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BBA 3002

FINANCIAL STATEMENT ANALYSIS

TAN WAH TIONG


940928-14-5531
201565

LOH YONG CHIANG


AUGUST 2014
NO
1.0
2.0
3.0

DETAIL
Content
Introduction
Body
-

Balance sheet

Common-size statement

PAGE
1
2-3
4-29

Page 1 of 45

Principle financial ratio

Compare and contrast the companies

Cross Sectional and Time Series Analysis of Financial Ratio

Conclusion

4.0

References

30

5.0

Coursework

31-38

2.0 Introduction to four company


Toyota

Page 1 of 45

Toyota Motor Corporation is a Japanese automotive manufacturer headquartered


in Toyota, Aichi, Japan. In 2013 the multinational corporation consisted of 333,498
employees worldwide and, as of January 2014, is the fourteenth-largest company in the
world by revenue. Toyota was the largest automobile manufacturer in 2012 (by
production). In July of that year, the company reported the production of its 200millionth vehicle. Toyota is the world's first automobile manufacturer to produce more
than 10 million vehicles per year. It did so in 2012 according to OICA, and in 2013
according to company data. As of July 2014, Toyota was the largest listed company in
Japan by market capitalization (worth more than twice as much as-ranked Soft
Bank) and by revenue.
Honda
Honda was the first Japanese automobile manufacturer to release a dedicated luxury
brand, Acura, in 1986. Aside from their core automobile and motorcycle businesses,
Honda also manufactures garden equipment, marine engines, personal watercraft and
power generators, amongst others. Since 1986, Honda has been involved with artificial
intelligence/robotics research and released their ASIMO robot in 2000. They have also
ventured into aerospace with the establishment of GE Honda Aero Enginesin 2004 and
the Honda HA-420 HondaJet, which began production in 2012. Honda has three jointventures in China (Honda China, Dongfeng Honda, and Guangqi Honda).

Page 2 of 45

Hyundai
The Hyundai Motor Company is a South
Korean multinational automotive manufacturer headquartered in Seoul, South Korea.
The company was founded in 1967 and, along with its 32.8% owned subsidiary, Kia
Motors, together comprise the Hyundai Motor Group, which is the world's fifth largest
automaker based on annual vehicle sales in 2012. [needs update] In 2008, Hyundai
Motor (without Kia) was ranked as the eighth largest automaker. As of 2012, the
Company sold over 4.4 million vehicles worldwide in that year, and together with Kia
total sales were 7.12 million. Hyundai is currently the fourth largest vehicle
manufacturer in the world. Hyundai operates the world's largest integrated automobile
manufacturing facility in Ulsan, South Korea, which has an annual production capacity
of 1.6 million units. The company employs about 75,000 people worldwide. Hyundai
vehicles are sold in 193 countries through some 6,000 dealerships and showrooms.
Valksvagon
Volkswagen is a German automobile manufacturer headquartered in Wolfsburg, Lower
Saxony, Germany. Volkswagen is the top-selling and original marque of

Page 3 of 45

the Volkswagen Group, the biggest German automaker and the second largest
automaker in the world.

