accounting

accDefinition

The systematic recording, reporting, and analysis of financial transactions of a

business. The person in charge of accounting is known as an accountant, and
this individual is typically required to follow a set of rules and regulations,
such as the Generally Accepted Accounting Principles. Accounting allows a
company to analyze the financial How to Make an Accounting
Process Flowchart
Even the slightest deviations to your standard accounting process can corrupt your financial
statements. Record this fixed cycle by preparing an accounting process flowchart. This flowchart
reminds accounting employees of the essential steps in the series and helps ensure their
conformance to this necessary procedure.
Difficulty: Moderately Challenging

Instructions
1. 1
Brainstorm the necessary steps in the company's financial accounting process.
Divide these steps into three categories including Daily Processes, Period-End
Processes and Financial Reporting Processes. Open a new document using
graphics presentation software. Save the document as "Financial Accounting
Process."
2. 2
Type the three category titles beneath the chart's title. Space the titles to create
columns sufficiently wide to include text. Decide whether the title should be in fields
or text boxes. Insert enough fields or text boxes for each step in the entire
accounting process.
3. 3
Begin with Daily Processes. Insert a beginning field for "Source Document" and an
ending field for "Journal Entry." Add fields in between for "Posting Source
Document," "Journals and Ledgers" and "Preparation of Journal Entries."
4. 4
Draw an arrow from the last field in the Daily Processes category to the first box in
Period End Processes. Insert the first field, "Journal Voucher File" and ending field,
"General Ledger." Add one field in the middle for "Post Journal Voucher File."
5. 5
Move to the Financial Reporting Processes category. Create a field for "Obtain
Account Balances for Worksheet." Extend an arrow from the "General Ledger" field
 to this one. Follow with these fields, "Worksheet," "Prepare Trial Balance," "Trial
Balance," "Analyze Account Balances," "Prepare Adjusting Entries and Adjusted
Trial Balance," "Adjustable Trial Bar" and "Prepare Financial Statements."
6. 6
7. Finish the chart with "Prepare Closing Entries and Post to General Ledger."

Accounting Process
Accounting is used for quantitative information of finances. But what is the accounting process? Read on to find out.

Every company has an accounts department that looks after the accounting details of the company. But
why is accounting important and what does the accounts department do? An accounting department is the
backbone of every business. It records all the business transactions and keeps a track of the incomes
and expenses of the business. The business depends on these incomes for its profits and should know all
the expenses that are incurred to keep it going. They also determine the correct financial position and
financial standing of the business. All this makes the recording of transactions important. For the
systematic and accurate recording of the transactions, accounting is important. For accurate accounting of
transactions, an accounting process is essential. Let us understand the accounting process in detail.

The accountants should know the accounting process well so that there is no confusion in recording the
transactions. Following the correct accounting process is mandatory as per accounting ethics and it also
helps to understand and communicate the financial operations of any type of organizations. The following
paragraphs are devoted to complete understanding of the accounting process.

Accounting Process Definition

The purpose of accounting is recording all the transactions honestly and accurately in the books of
accounts. The accounting process is the method followed by the accountants to record the transactions.
The accounting process can be defined as "the process that begins when the transaction takes place and
ends when the transaction is recorded in the books of accounts". It is a series of procedures that are used
to analyze and record the business transactions for a particular period of time.

The Accounting Process

The accounting process, also known as the accounting cycle process, includes the below mentioned
steps. In order to follow these steps, you will need to know all the accounting principles and concepts well.

