory Tricks
When it comes to Debits and Credits you need all the help you can get to remember the ups and downs. This young lady has come up with a method that many young students find helpful. It incorporates the age old use of fingers in math and Newvo Hang Ten sign. L.O.L. what ever works for you, works for me.
This video provides a great summary of the key accounting equations you need to commit to memory.
This video provides a great summary of the key accounting equations you need to commit to memory.
Saturday, January 16, 2010
Debits & Credits A to Z
The term debit comes from the Latin debitum which means "that which is owing" (the past participle of debere "to owe"). Debit is abbreviated to Dr (for debtor). The term credit comes from the Latin credere/credit meaning "to trust or believe" / "he trusts or believes" via the French credit and the Italian credito. Credit is abbreviated to Cr (for creditor).
The double-entry bookkeeping system refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits, and serves as a kind of error-detection system: if, at any point, the sum of debits do not equal the corresponding sum of credits, then an error has occurred.
The above educational video provides a basic class on Journal Entries. Early in your Accounting learning when faced with Journal Entries it's important to ask yourself is this an ASSET or a LIABILITY and should this entry INCREASING or DECREASING the value of that ASSET or LIABILITY? The Map For Debits Credits concept helps to train your brain.
The term debit refers to the left side of an account and credit refers to the right side of an account. A debit is always entered in the left hand column of a Journal or Ledger Account and a credit is always entered in the right hand column. Debit is abbreviated Dr. and Credit is abbreviated Cr.
When you post (record) an entry in the left hand column of an account you are debiting that account. Whether the debit is an increase or decrease depends on the type of account. Likewise, when you post (record) an entry in the right hand column of an account you are crediting that account. Whether the credit is an increase or decrease depends on the type of account.
Simple Debit / Credit Rules:
All Accounts that Normally Have a Debit Balance are Increased with a Debit by placing the amount in the Left Column of the account and Decreased with a Credit by placing the amount in the Right Column of the account.
Assets
Draws
Expenses
All Accounts that Normally have a Credit Balance are Increased with a Credit by placing the amount in the Right Column of the account and Decreased with a Debit by placing the amount in the Left Column of the account.
Liabilities
Owner's Equity ( Capital )
Revenue
All You Need To Know About Debits and Credits
Summarized In One Sentence:
Enter an amount in the Normal Balance Side of an Account to Increase the Balance of an Account and in the Opposite Side of an Account to Decrease the Balance of an Account.
Additional Clarification:
Since Assets, Draw, and Expense Accounts normally have a Debit Balance, in order to Increase the Balance of an Asset, Draw, or Expense Account enter the amount in the Debit or Left Side Column and in order to Decrease the Balance enter the amount in the Credit or Right Side Column.
Likewise, since Liabilities, Owner's Equity (Capital), and Revenue Accounts normally have a Credit Balance in order to Increase the Balance of a Liability, Owner's Equity, or Revenue Account the amount would be entered in the Credit or Right Side Column and the amount would be entered in the Debit or Left Side column to Decrease the Account's Balance.
Principles or Rules of Debit and Credit
Each transaction consists of debits and credits, and for every transaction they must be equal.
' For Every Transaction: ' 'The Value of Debits = The Value of Credits'
This also means that the accounts with debits balances will equal the total value of accounts with credit balances. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total credits.
The extended accounting equation must also balance: 'A + E = L + OE + R'
(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)
So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'
Debits are on the left and increase a debit account and reduce a credit account. Credits are on the right and increase a credit account and decrease a debit account.
Examples
1. when you pay rent with cash: you increase rent (expense) by debiting, and decrease cash (asset) by credit.
2. when you receive cash for a sale: you increase cash (asset) by debiting, and increase sales (revenue) by credit.
3. when you buy equipment (asset) with cash: You increase equipment (asset) by debiting, and decrease cash (asset) by credit.
4. when you borrow with a cash loan: You increase cash (asset) by debiting, and increase loan (liability) by credit.
For more information read Bean Counters Debits & Credits and The Quick MBA Accounting
Sunday, January 10, 2010
Accounting - Overview 100 to 400
Accountancy is the art of communicating financial information about a business entity to users such as shareholders and managers.