3.0 Body
3.1 Balance Sheet (1) Toyota

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(2) Honda

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(3) Hyundai

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(4) Volkswagen AG

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3.2 common size statement


(1) Toyota
Period

2010

ending
Balance sheet
Cash
1.87T

2011

6.2
%

2.08T

2012

7.0

1.68T

2013

5.5 %

1.72T

4.8 %

Page 14 of 45

Short-term

2.19T

7.2

1.43T

4.8

1.26T

4.1 %

1.55T

4.4 %

Investments
Total

6.46T

%
21.3

5.89T

%
19.8

6.52T

21.3

7.52T

21.2

current

receivable
Inventories

1.42T

4.7

1.3T

4.4

1.62T

5.3 %

1.72T

4.8 %

Other

1.14T

%
3.8%

1.12T

%
3.8

1.24T

4.0 %

1.28T

3.6 %

6.24T

20.4

6.85T

19.3

current
assets
Net

%
6.71T

Property,

22.1

6.31T

21.2
%

Plant &
Equipment
Total

4.14T

13.6

Investment
Long term

5.7

%
18.8

Note

Receivable
Other assets

608.38

2.0

542.98

1.8

368.99

1.2 %

469.62

1.3 %

Total asset

B
30.35T

%
100

B
29.82T

%
100

B
30.65T

100

B
35.48T

100%

10.69T

%
35.2

10.79T

%
36.2

11.78T

%
38.4

12.91T

36.4

Total
Current

5.4T
5.62T

18.1

5.97T

19.5

7.28T

20.5

%
18.8

5.66T

%
18.5

7T

%
19.7

Page 15 of 45

Liabilities
Long-Term

7.02T

23.1

Debt
Provision

678.68

%
2.2%

for Risks &

Charges
Deferred

690.6B

6.45T

59.2

668.02

%
2.2%

6.04T

19.7

708.4B

%
2.3%

B
2.3%

691.28

817.03

2.7%

1.29T

3.6%

0.6%

B
143.35

0.5%

308.08

0.9%

B
19.58T

63.9

B
22.71T

64.0

12.77T

%
36.0

35.48T

%
100%

225.32

0.7%

Liabilities
Total

B
19.42T

64.0

B
18.9T

63.4

Liabilities
Total Equity 10.93T

%
36.0

10.92T

%
36.6

11.07T

%
36.1

Liabilities

%
100

29.82T

%
100

30.65T

%
100%

766.11

%
2.2%

2.3%

B
179.78

&

20.7

Taxes
Other

30.35T

7.34T

Shareholder
s' Equity

Page 16 of 45

(2) Honda
Period

2010

2011

2012

2013

ending
Balance sheet
Cash
1.12T

9.6%

1.28T

11.1%

1.25T

10.%

1.21T

8.9%

Short-term

1.89B

0.02

1.7B

0.01%

3.74B

0.3%

3.1B

0.00

1.98T

%
17.0

2.25T

%
16.5

Investments
Total
current

1.92T

16.6%

1.89T

16%

receivable
Inventories

936.98

8.0%

900.6B

7.8%

1.04T

8.8%

1.22T

8.9%

Other

B
571.32

4.9%

589.96

5.1%

557.76

4.7%

649.42

4.8%

current

assets
Net

3.39T

Property,

B
29.1

3.3T

B
28.5%

3.45T

B
29.3

4.24T

31.1
%

Plant &
Equipment
Total

641.16

Investment
Long term

B
2.36T

5.5%

638.77

20.3

B
2.35T

5.5%

622.33

20.3%

B
2.37T

5.3%

666.66

4.9%

20.1

B
2.79T

20.5

Page 17 of 45

Note

Receivable
Other assets

408.19

3.5%

434.62

Total asset

B
11.63T

Total

3.42T

Current

3.8%

425.71

100

B
11.57T

%
29.4

3.57T

3.6%

475.17

3.5%

100%

B
11.78T

100

B
13.64T

100

30.9%

3.58T

%
30.4

4.1T

%
30.1

Liabilities
Long-Term

2.31T

19.9

2.04T

17.6%

2.24T

19.0

2.71T

19.9

Debt
Provision

699.92

%
6.0%

640.96

5.5%

664B

%
5.6%

727.05

%
5.3%

for Risks &

Charges
Deferred

195.51

Taxes
Other

B
336.72

2.9%

Liabilities
Total

B
7.17T

61.7

4.46T

%
38.3

4.58T

Liabilities & 11.63T

%
100

11.57T

Shareholder

Liabilities
Total Equity

B
1.7%

312B

B
2.7%

344.55

2.9%

488.63

3.6%