• The first step involves identifying the transaction and finding the source documents of the
transaction.
• Analyze which accounts is the transaction affecting and what is the amount of the transaction.
• Record the entry into the journal as a credit or debit, according to its nature.
• Transfer the journal entries into the appropriate accounts in the ledger.
• A trial balance is then created which sees to it that the debit amount equals the credit amounts.
• Correct the discrepancies in the trail balance and balance the debit side with the credit side.
• Make adjusting entries in order to record the accrued and deferred amounts.
• Next, prepare the adjusted trial balance on the basis of the deferred amounts.
• Prepare the financial statements like the income statements, the balance sheet, retained earnings
statements and finally the cash flow statements.
 • Close the temporary accounts like revenues, expenses, gains, etc. by closing journal entries.
These accounts are transferred to the income summary account and later posted into the capital
accounts.
• Prepare the final trial balance on the basis of the closing journal entries.
There can be a slight alteration to the above accounting process flow. The financial statements can be
made before the adjusting entries. Also, some companies add another step after the final trial balance.
This step is called as reversing entries step. Reversing entries is done if an accrual or deferral entry was
recorded earlier and needs to be adjusted to avoid a double entry. It is recorded on the first day of a new
recording period. All the accountants follow the same accounting process sequence, except for the
reversing entries. That is an optional step which may or may not be followed.

The process of accounting is framed based on the basic accounting concepts and principles followed in the
business world. Those who understand the importance of accounting follow these processes accurately. I
hope that this article on accounting process will be useful for you.

Account Types

There are a total of 13 basic account types.They are

Seven Asset Accounts

Cash
Use this account to track the money you have on hand, in your wallet, in your piggy bank, under your mattress, or
wherever you choose to keep it handy. This is the most liquid, or easily traded, type of asset.

Bank
This account is used to track your cash balance that you keep in institutions such as banks, credit unions, savings
and loan, or brokerage firms - wherever someone else safeguards your money. This is the second most liquid type of
account, because you can easily convert it to cash on hand.

Stock
Track your individual stocks and bonds using this type of account.With these types of assets, you may not be able to
easily convert them to cash unless you can find a buyer, and you are not guaranteed to get the same amount of cash
you paid for them.

Mutual Fund
This is similar to the stock account, except that it is used to track funds.

Currency
If you trade other currencies as investments, you can use this type of account to keep track of them.

Accounts Receivable
This is typically a business use only account in which you place outstanding debts owed to you.
 Asset
For personal finances, use this type of account to track "big-ticket" item purchases that significantly impact your net
worth.

Three Liability Accounts

Credit Card
Use this to track your credit card receipts and reconcile your credit card statements. Credit cards represent a short-
term loan that you are obligated to repay to the credit card company.

Accounts Payable
This is typically a business use only account in which you place bills you have yet to pay.

Liability
Use this type of account for all other loans, generally larger long-term loans such as a mortgage or vehicle loan. This
account can help you keep track of how much you owe and how much you have already repaid.

One Equity Account

Equity
It represents what is left over after you subtract your liabilities from your assets, so it is the portion of your assets that
you own outright, without any debt.

One Income Account

Income
Income is the payment you receive for your time, services you provide, or the use of your money.

One Expense Account

Expense
Expenses refer to money you spend to purchase goods or services provided by someone else.

Classification of Accounting
In order to satisfy needs of different people interested in the accounting
information, different branches of accounting have developed.
Accounting is generally classified into three different disciplines as shown in
Figure.
Financial Accounting: Accounting involves recording, classifying and
summarizing of past events and thus is historical in nature. It is Historical
accounting which is better known as Financial accounting whose primary intention
is to prepare the Statements revealing the Income / Loss and financial position of
the business on the basis of events, which have happened in the period being
reckoned.
But this information, though of immense vitality does not adequately aid the
management in planning, controlling, organizing and efficiently conducting the
course of the business as a result of which Cost Accounting and Management
Accounting are in place.
Cost Accounting: It shows classification and analysis of costs on the basis of
functions, processes, products, centers etc. It also deals with cost computation,
cost saving, cost reduction, etc.
Management Accounting: Management Accounting begins where Financial
Accounting and Cost Accounting ends. It deals with the processing of data
generated in financial accounting and cost accounting for managerial decision-
making. It also deals with application of managerial economics concepts for
decision-making.

