Preparing the Books for a Small Business

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Figuring the Profit Ratio for a Business

Business is motivated by profit, so calculating the profit ratio for a business is very important, to say the least. The bottom line is not called the bottom line [more…]

Average Cost Method for Cost of Goods Sold

The average cost method for cost of goods sold expense is an alternative method to the more commonly used FIFO and LIFO methods. If you were to make an exhaustive survey of businesses, you would find out [more…]

Recording Inventory Losses under the LCM Rule

Businesses should apply the lower of cost or market (LCM) rule to inventory, regardless of which method they use to record cost of goods sold and inventory cost. Acquiring and holding an inventory of products [more…]

Looking at Depreciation Expense Accounting Methods

Depreciation expense accounting seems straightforward enough: You divide the cost of a fixed asset (except land) among the number of years that the business expects to use the asset. So, instead of having [more…]

Common Expense Accounting Issues for Businesses

Expense accounting has become very complicated and confusing for many U.S. businesses — whether large or small, public or private. Operating a business in a highly developed and very sophisticated economy [more…]

Management’s Role in Preparing Financial Reports

The management (CEO and financial officers) of a business must make sure that the financial statements and disclosures are adequate according to financial reporting standards, and that all the disclosure [more…]

The Purpose of Financial Reporting in a Business

Business managers, creditors, and investors read financial reports because these reports provide information regarding how the business is doing and where it stands financially. Indeed, these accounting [more…]

Disclosures in Financial Reports: Footnotes

A business’s financial report is much more than just the financial statements; a financial report needs additional information, called disclosures. Footnotes are one form of disclosure included in a financial [more…]

Disclosures in Financial Reports: Supplementary Items

The financial report of a business includes more than just the financial statements; a financial report also needs information called disclosures. Supplementary items such as financial schedules and tables [more…]

Comparing Financial Reports from Private and Public Businesses

If you were to compare annual financial reports of publicly owned corporations with annual reports of privately owned businesses, you’d discover many differences. Public companies are generally much larger [more…]

Dealing with Information Overload in Financial Reports

Investors in a business must deal with the information overload of annual financial reports. In general, the larger a business, the longer its financial report. The annual reports of large, publicly owned [more…]

The Statement of Changes in Owners’ Equity Report

In many situations, a business prepares a “mini” financial statement — called the statement of changes in owners’ equity — in addition to its three primary financial statements [more…]

How to Become a More Savvy Business Investor

You can become a more savvy business investor by understanding tools that lenders and investors use for getting information value from a business’s financial reports. An investment opportunity in a private [more…]

How Business Investors Look Beyond Financial Reports

Business investors don’t rely solely on financial reports when making investment decisions. Analyzing a business’s financial reports is just one part of the process. You should consider several additional [more…]

Calculating the Gross Margin Ratio for a Business

Financial statement ratios — such as the gross margin ratio — provide useful ways to interpret the financial reports of a business. You calculate these financial ratios by dividing one particular number [more…]

Figuring the Return on Equity (ROE) Ratio

The return on equity (ROE) ratio tells you how much profit a business earned in comparison to the book value of its owners’ equity. This ratio is especially useful for privately owned businesses, which [more…]

Calculating the Earnings Per Share (EPS) Ratio

Publicly owned businesses, according to generally accepted accounting principles (GAAP), must report earnings per share (EPS) below the net income line in their income statements — giving EPS a certain [more…]

Looking at the Price/Earnings (P/E) Ratio

The price/earnings (P/E) ratio is of particular interest to investors in public businesses. The P/E ratio gives you an idea of how much you’re paying in the current price for stock shares for each dollar [more…]

Calculating the Dividend Yield Ratio

The dividend yield ratio tells investors how much cash income they’re receiving on their stock investment in a business. You can compare the dividend yield with the interest rate on high-grade debt securities [more…]

Comparing Book Value and Book Value per Share

The amount reported in a business’s balance sheet for owners’ equity is called its book value. The book value per share is the measure of the recorded value of the company’s assets less its liabilities [more…]

Determining the Short-Term Solvency of a Business

The current ratio is a test of a business’s short-term solvency — its capability to pay its liabilities that come due in the near future (up to one year). The ratio is a rough indicator of whether cash [more…]

Calculating the Acid-Test Ratio for a Business

Investors and lenders calculate the acid-test ratio— also known as the quick ratio or the pounce ratio — to test a business’s short-term solvency. The acid-test ratio is a more severe test of a business’s [more…]

Return on Assets (ROA) Ratio and Financial Leverage Gain

The first step in determining financial leverage gain for a business is to calculate a business’s return on assets (ROA) ratio, which is the ratio of EBIT [more…]

How to Decipher Footnotes in Annual Financial Reports

Deciphering footnotes in a business’s annual financial report can be challenging. Footnotes provide additional information about the basic figures included in the business’s financial statements. The investment [more…]

Important Warning to Look for in an Auditor's Report

In most cases, the auditor’s report confirms that everything in a financial report is hunky-dory, and you can rely on the financial report. However, sometimes an auditor waves a yellow flag — and in extreme [more…]

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