Unit 18 - Financial Statement Analysis

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What does the Acid-test (quick) ratio measure?
The acid-test ratio, also called quick ration, measures the company’s short-term liquidity; it is computed by dividing the sum of cash, short-term investments, and net receivable by current liabilities.

What does the asset turnover measure?
Asset turnover measures the ability of the company to generate sales; it is computed by dividing net sales by average assets.

What is a change in accounting principle?
When a company prefers to use, in the current year, one accounting principle that is different from the one used the previous year it is said to have a ‘change in accounting principle.’ An example of a change is switching from the average cost method of inventory costing to LIFO.

What does Comprehensive income include?
Comprehensive income includes the net income plus all changes in shareholders’ equity during a period, except those resulting from investments by stockholders and distributions to stockholders.

What does the Current ratio measure?
The current ratio measures the company’s liquidity and short-term debt-paying ability; it is computed by dividing the current assets by current liabilities.

What does the debt to total assets ratio measure?
This ratio measures the percentage of total assets provided by creditors; it is computed by dividing total debt by total assets.

What is meant by discontinued operations?
‘Discontinued operations’ takes place when a significant segment of a business is sold or disposed of.

What does Earnings per share (EPS) measure?
EPS measures the net income earned by each share of common stock; it is computed by dividing net income minus preferred dividends (if any) by the number of common shares outstanding. When additional shares of common stock are issued during the year, use the weighted average for the denominator.

What are extraordinary items?
Extraordinary items are events and transactions that are unusual in nature and infrequent in occurrence.

What is Horizontal analysis?
Horizontal analysis is a technique that accountants use to evaluate financial statements over a period of time; usually over two years. The analysis shows the increase or decrease between the years and it may be shown in dollars or percentages.

What does the inventory turnover measure?
Inventory turnover measures the liquidity of the merchandise inventory; it is computed by dividing cost of goods sold by average inventory.

What is meant by leveraging?
Leveraging or trading on the equity at a gain occurs when the company borrows money at an interest rate that is lower than its return on assets.

What are liquidity ratios?
Liquidity ratios are measures of the short-term ability of a company to pay its current bills and to keep solvent by maintaining a reasonable cash cushion for unplanned needs.

What is a payout ratio?
The payout ratio is a ratio that measure the percentage of earnings distributed as cash dividends; it is computed by dividing cash dividends by net income.

What does the Price-earning (P-E) ratio measure?
This ratio shows the relationship between the market value of a share of common stock and its actual earnings per share. The resulting ratio is referred to as “multiples.” The importance of this ratio lies in its usefulness, as investors will compare a company’s multiples to the average multiples of the whole market. The ratio is computed by dividing the market price of the stock by its earnings per share (EPS).

What does the Profit Margin measure?
The profit margin measures the percentage of each dollar of sales that results in net income; it is computed by dividing net income by net sales.

What are profitability ratios?
Profitability ratios measure the degree of success of a company in producing income from operations and net income.

What is pro forma income?
Pro forma income is a measure of income that usually excludes items that may be unusual or infrequent.

What is meant by quality of earnings?
Quality of earnings makes clear to reader of a company’s financial statements that the net income is earned by the operation of the main line of business, and not by transfers, changes of accounting principles, or murky bookkeeping practices.

What is a ratio?
A ratio is a mathematical relationship between two quantities which may be expressed as a percentage (12%), a decimal (0.12), a proportion (3:1), a fraction (12/100), or in words (twelve per cent).

What is ratio analysis?
Ratio analysis is a technique for evaluating financial statements; they evaluate liquidity, profitability, and solvency.

What does the receivables turnover measure?
The receivables turnover measures the liquidity and collectability of the receivables; it is computed by dividing net credit sales by average net receivables.

What is return on assets?
Return on assets is a measure of profitability; it is computed by dividing net income by average assets.

What does return on common stockholders’ equity measure?
The return on common stockholders’ equity measures the dollars of net income earned for each dollar invested by the shareholders; it is computed by dividing net income minus preferred dividends (if any) by average common stockholders’ equity.


Ch1 Accounting in Action

Ch2 Recording Process

Ch3 Adjusting the Accounts

Ch4 Completing the Accounting Cycle

Ch5 Merchandising Operations

Ch6 Inventories

Ch7 Accounting Information Systems

Ch8 Internal Control and Cash

Ch9 Accounting for Receivables

Ch10 PP&E, Natural Resources, and Intangible Assets

Ch11 Current Liabilities and Payroll


Ch12 Partnerships

Ch13 Corporations

Ch14 Corporations:Dividends, RE

Ch15 Long Term Liabilities

Ch16 Investment

Ch17 Statement of Cash Flows

Ch18 Financial Statement Analysis

Plato and Accounting

Price/Earnings Ratio

Plant Assets

Luca Pacioli and DaVinci

The secrets of 'no-doze' prose:
Mary Duffy's Sentence Openers

Unit 16 — Investments

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What are available-for-sale securities?
Securities available-for-sale are the type of securities that a company buys as an investment and with the intention of selling them sometime in the future.

What are consolidated financial statements?
Consolidated financial statements are inclusive statements that present all the assets and liabilities of subsidiaries that are controlled by the parent company. They also show all the revenues, cost, and expenses of subsidiaries.

What is controlling interest?
When a corporation owns more than 50% of the common stock of another corporation, then the owning corporation is said to own a controlling interest.

What is meant by Cost method?
Cost method is an accounting method in which the investment in common stock of another corporation is recorded at cost, and revenue is recognized only when the cash dividends are received.

What are debt investments?
Debt investments are investments in bonds issued by governments (to include their agencies) and corporations.

What is the equity method?
The equity method is an accounting method in which the investment in common stock is initially recorded at cost. At the end of the fiscal year the account is adjusted and marked to market.