According to Modern approach Accounts are classified into five groups:

• Asset
• Expense
• Revenue
• Liability
• Capital
According to Traditional approach Accounts are classified into three groups:
• Real : all the assets except Debtors
• Nominal : all the expenses , incomes , losses, gains.
• Personal : all the accounts of persons, company or firms.
these are further classified into three types
○ Natural: all the accounts of persons. E.g. debtors,
Creditors
○ Artificial: all the accounts of a company, a firm,or any
other business organization. E.g. Bank, Sharma Traders
etc.
○ Representative: all the expense O/S or prepaid, revenue
in advance or accrued.
Assets:
assets are economic resources. Anything tangible or intangible that is capable of
being owned or controlled to produce value and that is held to have positive
economic value is considered an asset. Simply stated, assets represent ownership
of value that can be converted into cash (although cash itself is also considered an
asset)

Expenses:

In common usage, an expense or expenditure is an outflow of money to another

person or group to pay for an item or service, or for a category of costs. For a
tenant, rent is an expense. For students or parents, tuition is an expense. Buying
food, clothing, furniture or an automobile is often referred to as an expense. An
expense is a cost that is "paid" or "remitted", usually in exchange for something of
value. Something that seems to cost a great deal is "expensive". Something that
seems to cost little is "inexpensive". "Expenses of the table" are expenses of dining,
refreshments, a feast, etc.

Revenue:
In business, revenue is income that a company receives from its normal
business activities, usually from the sale of goods and services to customers.
In many countries, such as the United Kingdom, revenue is referred to as
turnover. Some companies receive revenue from interest, dividends or
royalties paid to them by other companies.[1] Revenue may refer to business
income in general, or it may refer to the amount, in a monetary unit,
received during a period of time, as in "Last year, Company X had revenue of
$42 million."
liability
In financial accounting, a liability is defined as an obligation of an entity
arising from past transactions or events, the settlement of which may result
in the transfer or use of assets, provision of services or other yielding of
economic benefits in the future.
• All type of borrowing from persons or banks for improving a
business or person income which is payable during short or
long time.
• They embody a duty or responsibility to others that entails
settlement by future transfer or use of assets, provision of
services or other yielding of economic benefits, at a specified
or determinable date, on occurrence of a specified event, or on
demand;
Capital account
• In Macroeconomics and international finance, the capital
account (also known as financial account) is one of two
primary components of the balance of payments, the other
being the current account. Whereas the current account
reflects a nation's net income , the capital account reflects net
change in national ownership of assets.
 • The term "capital account" is used with a narrower meaning by
the IMF and affiliated sources. The IMF splits what the rest of
the world call the capital account into two top level divisions:
financial account and capital account, with by far the bulk of
the transactions being recorded in its financial account.
• Personal Accounts
• Accounts recording transactions relating to individuals or firms or company are
known as personal accounts. Personal accounts may further be classified as :
• (1) Natural person's personal accounts: The accounts recording transactions
relating to individual human beings e.g., Anand's A/c, Remesh's A/c, Pankaj's
A/c are classified as natural person's personal accounts.
• (2) Artificial person's personal account: The accounts recording transactions
relating to limited companies. bank, firm, institution, club. etc. e.g. Delhi Cloth
Mill; Hans Raj College; Gymkhana Club are classified as artificial persons'
personal accounts.
• (3) Representative personal accounts: The accounts recording transactions
relating to the expenses and incomes are classified as nominal accounts. But in
certain cases due to the matching concept of accounting the amount, on a
particular date, is payable to the individuals or recoverable from individuals.
• Such amount (a) relates to the particular head of expenditure or income and (b)
represents persons to whom itis payable or from whom it is recoverable. Such
accounts are classified as representative personal accounts e.g. "Wages
Outstanding Account", Pre-paid Insurance Account. etc.
• Real Accounts
• The accounts recording transactions relating to tangible things (which can be
touched, purchased and sold) such as goods, cash, building. machinery etc., are
classified as tangible real accounts.
• Whereas the accounts recording transactions relating to. intangible things
(which do not have physical shape) such as goodwill, patents and copy rights.
trade marks etc., are classified as intangible real accounts.
• Nominal Accounts
• The accounts recording transactions relating to the losses, gains. expenses and
incomes e.g., Rent, salaries, wages, commission, interest, bad debts etc. are
classified as nominal accounts. As already discussed, wherever a nominal
account represents the amount payable to or receivable from certain persons it
is known as representative personal account.
• Rules of Debit and Credit (classification based)
• 1. Personal Accounts: Debit the receiver, Credit the giver (supplier)
• 2. Real Accounts: Debit what comes in, Credit what goes out