2.3%

B
247.41

2.1%

B
287.16

263.19

2.1%

B
6.99T

60.4%

B
7.25T

61.5

B
8.44T

61.9

39.6$

4.53T

%
38.5

5.2T

%
38.1

%
100%

11.78T

%
100

13.64T

%
100

s' Equity

Page 18 of 45

(3) Hyundai
Period

2010

2011

2012

2013

ending
Balance sheet
Cash
6.22T

6.6%

6.23T

5.7%

6.76T

5.7%

6.87T

5.1%

Short-term

7.55T

8.0%

9.53T

8.1%

12.48T

10.3

15.35T

11.5

Investments
Total current

22.99T

24.3

25.72T

23.5

26.84T

%
22.1

27.81T

%
20.8

5.49T

%
5.8%

6.24T

%
5.7%

6.77T

%
5.8%

7.07T

%
5.3%

receivable
Inventories

Page 19 of 45

Other current

1.27T

1.3%

1.21T

1.1%

2T

1.6%

1.75T

1.3%

21.12T

22.3

24.82T

22.7

28.57T

23.5

32.03T

24%

17.51T

13.1

20.93T

%
15.7

assets

Net Property,
Plant &
Equipment
Total
Investment
Long term

%
9.31T
17.25T

Note

9.8%
18.2

%
13.88T

12.7

18.47T

%
16.9

%
14.99T

12.3

19.43T

%
16.0

Receivable
Intangible

2.65T

2.8%

2.66T

2.4%

2.88T

2.4%

3.13T

2.3%

Assets
Other assets

275.45

0.3%

266.99

0.2%

326.73

0.3%

452.89

0.3%

Total asset

B
94.71T

100

B
109.48

100

B
121.54

100

B
133.42

100

31.45T

%
33.2

T
33.16T

%
30.3

T
32.84T

%
27%

T
31.92T

%
23.9

Total
Current
Liabilities
Long-Term
Debt
Provision for

%
22.74T
4.88T

2.9%
5.2%

%
27.17T

24.8

5.61T

%
5.1%

%
30.53T

25.1

6.06T

%
5.0%

34T

25.5

5.51T

%
4.1%

Risks &

Page 20 of 45

Charges
Deferred

324.73

0.3%

1.02T

0.9%

1.87T

1.5%

2.83T

2.1%

Taxes
Other

B
1.85T

2.0%

1.74T

1.6%

1.83T

1.5%

2.05T

1.5%

Liabilities
Total

61.83T

68.5

69.15T

63.2

73.62T

60.6

76.84T

57.6

Liabilities
Total Equity

32.89T

%
34.7

40.33T

%
36.8

47.92T

%
39.4

56.58T

%
42.4

Liabilities &

94.71T

%
100

109.48

%
100

121.54

%
100

133.42

%
100

Shareholders'
Equity

(4) Volkswagen AG
Period

2010

2011

2012

2013

ending

Page 21 of 45

Balance sheet
Cash
18.67B

9.4%

18.29B

7.2%

18.49B

6.0%

23.18B

7.1%

Short-term

6.42B

3.2%

8.41B

3.3%

10.53B

3.4%

12.35B

3.8%

Investments
Total

43.21B

21.7

51.38B

20.2

55.37B

17.89

58.01B

17.9

current

receivable
Inventories

17.63B

9.8%

27.55B

10.9

28.67B

9.26%

28.65B

8.8%

Other

0%

%
0%

4.06B

1.31%

4.39B

1.4%

37.66B

18.9

48.5B

19.1

59.46B

19.2%

64.65B

19.9

current
assets
Net
Property,

Plant &
Equipment
Total

21.88B

11%

25.49B

10%

16.02B

5.2%

16.87B

5.2%

Investment
Long term

36.51B

18.3

45.58B

18%

54B

17.4%

55.69B

17.2

Note

Receivable

Intangible

13.1B

Assets
Other assets

57M

0.03

22.18

8.74

59.11

%
0.02

48M

35M

19.1%

0.01%

59.24

18.3

%
0.01

63M

Page 22 of 45

Total asset

199.39

%
100

253.77

%
100

309.52

Total

B
76.9B

%
38.6

B
101.24

%
39.9

B
105.54

37.16B

18.6

44.44B

1.7%

63.6B

20.5%

61.52B

19%

30.21B

%
15.2

33.74B

13.3

42.27B

13.7%

39.43B

12.2

Deferred

(2.58B

%
-

%
(2.28B) -

5.26B

0.08%

6.63B

%
2.0%

Taxes

0.01

Other

4.74B

%
2.4%

6.94B

2.7%

7.07B

2.3%

6.83B

2.1%

Liabilities
Total

150.68

75.6

190.42

75%

227.52

73.5%

234.3B

72.2

Liabilities
Total Equity

B
48.71B

%
24.4

B
63.35B

25%

B
82B

90.04B

%
27.8

Liabilities

199.39

%
100

253.77

100

309.52

