İncome statement

Revenues
-Expenses
=Net İncome

Statement of Retained Earnings

Opening Balance
+Net İncome
-Dividends
=Retained Earnings

Balance Sheet
Assets Liabilities
Equity
A=L+E

Statement of Cash Flows

Operating Activities
+İnvesting Activities
+Financing Activities
=Change in Cash
+Starting Balance
=Ending Cash Balance
 ACCOUNTİNG AS AN İNFORMATİON
SYSTEM
Accounting is a link between business
activities and decision makers.
.Accounting measures business activities by recording
data about them for future use
.The data are stored until needed and then processed
to become useful information
.Based on information from accounting ,decision
makers take actions that affect subsequent business
activities
 Business Goals and Activities
BUSINESS GOALS BUSINESS ACTIVITIES

PROFITABILITY FINANCING OPERATING

LIQUIDITY INVESTING

Exhibit 1.2
 Business goals and activities
• A business is an economic unit that aims to
sell goods and services to customers at prices
that will provide an adequate return to its
owners.
• Nike , Inc. Athletic footwear and clothing
• Burger King Holdings,Inc. Food service
• Starbucks Corp. Coffee and related service
The two major goals of all businesses are profitabilitiy
and liquidity.

Profitability is the ability to earn enough income to

attract and hold investment capital.

Liquidity is the ability to have enough cash to pay

debts when they are due.
 Accounting as an Information System

BUSİNESS Actions DECİSİON

ACTİVİTİES MAKERS

Data İnformation

ACCOUNTİNG

MEASUREMENT PROCESSİNG COMMUNİCATİON

Exhibit 1.1
All companies , whether they are retails , manufacturers, or service providers , pursue
their goals by engaging in operating , investing, and financing activities.

Operating activities include buying, producing, and selling goods and services; hiring
managers and other employees ; and paying taxes.

İnvesting activities involve spending a company’s capital in ways that will help it
achieve its goals.They include buying the resources needed to operate the business,
such as land,buildings,and equipment, and selling those resources when they are no
longer needed.

Financing activities involve obtaining adequate funds to begin operating the business
and to continue operating it.They include obtaining capital from creditors, such as
banks and suppliers,and from the company’s owners.They also include repaying
creditors and paying a return to the owners.
 Financial and Management Accounting
Management Accounting Internal decision makers use
information provided by management accounting about
financing, investing and operating activities to achieve the
goals of profitability and liquidity.
Financial Accounting External decision makers use financial
accounting reports to evaluate how well the business has
achieved its goals. These reports are called financial
statements.
 Ethical Financial Reporting

Ethics is a code of conduct that applies to everyday life.It

adresses the question of whether actions are right or wrong.
DECISION MAKERS:THE USERS OF
ACCOUNTING INFORMATION
The people who use accounting information to make decisions fall into
three categories:

•Those who manage a business

•Those outside a business enterprise who have a direct

financial interest in the business

•Those who have an indirect financial interest in a business

 The Users of Accounting Information

DECISION MAKERS

MANAGEMENT
Finance THOSE WITH DIRECT THOSE WITH INDIRECT
FINANCIAL INTEREST FINANCIAL INTEREST
Investment
Investors Tax Authorities
Operations and Production
Creditors Regulatory Agencies
Marketing
Labor Unions
Human Resorcues
Customers
Information Systems
Economic Planners
Accounting
 Users with a Direct Financial Interest
• The primary external users of accounting
information are investors and creditors.
 Users with an Indirect Financial Interest

• Tax Authorities,
• Regulatory Agencies,
• Other Groups: Labor Unions- Advisors of
Investors and Creditors- Consumer Groups,
Customers, and the General Public- Economic
Planners
 THE FINANCIAL STATEMENTS AND THEIR
ELEMENTS
• Four major financial statements are used to
communicate accounting information abut a
buiness:
• the income statemet,
• the statement of retained earnings,
• the balance sheet,
• the statement of cash flows.
Income Statement
The basic elements of an income statement
revenues,expenses,and net income
Statement of retained earnings
Retained earnings represent the accumulated
earnings generated by a business’s income-
producing activities less amounts that have
been paid out to stockholders
Balance sheet
The purpose of a balance sheet is o show the
financial position of a business on a certain
date, usually the end of the month or year.
It often is called the statement of financial
position.
• The date on the balance sheet is a single date ,
whereas the dates on the other three
statements cover a period of time, such as a
month,quarter,or year.
• The balance sheet presents a view of the
business as the holder of resources .
• It has three elements : assets, liabilities (also
called creditors’ equities), and stockholders’
equity.
 The Accounting Equation

Stockholders’
Assets Liabilities Equity

A=L+SE
Exhibit 1.9
This equation is known as the accounting equation.
The two sides of the equation must always be equal ,
or be ‘’in balance’’, as shown in Exhibit 1.9.
Assets Assets are the economic resources of company that
are expected to benefit the company’s future operations.