3. Nominal Accounts: Debit expenses and losses, Credit incomes and gains.,
Double Entry System
In the 15th century a Franciscan Monk, Lucas Pacioli, described a method of arranging accounts
in such a way that the dual aspect (present in every account transaction) would be expressed by a
debit amount and an equal and offsetting credit amount.
Double Entry system is the system under which each transaction is regarded to have two fold
aspects and both the aspects are recorded to obtain complete record of dealings. Double Entry
system of book keeping adheres to the rule. that for each transactions the debit amount (s) must
equal the credit amount(s). That is why this system is called Double Entry.
Advantages of Double Entry System
(i) It enables to keep a complete record of business transactions.
(ii) It provides a check on the arithmetical accuracy of books of accounts based on equality of
debit and credit.
(iii) It gives the results of business activities either profit or loss during the accounting period.
(iv) It tells the financial position of the business at a point of time. Total resources of the
business, claims of the outsiders, amount due by outsiders etc. are revealed by a statement known
as Balance Sheet.
(v) It makes possible comparison of the current year with those of previous years helping the
owner to manage his business on better lines.
(vi) It reduces the chances of errors creeping in the accounting records because of its equality
principle. .
(vii) It helps to ascertain the details regarding any account easily and accurately. Other systems
of book-keeping. In addition to the double entry system, there is also single entry system.
The single-entry system is "a system of book-keeping in which as a rule only records of cash and
of personal account are maintained; it is always incomplete double entry varying with
circumstances. Such system may be economical but it is incomplete, unscientific and full of
defects.
Compound Journal Entries
If in a journal entry only one account is to be debited and only one account is to be credited then
such an entry is 'Simple Journal Entry'. However, in some cases the entry may require more than
one debit or credit or both. Such entries are known as compound entries. Compound entries
should be created where
(i) Transaction occur on the same day
(ii) One aspect of these transactions is common; and
(iii) Accounts involved are more than two In fact compound entry is the combination of two or
more simple journal ntries.
2. accounting ratio analysis
Ratio Analysis

Ratio analysis is used to evaluate relationships among financial statement items. The ratios are

used to identify trends over time for one company or to compare two or more companies at one
point in time. Financial statement ratio analysis focuses on three key aspects of a business:

liquidity, profitability, and solvency.

Liquidity ratios

Liquidity ratios measure the ability of a company to repay its short-term debts and meet

unexpected cash needs.

Current ratio. The current ratio is also called the working capital ratio, as working capital is

the difference between current assets and current liabilities. This ratio measures the ability of a

company to pay its current obligations using current assets. The current ratio is calculated by

dividing current assets by current liabilities.

20X1 20X0

Current assets $38,366 $38,294

Current liabilities 27,945 30,347

Current ratio 1.4 : 1 1.3 : 1

This ratio indicates the company has more current assets than current liabilities. Different

industries have different levels of expected liquidity. Whether the ratio is considered adequate

coverage depends on the type of business, the components of its current assets, and the ability

of the company to generate cash from its receivables and by selling inventory.

Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as

cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of

the allowances for doubtful accounts. These assets are considered to be very liquid (easy to

obtain cash from the assets) and therefore, available for immediate use to pay obligations. The

acid-test ratio is calculated by dividing quick assets by current liabilities.