324.33

%
100

&

Current
Liabilities
Long-Term
Debt

100%

324.33

%
100

34.1%

B
118.67

%
5.8%

0.9%

26.5%
100%

Shareholder
s' Equity

Page 23 of 45

3.3 Principle Financial ratio


(1) Toyota
Ratio
Activity ratio
Total asset turnover
Inventory turnover
Accounts receivable turnover
Age of inventory
Liquidity ratio
Current ratio
Quick ratio
Profitability ratio
Gross margin
Profit margin on sales
Sales to total assets

2010

2011

2012

2013

0.62
11.56
10.02
31.14

0.64
12.96
13.10
27.78

0.61
10.12
9.29
35.57

0.62
10.77
11.20
33.43

1.22
1.09

1.10
0.98

1.05
0.91

1.07
0.93

13.35
1.11
0.62

11.27
2.15
0.64

11.73
1.53
0.61

16.00
4.36
0.62

Return on total asset


Leverage ratio
Debt ratio
Long-term debt to equity

0.080

0.070

0.013

0.030

0.63
0.68

0.63
0.62

0.64
0.57

0.64
0.60

Page 24 of 45

(2) Honda
Ratio
Activity ratio
Total asset turnover
Inventory turnover
Accounts receivable turnover
Age of inventory
Liquidity ratio
Current ratio
Quick ratio
Profitability ratio
Gross margin
Profit margin on sales
Sales to total assets
Return on total asset
Leverage ratio
Debt ratio
Long-term debt to equity

2010

2011

2012

2013

0.74
6.86
9.71
52.48

0.77
7.22
11.34
49.86

0.67
5.69
9.79
63.27

0.72
6.02
9.78
59.80

1.35
1.07

1.31
1.06

1.32
1.03

1.30
1.00

25.29
3.13
0.74
0.024

27.29
5.97
0.77
0.047

25.53
2.66
0.67
0.019

25.61
3.70
0.73
0.028

0.62
0.53

0.60
0.46

0.62
0.51

0.62
0.54

(3) Hyundai

Page 25 of 45

Ratio
Activity ratio
Total asset turnover
Inventory turnover
Accounts receivable turnover
Age of inventory
Liquidity ratio
Current ratio
Quick ratio
Profitability ratio
Gross margin
Profit margin on sales
Sales to total assets
Return on total asset
Leverage ratio
Debt ratio
Long-term debt to equity

2010

2011

2012

2013

0.71
9.32
21.00
38.62

0.71
9.08
20.21
39.65

0.69
9..55
22.87
37.70

0.65
9.55
17.89
37.70

1.38
1.21

1.48
1.29

1.67
1.46

1.84
1.62

23.65
8.21
0.71
0.060

24.54
9.85
0.71
0.070

23.45
10.13
0.69
0.070

23.68
9.78
0.65
0.070

0.65
0.76

0.63
0.73

0.61
0.69

0.58
0.66

2010

2011

2012

2013

0.64
6.07
7.20
59.31

0.62
4.80
5.78
75.00

0.62
5.55
6.72
64.86

0.61
5.70
6.88
63.16

(4) Volkswagen
Ratio
Activity ratio
Total asset turnover
Inventory turnover
Accounts receivable turnover
Age of inventory

Page 26 of 45

Liquidity ratio
Current ratio
Quick ratio
Profitability ratio
Gross margin
Profit margin on sales
Sales to total assets
Return on total asset
Leverage ratio
Debt ratio
Long-term debt to equity

1.12
0.89

1.04
0.77

1.11
0.84

1.07
0.83

15.66
5.39
0.64
0.040

17.07
9.67
0.63
0.065

17.37
11.27
0.62
0.075

17.04
4.6
0.61
0.033

0.76
0.81

0.75
0.77

0.74
0.81

0.72
0.70

3.4 Compare and contrast the companies


3.4.1 Liquidity Ratio
Common liquidity ratios include the current ratio, the quick ratio and the operating cash
flow ratio. Different analysts consider different assets to be relevant in calculating
liquidity. Some analysts will calculate only the sum of cash and equivalents divided by
current liabilities because they feel that they are the most liquid assets, and would be the
most likely to be used to cover short-term debts in an emergency.

