3.Week two discussion
In chapter 2 we refreshed our knowledge about financial accounting . Please list any areas of concern and we can all review in the discussion forum .Chapter
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Review of Accounting
2
Outline
Income Statement
Price-earnings Ratio
Balance Sheet
Statement of Cash Flows
Tax-free Investments (Deprecation)
Basic Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
Income Statement
Device to measure the profitability of a firm over a period of time.
It covers a defined period of time.
It is presented in a stair-step or progressive fashion
To examine the profit or loss after each type of expense item is deducted.
Income Statement (cont’d)
Sales – Cost of Goods Sold (COGS)
= Gross Profit (GP)
GP – Expenses = Earnings Before Interest and Taxes (EBIT) or Operating Income (OI)
EBIT – Interest = Earnings Before Taxes (EBT)
EBT – Taxes = Earnings After Taxes (EAT) or Net Income (NI)
Income Statement (cont’d)
Return to Capital
Three primary sources of capital:
Bondholders
Preferred stockholders
Common stockholders
Earnings per share
Interpreted in terms of number of outstanding shares.
May be paid out in dividends or retained by company for subsequent reinvestment.
Statement of retained earnings
Indicates the disposition of earnings.
Statement of Retained Earnings
Price-Earnings (P/E) Ratio
Refers to the multiplier applied to earnings per share to determine current value of the common stock.
P/E Ratio = Market Price of Stock / Earnings per share (EPS).
Some factors that influence P/E:
Earnings and the sales growth of the firm.
Risk (volatility in performance).
Debt-equity structure of the firm.
Dividend payment scheme.
Quality of management.
Price-Earnings (P/E) Ratio (cont’d)
Allows comparison of the relative market value of many companies based on $1 of earnings per share.
Indicates expectations about the future of the company.
Price-earnings ratios can …
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