Management is responsible for preparing financial statements. Which should be of high quality.
Financial statements are of high quality when they are relevant and reliable. Only then, they are
useful to investors and creditors.
According to the revenue recognition principle, revenues are recorded when earned. Revenues are
earned when goods or services are transferred to the customer.
According to the expense recognition principle, expenses are recognized in the same period as the
revenues to which they relate. Expenses are recorded when they are incurred to generate revenue.
Deferred revenue Money received in advance of services
Deferred expense Expenses that have been paid but not been incurred
Accrued revenue Revenue that has been earned, but no cash has been received
Accrued expenses Expenses which are recognized on the books, but have not been paid yet
Earnings per share = net income / average number of outstanding common stock during the period
Total asset turnover ratio = net sales / average total assets
The total asset turnover ratio shows how efficient management is in using its resources to generate
sales. The higher the asset turnover is, the more efficient assets are being utilized to generate
revenues.
When closing the books:
Even though the balance sheet account balances carry forward to the next period, the income
statement balances to not carry forward.
When closing the books; transfer net income (or loss) to retained earnings
Chapter 5:
Return on assets= net income / average total assets.
The ROA ratio is a financial ratio that indicated how profitable a company is in relation to its
total assets. ROA can only be used within the same industry (appels met peren vergelijken).
Chapter 6
Sales revenue is recorded when title and risk of ownership transfer to the buyer.
, Companies use a variety of methods to motivate customers to buy their products:
- Allowing customers to use credit cards
- Providing early payment incentives
- Allowing returns under certain circumstances
Retailers accept credit cards for several reasons:
- To increase customer traffic
- To avoid costs of providing credit directly to customers
- To lower risks due to bad checks
- to receive payment quicker
A customer will not take the cash discount if they can earn more money somewhere else.
Accounts receivable short term
Notes receivable long term
Bad debts result from credit customers who will not pay the amount they owe, regardless of
collection efforts.
The two primary goals of inventory management are:
- to have sufficient quantities of high quality inventory available to serve customer’s needs
- to minimize the costs of carrying inventory
inventory systems:
perpetual inventory system:
continuously updates inventory account as goods are bought and sold on a unit-by-unit basis
periodic inventory system:
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