Page 27 of 45

Company
Current ratio
Quick ratio

Toyota
1.07
0.93

Honda
1.30
1.00

Hyundai
1.84
1.62

Volkswagon
1.07
0.83

Current ratio is the ratio of the current assets and current liabilities, it shows if a
company is able to meet its short-term obligations or not. As shown in the table all the
companies have the ratio over 1. That means they have enough current assets to settle
the current liabilities.
In year 2013, all the companies can be trusted on their liquidity abilities, but having too
much of current ratio suggests they have too much current assets that is left un-invested.
The extra assets are wasted by the companies. For instance, Hyundai has a current ratio
of 2.93, which is too high. Toyota has 1.07, Honda and Volkswagon have 1.30 and 1.07
respectively. It is clear that Ford has too much of current assets left over. Quick ratio
does not include the current assets like inventories as they are not believed to be easily
liquidable. Hyundai has the maximum ratio of 2.75, while the others have the ratio
around one.

3.4.2 Leverage ratio

Page 28 of 45

Leverage ratio is a ratio used to measure a company's mix of operating costs, giving an
idea of how changes in output will affect operating income. Fixed and variable costs are
the two types of operating costs; depending on the company and the industry, the mix
will differ.
Company
Debt ratio
Long-term debt to equity

Toyota
0.64
0.60

Honda
0.62
0.54

Hyundai
0.58
0.66

Volkswagon
0.72
0.70

The leverage ratio of volkswagon is the highest among the 4 companies, which means
that it has many debts. However, the Hyundai has the lowest total debt to equity ratio
among the companies, which means it has less debt compare to the other companies.

Page 29 of 45

3.4.3 Profitability ratio


For most of these ratios, having a higher value relative to a competitor's ratio or the
same ratio from a previous period is indicative that the company is doing well.
Company
Gross margin
Profit margin on sales
Sales to total assets

Toyota
16.00
4.36
0.62

Honda
25.61
3.70
0.73

Hyundai
23.68
9.78
0.65

Volkswagon
17.04
4.6
0.61

Return on total asset

0.030

0.028

0.0700

0.033

The Hyundai has the highest return on total assets. It means that Hyundai more
efficiency manage its assets to generate earnings. Besides, Hyundai also has the highest
profit margin on sales among the four companies, which means that the company can
generates more profit with the money that the shareholders have invested. However,
Honda has the highest gross margin. Honda has the more retains on each dollar of sales
to service its other costs and obligations.

Page 30 of 45

3.4.4 Activity ratio


Activity ratios are used to measure the relative efficiency of a firm based on its use of
its assets, leverage or other such balance sheet items. These ratios are important in
determining whether a company's management is doing a good enough job of
generating revenues, cash, etc. from its resources
Company
Total asset turnover
Inventory turnover
Accounts receivable turnover

Toyota
0.62
10.77
11.20

Honda
0.72
6.02
9.78

Hyundai
0.65
9.55
17.89

Volkswagon
0.64
6.07
7.20

Age of inventory

33.43

59.80

37.70

59.31

Toyota has the lowest total assets turnover, which means that Toyota has less efficiency
on deploying its assets. Hyundai has the highest account receivable turnover, which
means that Hyundai has the highest efficiency to collect back the debts. However,
Toyota has the highest inventory turnover. It means that Toyota has the most times
among the company on inventory is sold and replaced over a period.