 20X1 20X0

Cash $6,950 $6,330

Accounts receivable, net 18,567 19,230

Quick Assets $25,517 $25,560

Current Liabilities $27,945 $30,347

aAcid-test ratio .9 : 1 .8 : 1

The traditional rule of thumb for this ratio has been 1:1. Anything below this level requires

further analysis of receivables to understand how often the company turns them into cash. It

may also indicate the company needs to establish a line of credit with a financial institution to

ensure the company has access to cash when it needs to pay its obligations.

Receivables turnover. The receivable turnover ratio calculates the number of times in an

operating cycle (normally one year) the company collects its receivable balance. It is calculated

by dividing net credit sales by the average net receivables. Net credit sales is net sales less cash

sales. If cash sales are unknown, use net sales. Average net receivables is usually the balance of

net receivables at the beginning of the year plus the balance of net receivables at the end of the

year divided by two. If the company is cyclical, an average calculated on a reasonable basis for

the company's operations should be used such as monthly or quarterly.

Calculation of Receivables Turnover

 20X1 20X0 20W9

Net credit sales $129,000 $97,000

Accounts receivable 18,567 19,230 $17,599

Average receivables (18,567+19,230)

/2= (19,230+17,599)
/2=

18,898.5 18,414.5

Receivables turnover $129,00

/$18,898.5 = $97,00
/$18,414.5 =

6.8 times 5.3 times

Average collection period. The average collection period (also known as day's sales

outstanding) is a variation of receivables turnover. It calculates the number of days it will take

to collect the average receivables balance. It is often used to evaluate the effectiveness of a

company's credit and collection policies. A rule of thumb is the average collection period should

not be significantly greater than a company's credit term period. The average collection period is

calculated by dividing 365 by the receivables turnover ratio.

20X1 20X0

Receivables Turnover 6.8 times 5.3 times

Average Collection Period 53.7 days 68.9 days

The decrease in the average collection period is favorable. If the credit period is 60 days, the

20X1 average is very good. However, if the credit period is 30 days, the company needs to

review its collection efforts.

Inventory turnover. The inventory turnover ratio measures the number of times the

company sells its inventory during the period. It is calculated by dividing the cost of goods sold

by average inventory. Average inventory is calculated by adding beginning inventory and ending
inventory and dividing by 2. If the company is cyclical, an average calculated on a reasonable

basis for the company's operations should be used such as monthly or quarterly.

Calculation of Inventory Turnover

20X1 20X0 20W9

Cost of goods sold $70,950 $59,740

Inventory 12,309 12,202 $12,102

Average inventory (12,309+12,202)

/2= (12,202+12,102)
/2=

12,255.5 12,152

Inventory turnover $70,950

/$12,255.5= $59,740
/$12,152=

5.8 times 4.9 times

Day's sales on hand. Day's sales on hand is a variation of the inventory turnover. It calculates

the number of day's sales being carried in inventory. It is calculated by dividing 365 days by the

inventory turnover ratio.

20X1 20X0

Inventory Turnover 5.8 times 4.9 times

 20X1 20X0

Day's Sales on Hand 62.9 days 74.5 days

Profitability ratios

Profitability ratios measure a company's operating efficiency, including its ability to generate

income and therefore, cash flow. Cash flow affects the company's ability to obtain debt and

equity financing.

Profit margin. The profit margin ratio, also known as the operating performance ratio,

measures the company's ability to turn its sales into net income. To evaluate the profit margin, it

must be compared to competitors and industry statistics. It is calculated by dividing net income

by net sales.

20X1 20X0

Net income/(loss) $ 8,130 $(1,400)

Net sales 129,000 97,000

Profit margin 6.3% (1.4%)

Asset turnover. The asset turnover ratio measures how efficiently a company is using its

assets. The turnover value varies by industry. It is calculated by dividing net sales by average

total assets.
 Calculation of Asset Turnover

20X1 20X0 20W9

Net sales $129,000 $97,000

Total assets 114,538 118,732 $102,750

Average total assets (114,538+118,732)

/2= (118,732+102,750)
/2=

116,635 110,741

Asset turnover $129,00

/$116,635= $97,00
/$110,741 =

1.1 times .9 times

Return on assets. The return on assets ratio (ROA) is considered an overall measure of

profitability. It measures how much net income was generated for each $1 of assets the company

has. ROA is a combination of the profit margin ratio and the asset turnover ratio. It can be

calculated separately by dividing net income by average total assets or by multiplying the profit

margin ratio times the asset turnover ratio.