Certain kinds of assets -cash and accounts receivable- are

monetary items.

Other assets – inventories, land, building and equipment – are

nonmonetary phsical items.

Still other assets – the right granted by patents, trademark,

and copyrights- are nonphysical.
Liabilities Liabilities are a business’s present obligations to pay
cash , transfer assets , or provide services to other entities in
the future.

Among these obligations are amounts owed to suppliers for

goods or services bought on credit ( called accounts payable )

Borrowed money ( money owed on bank loans )

Salaries and wages owed to employees

Taxes owed to the government .

Stockholders’ equity stockholders’ equity (also called
shareholders’ equity ) represents the claims of the owners of
a corporation to the assets of the business.

Stockholders’ equity has two parts, contributed capital and

retained earnings :
Stockholders’ Equity = Contributed Capital + Retained
Earnings

Contributed Capital is the amount that stockholders

invest in the business.
Statement f Cash Flows
Whereas the income statement focuses on a company’s
profitabilitiy, the statement os cash flows focuses on its
liquidity.

Cash flows are the inflows and outflows of cash into and out
of a business.

Net cash flows are the difference between the inflows and
outflows.
RATIO
Profit Margin is calculated by dividing net income by revenues.

Profit margin = net income / revenues

Financial Ratios

Liquidity Ratios

Leverage ratios (Capital Structure Ratios)

Profitability ratios

Valuation ratios

Turnover Ratios
Liquidity Ratios

Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its
short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

Current assets
Current ratio 
Current liabilitie s
Quick Ratio: The quick ratio measures the dollar amount of liquid assets available for each
dollar of current liabilities.

Quick Ratio =Cash in hand + Cash at Bank + Receivables + Marketable Securities

Current Liabilities

= (current assets – inventory)/ Current liabilities

Leverage (Capital Structure) Ratios

Debt to equity ratio (DE ratio): It refers a company’s capital structure and whether the company
is more reliant on borrowings (debt) or shareholder capital (equity) to fund assets and activities.

Total debt
Debt/equity ratio 
Total equity
Total liabilities to total tangible assets (TLTAI): This ratio provides the relationship between a
company’s liabilities and tangible assets. Tangible assets are defined as physical assets, such as
property, cash, inventory and receivables.

Total liabilities
TLTAI 
Total tangibleassets
Interest cover ratio: measures company’s ability to meet interest expenses on debt using profits.

EBIT (Earnings before interest and taxes)

Interest cover ratio 
Interest
Net debt to equity ratio: This represents the level of risk associated with the company’s
funding source. It is a useful internal measure to review the balance between interest bearing
debt and shareholders’ equity for the purpose of improving company capacity to meet debt
repayments and/or return on equity.

Interest bearing debt  Cash

Net debt/equity ratio 
Net ordinary share equity
Profitability Ratios

Gross profit margin: Gross profit margin tells us what percentage of a company’s sales revenue
would remain after deducting the cost of goods sold.

Sales  Cost of goods sold (direct cost)

Gross Profit Margin  X100
Sales
Net profit margin: Net profit margin meanwhile indicates what percentage of a company’s sales
revenue would remain after all costs have been taken into account.

Net Income
Net Profit Margin  X100
Sales
Return on assets (ROA): It is a measurement of management performance. ROA tells the
investor how well a company uses its assets to generate income. A higher ROA denotes a higher
level of management performance.

Net Income
Return on assets (ROA)   100
Average Total Assets
Return on equity (ROE): It is another measurement of management performance. ROE tells the
investor how well a company has used the capital from its shareholders to generate profits. A
higher ROE denotes a higher level of management performance.

Net Income
Return on equity (ROE)   100%
Average Total Equity
Valuation Ratios

Price to earnings ratio (PE): It assess a company’s value. It measures company’s current share
price relative to its per-share earnings.

Price per share

PE 
Earnings per share
Price/earnings to growth ratio (PEG): The PEG ratio acts as a measure of company’s value that
takes into account future growth.

PE
PEG 
EPS growth rate
Turnover Ratios

Inventory turnover: It is a measure of the number of times inventory is sold or used in a time
period such as a year

Cost of goods sold

Inventory turnover 
Average Inventory