Page 31 of 45

3.4.5 Cross Sectional and Time Series Analysis of Financial Ratio

Selected ratio
Current ratio

Long term debt to equity

Return on total asset

Total assets turnover

Toyota
Honda
Hyundai
Volkswagon
Toyota
Honda
Hyundai
Volkswagon
Toyota
Honda
Hyundai
Volkswagon
Toyota
Honda
Hyundai
Volkswagon

2010
1.22
1.35
1.38
1.12
0.68
0.53
0.76
0.81
0.080
0.024
0.060
0.040
0.62
0.74
0.71
0.64

2011
1.10
1.31
1.48
1.04
0.62
0.46
0.73
0.77
0.070
0.047
0.070
0.065
0.64
0.77
0.71
0.62

2012
1.05
1.32
1.67
1.11
0.57
0.51
0.69
0.81
0.013
0.019
0.070
0.075
0.61
0.67
0.69
0.62

2013
1.07
1.30
1.84
1.07
0.60
0.54
0.66
0.70
0.030
0.028
0.070
0.033
0.62
0.72
0.65
0.61

Page 32 of 45

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3.4.6 Conclusion
Along the time, the current ratio of Hyundai had improved from 1.38 to 1.84. By
flowing the improvement of the current ratio, the quick ratio of the company is also had
improved. The financial leverage of the company had become less compare with year
2010 with 2013 while the total debt to equity ratio also decreases a lot. Hyundai has the
highest return on total assets and return on equity in year 2013. The return of the assets
of the company reaches the highest figure in year 2013.

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4.0 reference
- www.google.com
- www.marketwatch.com
- www.http://en.wikipedia.org
- www.scribd.com
- http://www.investors.com/default.htm

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BBA 3002
FINANCIAL STATEMENT ANALYIS
(COURSEWORK)

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TAN WAH TIONG


940928-14-5531
201565

LOH YONG CHIANG


AUGUST 2014

List and briefly explain twelve accounting principles


These rules and assumptions define and qualify all that accountants do and all that
financial reporting reports. We will deal with each in turn.

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1.

Accounting Entity. The accounting entity is the business unit (regardless of the

legal business form) for which the financial statements are being prepared. The
accounting entity principle states that there is a "business entity" separate from its
owners... a fictional "person" called a company for which the books are written.
2.

Going Concern. Unless there is evidence to the contrary, accountants assume

that the life of the business entity is infinitely long. Obviously this assumption can not
be verified and is hardly ever true. But this assumption does greatly simplify the
presentation of the financial position of the firm and aids in the preparation of financial
statements. If during the review of a corporation's books, the accountant has reason to
believe that the company may go bankrupt, he must issue a "qualified opinion" stating
the potential of the company's demise. More on this concept later.
3.

Measurement. Accounting deals with things that can be quantifiedresources

and obligations upon which there is an agreed-upon value. Accounting only deals with
things that can be measured. This assumption leaves out many very valuable company
"assets." For example, loyal customers, while necessary for company success, still
cannot be quantified and assigned a value and thus are not stated in the books. Financial
statements contain only the quantifiable estimates of assets (what the business owns)
and liabilities (what the business owes). The difference between the two equal owner's
equity.

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4.

Units of Measure. U.S. dollars are the units of value reported in the financial

statements of U.S. companies. Results of any foreign subsidiaries arc translated into
dollars for consolidated reporting of results. As exchange rates vary, so do the values of
any foreign currency denominated assets and liabilities.
5.

Historical Cost. What a company owns and what it owes are recorded at their

original (historical) cost with no adjustment for inflation.A company can own a building
valued at $50 million yet carry it on the books atits $5 million original purchase price
(less accumulated depreciation), a gross understatement of value.This assumption can
greatly understate the value of some assets purchased in the past and depreciated to a
very low amount on the books. Why, you ask, do accountants demand that we obviously
understate assets? Basically, it is the easiest thing to do. You do not have to appraise and
reappraise all the time.
6.

Materiality. Materiality refers to the relative importance of different financial

information. Accountants don't sweat the small stuff. But all transactions must be
reported if they would materially affect the financial condition of the
company.Remember, what is material for a corner drug store is not material for IBM
(lost in the rounding errors). Materiality is a straightforward judgment call.
7.