The information shown in equation format can also be shown as follows:

20X1 20X0 20X1 20X0

Net income/(loss) $ 8,130 $(1,400) Profit margin 6.3% (1.4%)

Average total assets 116,635 110,741 Asset turnover 1.1 times .9 times
 20X1 20X0 20X1 20X0

Return on assets 6.97% (1.3%) Return on assets 6.93% * (1.3%)

Return on common stockholders' equity. The return on common stockholders' equity

(ROE) measures how much net income was earned relative to each dollar of common

stockholders' equity. It is calculated by dividing net income by average common stockholders'

equity. In a simple capital structure (only common stock outstanding), average common

stockholders' equity is the average of the beginning and ending stockholders' equity.

Calculation of Return on Common Stockholders' Equity

20X1 20X0 20W9

Net income/(loss) $ 8,130 $ (1,400)

Total stockholders' equity 71,593 65,385 $68,080

Average stockholders' equity (71,593+65,385)

/2= (65,385+68,080)
/2=

68,489 66,732.5

Return on common stockholders' equity $8,130

/$68,489= /$66,732.5=
$(1,400)

11.9% (2.1%)

In a complex capital structure, net income is adjusted by subtracting the preferred dividend

requirement, and common stockholders' equity is calculated by subtracting the par value (or call

price, if applicable) of the preferred stock from total stockholders' equity.

Earnings per share. Earnings per share (EPS) represents the net income earned for each share

of outstanding common stock. In a simple capital structure, it is calculated by dividing net

income by the number of weighted average common shares outstanding.

Assuming The Home Project Company has 50,000,000 shares of common stock outstanding, EPS

is calculated as follows:

20X1 20X0 20W9

Net income/(loss) $ 8,130 $ (1,400)

Share outstanding 50,000 50,000 50,000

Earnings/(loss) per share $0.16 ($0.03)

Calculation notes:

1. If the number of shares of common stock outstanding changes during the year, the

weighted average stock outstanding must be calculated based on shares actually

outstanding during the year. Assuming The Home Project Company had 40,000,000 shares

outstanding at the end of 20X0 and issued an additional 10,000,000 shares on July 1,

20X1, the earnings per share using weighted average shares for 20X1 would be $0.18. The

weighted average shares was calculated by 2 because the new shares were issued half way

through the year.

 2. If preferred stock is outstanding, preferred dividends declared should be subtracted from

net income before calculating EPS.

Price-earnings ratio. The price-earnings ratio (P/E) is quoted in the financial press daily. It

represents the investors' expectations for the stock. A P/E ratio greater than 15 has historically

been considered high.

If the market price for The Home Project Company was $6.25 at the end of 20X1 and $5.75 at

the end of 20X0, the P/E ratio for 20X1 is 39.1.

20X1 20X0

Marketing price per common share $6.25 $5.75

Earnings per share $0.16 (0.03)

P/E 39.1 N/M

Payout ratio. The payout ratio identifies the percent of net income paid to common

stockholders in the form of cash dividends. It is calculated by dividing cash dividends by net

income.
Cash dividends for The Home Project Company for 20X1 and 20X0 were $1,922,000 and

$1,295,000, respectively, resulting in a payout ratio for 20X1 of 23.6%.

20X1 20X0

Cash dividends $1,922 $1,295

Net income/(loss) 8,130 (1,400)

Payout ratio 23.6% N/M

A more stable and mature company is likely to pay out a higher portion of its earnings as

dividends. Many startup companies and companies in some industries do not pay out dividends.

It is important to understand the company and its strategy when analyzing the payout ratio.