The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management. It is the branch of mathematical science that is useful in discovering the causes of success and failure in business. The principles of accountancy are applied to business entities in three divisions of practical art, named accounting, bookkeeping, and auditing.
Accounting is defined by the AICPA as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."
Accounting is thousands of years old; the earliest accounting records were found in the Middle East which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced.
Early accounts served mainly to assist the memory of the businessperson and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting) purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.
Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management accounting and is used to provide information to employees, managers, owner-managers and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting is called Generally Accepted Accounting Principles, or GAAP.
A detailed example of how Assets = Liabilities + Owners Equity as you the accounting double entry debit and credit system is seen in action.
We offer a series of free Accounting training videos. See Accounting tag and classes 101-107 from last summer.
Thursday, January 7, 2010
Digital Text Books
The future is now. Finally we're starting to get serious about digitizing text books. But don't think you'll save hundreds annually by getting all your college text books free throught Bit Torrents. You know the management teams of printed textbooks don't want to lose their cash cows. You know the thousands of university college bookstores don't want to lose their on campus monopolies'. Yes, you guessed correct...Amazon's Kindle has companies like Sony and Apple scrambling to create a similiar product to sell to you. Early adapters always pay preme prices for the newest must have gadget. These things will be selling for as much as a new mid-level budget PC or high end notebook. How many gadgets can we carry at one time?
On the day after Christmas, Amazon said the Kindle was the most-purchased gift in its history and sales of its electronic books surpassed physical book sales on the holiday itself. Amazon Kindle is a software and hardware platform developed by Amazon.com subsidiary Lab126 for rendering and displaying e-books and other digital media
Now Coursesmart, a joint venture of five textbook publishers, shows how students might use tablet-based textbooks. It is based on their own renderings, not specific applications being developed with Apple.
Can we see people buying two ebook readers? One for Standard Print Books and one for School Text Books? In 2005 the concept of a tablet laptops was gaining momentum -it faded fast. By 2007 the selection, power and price points on laptops under $1,000 was motivating record levels of buyers. In 2009 regardless of the greatest American recession notebooks where flying off the shelf's at $399 price points.
Given there's nothing extremely unique behind any of these technologies, can anyone see one primary light-weight high-powered device that does it all. Assuming we'll always want a very small mobile phone, I referring to the possibility of the Tablet PC/Laptop returning to the lime-light. What do you think?
Wednesday, January 6, 2010
How's Your Government Accounting & Marketing ?
When your neighbor loses her job, it's a recession. When you lose your job, it's a depression. When federal workers not only keep their jobs but see their pay rise during a recession, it's a sign of the times. And when your home real-estate taxes have risen 18% during the period called the greatest recession and the city tax gets raised I'm ready to ask the federal government to make some layoffs and take some paycuts? How about you? Our state of Ohio employees have taken about a 5% cut but our unionized teachers got raises. let's post a few facts on how painful this great recession has been for the federal government employee vs the private sector employees.
USA Today:
The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.
Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted.
Federal workers are enjoying an extraordinary boom time — in pay and hiring — during a recession that has cost 7.3 million jobs in the private sector.
Since June, the federal government has increased employment by almost 10 percent, while the private sector has cut employment by over 6 percent over the prior two years of decline.
Now you know why I've been advising many students to seek careers in government for over 5 years.
My advice for financial students? Start learning government accounting and tax law. My advice for State and Federal Government? Start hiring those marketing majors. You need someone who could sell Ice to Eskimos' The government worker in this video couldn't sell water in the desert. Start working on those Taxes Are US slogans.
As a young BBA about 40% of our Business School was Accounting majors. When private and public sector recruiters came on campus all us Beta Alpha Phi folks lined-up for the Big 8 CPA firms. Alias, for those of us who were finance majors too, Investment Bankers didn't come to WMU back in 1976. The only government jobs we thought might provide some stability and be cool were for the FBI and CIA. Frankly, we had no required government accounting classes within the core program -there was no need. All of my professors were CPA's and PhD's. I don't recall any of them had worked in government accounting.
It's time to start signing up for any and all government related classes.
After looking at the chart Scott Heintzelman just found(below)the advice I'd give to college business graduates is and old stock traders motto: The Trend Is Your Friend -start working on government internships and interviews. Remember government will not outsource or offshore itself. In 50 years it's never downsized -the trend has only gone up!
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