Estimates and Judgments. Complexity and uncertainty make any measurement

less than exact. Estimates and judgments must often be made for financial reporting. It

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is okay to guess if (I) that is the best you can do and (2) the expected error would not
matter much anyway. But accountants should use the same guessing method for each
period. Be consistent in your guesses and do the best you can.
8. Consistency. Sometimes identical transactions can be accounted for differently. You
could do it this way or that way, depending upon some preference. The principle of
consistency states that each individual enterprise must choose a single method of
reporting and use it consistently over time. You cannot switch back and forth.
Measurement techniques mustIK- consistent from any one fiscal period to another.
9. Conservatism. Accountants have a downward measurement bias, preferring
understatement to overvaluation. For example, losses arc recorded when you feci that
they have a great probability of occurring, not later, when they actually do occur.
Conversely, the recording of a gain is postponed until it actually occurs, not when it is
only anticipated.
10. Periodicity. Accountants assume that the life of a corporation can be divided into
periods of time for which profits and kisses can be reported, usually a month, quarter or
year.
What is so special about a month, quarter or year? They are just convenient periods;
short enough so that management can remember what has happened, long enough to
have meaning and not just be random fluctuations. These periods are called "fiscal"

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periods. For example, a "fiscal year" could extend from October 1 in one year till
September 30 in the next year. Or a company's fiscal year could be the same as the
calendar year starting on January 1 and ending on December 31.

"Lines" are perhaps not as important as principles, but they can be confusing if you
don't
know how accountants use them in financial statements. Financial statements often have
two types of lines to indicate types of numeric computations.
Single lines on a financial statement indicate that a calculation (addition or
subtraction) has been made on the numbers just preceding in the column.
The double underline is saved for the last. That is, use of a double underline
signifies the very last amount in the statement.
Note that while all the numbers in the statement represent currency, only the top
line and the bottom line normally show a dollar sign.
a

SALES [$J

COST OF GOODS SOLD

a-b=c

GROSS MARGIN

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SALES & MARKETING

R&D

G&A

d+e+f=g

TOTAL EXPENSES

INTEREST INCOME

INCOME TAXES

c- g+h-i=j

NET INCOME |$|

FASB1 makes the rules and they are called GAAP.2 Financial Accounting Standard
Board ;2Generally Accepted Principles
11.

Substance over Form. Accountants report the economic "substance" of a

transaction rather than just its form. For example, an equipment lease that is really a
purchase dressed in a costume is booked as a purchase and not as a lease on financial
statements. This substance over form rule states that if it's a duck... then you must report
it as a duck.
12.

Accrual Basis of Presentation. This concept is very important to understand.

Accountants translate into dollars of profit or loss all the money-making (or losing)
activities that take place during a fiscal period. In accrual accounting, if a business
action in a period makes money, then all its product costs and its business expenses
should be reported in that period. Otherwise, profits and losses could flop around
depending on which period entries were made.

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In accrual accounting, this documentation is accomplished by matching for


presentation: (1) the revenue received in selling product and (2) the costs to make that
specific product sold. Fiscal period expenses such as selling, legal, administrative and
so forth arc then subtracted.
Key to accrual accounting is determining: (1) when you may report a sale on the
financial statements, (2) matching and then reporting the appropriate costs of products
sold and (3) using a system at ice and rational method allocating all the other costs of
being in business for the period. We will deal with each point separately:
Revenue recognition. In accrual accounting, a sale is recorded when all the necessary
activities to provide the good or service have been completed regardless of when cash
changes hands. A customer just ordering a product has not yet generated any revenue.
Revenue is recorded when the product is shipped.
Matching principle. In accrual accounting, the costs associated with making products
(Cost of Goods Sold) are recorded at the same time the matching revenue is recorded.
Allocation. Many costs are not specifically associated with a product. These costs must
be allocated to fiscal periods in a reasonable fashion. For example, each month can be
charged with one-twelfth of the general business insurance policy even though the
policy was paid in full at the beginning of the year. Other expenses are recorded when
they arise (period expenses).Note that all businesses with inventory must use the accrual

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basis of accountingother businesses may use a "cash basis" if they desire. Cash basis
financial statements
are just like the Cash Flow Statement or a simple check book. We will describe features
of
accrual accounting in the chanters that follow.

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