Dividend yield. Another indicator of how a corporation performed is the dividend yield. It

measures the return in cash dividends earned by an investor on one share of the company's

stock. It is calculated by dividing dividends paid per share by the market price of one common

share at the end of the period.

20X1 20X0

Cash dividends per share $ .038 $ .026

Market price per common share $ 6.25 $ 5.75

Dividend yield 0.6% 0.5%

A low dividend yield could be a sign of a high growth company that pays little or no dividends

and reinvests earnings in the business or it could be the sign of a downturn in the business. It

should be investigated so the investor knows the reason it is low.

Solvency ratios

Solvency ratios are used to measure long-term risk and are of interest to long-term creditors

and stockholders.
Debt to total assets ratio. The debt to total assets ratio calculates the percent of assets

provided by creditors. It is calculated by dividing total debt by total assets. Total debt is the

same as total liabilities.

20X1 20X0

Current liabilities $27,945 $ 30,347

Long-term debt 15,000 23,000

Total debt $ 42,945 $ 53,347

Total assets $114,538 $118,732

Debt to total assets 37.5% 44.9%

The 20X1 ratio of 37.5% means that creditors have provided 37.5% of the company's financing

for its assets and the stockholders have provided 62.5%.

Times interest earned ratio. The times interest earned ratio is an indicator of the

company's ability to pay interest as it comes due. It is calculated by dividing earnings before

interest and taxes (EBIT) by interest expense.

 20X1 20X0

Income before interest expense and income taxes

Income (loss) before taxes $13,550 $(2,295)

Interest expense 1,900 1,500

EBIT $15,450 $ (795)

Interest Expense $ 1,900 $ 1,500

Times interest earned 8.1 times N/M

A times interest earned ratio of 2–3 or more indicates that interest expense should reasonably be

covered. If the times interest earned ratio is less than two it will be difficult to find a bank to

loan money to the business.

Management Accounting Ratio Analysis

By Marquis Codjia, eHow Contributor

updated: July 18, 2010

A company needs to provide accurate and complete accounting reports that conform to international
financial reporting standards. Ratios help senior corporate leaders analyze operating data and make
decisions in the short and long terms.

Management Accounting Defined

1. Management accounting is a business process that focuses on internal cost management.
Management accountants usually prepare annual or quarterly budgets.

Ratio Defined
2. A ratio is an accounting indicator that helps a company's senior manager evaluate operating
data. A ratio can be expressed in percentage or decimal terms.

Current Ratio
3. Current ratio provides insight into the ability of a firm to repay short-term debt with short-
term assets and equals current assets divided by current liabilities.

Working Capital
4. Working capital is a measure of short-term cash availability and equals current assets, such
as cash and accounts receivable, minus current liabilities, such as accounts payable.

Profit Margin
5. Profit margin provides a gauge of a company's sales and marketing prowess during a month
or quarter and equals net income divided by total revenue.
 Return on Equity
6. Return on equity equals net income divided by owners' capital and indicates what return
percentage shareholders earn over a quarter or year.

In financial accounting, a cash flow statement, also known as statement of cash flows or funds
flow statement,[1] is a financial statement that shows how changes in balance sheet accounts and
income affect cash and cash equivalents, and breaks the analysis down to operating, investing,
and financing activities. Essentially, the cash flow statement is concerned with the flow of cash
in and cash out of the business. The statement captures both the current operating results and the
accompanying changes in the balance sheet.[1] As an analytical tool, the statement of cash flows
is useful in determining the short-term viability of a company, particularly its ability to pay bills.
International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals
with cash flow statements.
People and groups interested in cash flow statements include:
• Accounting personnel, who need to know whether the organization will be
able to cover payroll and other immediate expenses
• Potential lenders or creditors, who want a clear picture of a company's ability
to repay
• Potential investors, who need to judge whether the company is financially
sound
• Potential employees or contractors, who need to know whether the company
will be able to afford compensation
• Shareholders of the business.
v