Chapter 3 Finacial Satements and ratio analysis
3.1 Using the Stockholders’ report
The guidelines used to prepare and maintain financial reports are known as - generally accepted
accounting principles – GAAP.
These are authorized by the accounting profession’s rule-setting body – financial accounting
standards board – FASB.
Public company accounting oversight board (PCAOB) – a not-for-profit corporation established by
the Sarbanes Oxley Act of 2002 to protect the interests of investors and further the public interest
in the preparation of informative, fair, and independent audit reports.
Stockholders’ report – annual report that publicly owned corporations must provide to
stockholders; it summarizes and documents the firm’s financial activities during the past year.
Letter to stockholders – typically, the first element of the annual stockholders’ report and the
primary communication from management.
4 key financial statements:
- Income statement
- Balance sheet
- Statement of stockholders’ equity
- Statement of cash flows
Income statement – provides a financial summary of the firm’s operating results during a
specified period.
Sales revenue
- Cogs
= Gross profit
- Operating expenses
(selling expense, gen. and
admin. expense, lease expense,
depreciation expense)
= Operating profits (EBIT)
- Interest expense
= Net profits before taxes
- Taxes
= Net profits after taxes
- Preferred stock dividends
= Earnings available for
common stockholders
Earnings available for common stockholders / number of shares of common stock outstanding =
earnings per share (EPS).
Dividend per share (DPS) – the dollar amount of cash distributed during the period on behalf of
each outstanding share of common stock.
3.1 Using the Stockholders’ report
The guidelines used to prepare and maintain financial reports are known as - generally accepted
accounting principles – GAAP.
These are authorized by the accounting profession’s rule-setting body – financial accounting
standards board – FASB.
Public company accounting oversight board (PCAOB) – a not-for-profit corporation established by
the Sarbanes Oxley Act of 2002 to protect the interests of investors and further the public interest
in the preparation of informative, fair, and independent audit reports.
Stockholders’ report – annual report that publicly owned corporations must provide to
stockholders; it summarizes and documents the firm’s financial activities during the past year.
Letter to stockholders – typically, the first element of the annual stockholders’ report and the
primary communication from management.
4 key financial statements:
- Income statement
- Balance sheet
- Statement of stockholders’ equity
- Statement of cash flows
Income statement – provides a financial summary of the firm’s operating results during a
specified period.
Sales revenue
- Cogs
= Gross profit
- Operating expenses
(selling expense, gen. and
admin. expense, lease expense,
depreciation expense)
= Operating profits (EBIT)
- Interest expense
= Net profits before taxes
- Taxes
= Net profits after taxes
- Preferred stock dividends
= Earnings available for
common stockholders
Earnings available for common stockholders / number of shares of common stock outstanding =
earnings per share (EPS).
Dividend per share (DPS) – the dollar amount of cash distributed during the period on behalf of
each outstanding share of common stock.