What is meant by fair value?
Fair value is the market value of securities at particular a point in time.

What are held-to-maturity securities?
Held-to-maturity securities are bonds that the investor intends to hold until their maturity date.

What is an investment portfolio?
An investment portfolio is made up of a diversified group of stocks and bonds.

What are considered to be long term investments?
The stocks and bonds in a portfolio that the investor intends to hold for longer than a year are long term investments.

What is a parent company?
A parent company is a corporation that owns more than 50% of the common stock of another corporation.

What are considered to be short-term investments?
Short-term investments are stocks and bonds in a portfolio that will be sold within a year.

What is a subsidiary or affiliated company?
A subsidiary is a company whose stock is owned by another company.

What are trading securities?
Trading securities are stocks and bonds that are bought and sold to generate interest, dividends, and gains, by taking advantage of short-term price fluctuations.
Ch1 Accounting in Action

Ch2 Recording Process

Ch3 Adjusting the Accounts

Ch4 Completing the Accounting Cycle

Ch5 Merchandising Operations

Ch6 Inventories

Ch7 Accounting Information Systems

Ch8 Internal Control and Cash

Ch9 Accounting for Receivables

Ch10 PP&E, Natural Resources, and Intangible Assets

Ch11 Current Liabilities and Payroll


Ch12 Partnerships

Ch13 Corporations

Ch14 Corporations:Dividends, RE

Ch15 Long Term Liabilities

Ch16 Investment

Ch17 Statement of Cash Flows

Ch18 Financial Statement Analysis

Plato and Accounting

Price/Earnings Ratio

Plant Assets

Luca Pacioli and DaVinci

The secrets of 'no-doze' prose:
Mary Duffy's Sentence Openers

Economic Giants: Adam Smith, Karl Marx, John Maynard Keynes, and Milton Friedman

John Maynard Keynes once wrote:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Adam Smith (1723-1790), the father of capitalism, gave us the invisible hand of competition and self-interest, laissez-faire, and the division of labor. Karl Marx (1818-1883), hated free markets, and believe in total government. John Maynard Keynes (1883-1946) rescued capitalism by inventing fiscal and monetary policies. Milton Friedman (1912-2006) and his Chicago School believed in the total power of the mighty dollar; and hated Keynes and keynes' fiscal policy (deficit financing).

Go figure.

Not only are we slaves of these defunct economists, but also their followers. Hard as I look for new thinkers, I fail to find them. Larry Summers, Alan Greenspan, Ben Bernanke, Paul Krugman, and other minor luminaries are still distilling the teaching from the above masters.

And the old guard still rules.

Sonia Sotomayor, Associate Justice of the Supreme Court

Another wonderful accomplishment for the people of the United States of America.

Despite the shrieks, moans, and shrill outcries of some Republican senators (Jeff Sessions and Lindsay Graham), the good judge will be confirmed. That these senators latched on to one or two phrases from her speeches and attempted to cast doubt on her judicial accomplishments, is laughable if not reprehensible. While her record showed a steady, sober, and unequivocal passion for the rule of law, these men ignored it.

The First Amendment --according to senators Sessions and Graham-- applies to everyone except judges.

The TV low-drama highlighted the fact that some political cro-magnon-men will still throw rocks --speed bumps-- on a good woman's path to excellence.

Yo Mozart, My Man! Wassssap?

Not long ago I was browsing in the Luis Vuitton store (corner of 57th St and 5th Avenue), when I heard the sweetest sounds I've ever heard. When I asked about the music, the attendant told me they were playing Mozart's concerto for flute and harp.

Once at home, I immediately downloaded that piece into my iPod. Oh, heavenly sounds! Today, there isn't a single day that I don't listen to it--about 12 minutes of bliss.

I write this for those who don't like classical music, so that they can see that there's really nothing to dislike.

Mozart was born on January 27th, 1756, so he's now 253 years old. Long live Mozart!

Domains, Hosting, and Money Making

To earn money in the Internet we must make sure that we occupy at least three lanes in the racing course. What are these lanes?

1. You must buy your own domain for your blog or website.

2. You must host your own blog or website with a reliable service.

3. You must write decent English.

What does the above accomplish? By following the above suggestions, you will get an edge over the millions of competitors (bloggers, merchants, marketers, etc) who don't use this technique.

Domain: Whether you sell a service or a product, your domain must identify the product. Your domain name will be your Headline in any ads that you place to promote what you are selling.

To illustrate: I sell an e-book that teaches good writing practices by knowing how to begin sentences. Naturally, I purchased a fitting domain:SentenceOpeners.Com, which I use as the Headline of the Ads I place to promote the book.

Reliable Host: Many services out there will take down your blog or website at midnite, on weekends, for "maintenance," or to save bandwidth, or to favor bigger clients at your expense. In addition, many do NOT provide customer service.

I've been blogging since I retired two years ago, and I've had my share of bad services and disappointments. I could tell you horror stories, but I want to remain positive. So, while many services may want to lure you with flashy and doubtful offers, I prefer the simple, straight, no nonsense service 1and1.com. You will find the company at 1and1.com.

1and1.com is friendly and one need not be a genius to choose a domain and a host service. And all for modest prices.

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Adorable Women Society (of Women Who Possess The Secret)

Riding the elevator this morning I eavesdropped on two attractive ladies' conversation:
"...and you belong to that club?"
"Not a club--more like a dating sorority.'The Adorable Women Society' ..."
"You Pay fees?"
"No Way--It's free. I learned the secret [...blurred...] what a good man wants in a woman."
"So, tell me the secret..."
"For one, they ...[blurred]...captivate...{blurred]"
"Wow, let me check it out."