Fundamentals of Accounting- Lecture 1

Tutor: Min, YU
Room: Room 1237, CYT Building
Email: [email protected]
Fundamentals of Accounting

Objectives:

 To offer to participants who have never has exposure to accounting an

introduction to the jargon, the basic mechanics of accounting process, the resultant
financial statements, and some the uses of accounting both within and outside
organizations.

 For those who have previously had accounting, the course offers a refresher for
topics that may have diminished memory since completing their original studies
Grading

The assessment criteria will be as follows:

Attendance and Participation 20%

Quiz ( or take-home assignments) 40%
A closed-book in-class examination 40%
Total 100%
Schedule
Date Weekday Topics
General Introduction on:
What is accounting
30-Jul Tuesday
Financial statements, Accounting Concepts and Principles
Financial Interpretations made from financial statement data

Quiz 1 Solution Discussion

2-Aug Friday
Bookkeeping and Transaction Analysis
Quiz 2 Solution Discussion
6-Aug Tuesday
Balance Sheet Discussion - Assets Items

9-Aug Friday Balance Sheet Items Discussion - Liabilities Items and Equity Items

Quiz 3 Solution Discussion

13-Aug Tuesday
Income Satement and Statement of Cash Flow Items Discussion
Quiz 4 Solution Discussion
16-Aug Friday
Revision, Q&A

20-Aug Tuesday Final Exam (Multiple Choice Questions + Short Questions)

Venue

Date Teaching Mode Time Venue

30 Jul (Tue)
2 Aug (Fri) WMY 507
Hybrid OR
6 Aug (Tue)
9 Aug (Fri) 18:30 – 21:30 Meeting ID: 940 9501 9379
Password: 286189
13 Aug (Tue)
Face-to-face
16 Aug (Fri)

Examination:
Face-to-face 18:30 – 21:30 YIA LT3
20 Aug (Tue)
Some Important Rules

 Attendance: Please join the classroom room before 6:15pm.

 Submission of take-home quizzes/assignments: please send your take-home

quizzes/assignments to [email protected] before the deadline.
 Participation and discussion: there will be plenty of opportunities for you to
participate actively in class…but unrelated blabber is not welcome!
Some Important Rules
 No video recording or taping is allowed
 The lecture notes are provided to you for single use. You may not copy or
distribute all or any part of the notes without the written consent of the Tutor.
 Please be aware of intellectual property issues in all your work and presentations.
Take care to indicate the source of your quotes and include a reference list at the
end of your presentations.
 Plagiarism is not tolerated at CUHK. Plagiarism software may be used in
evaluating homework and clear cases of plagiarism will impact your grade
significantly.
 Part I:

General Production
Introduction to Accounting
 What is Accounting?
Accounting is the process of:

Identifying Economic For decisions and

Measuring information about informed
Communicating the entity judgements
Users and Uses of Accounting Information

User Decision / Informed Judgment Made

Management Planning, directing and controlling
Investors/Shareholders Assets amounts, timing, and uncertainy of future cash returns on their investment
Creditors / Supplier Assessing probability of collection and the risk of late (or non-)payment
Employees Planning for retirement and future prospects
SEC Reviewing fr compliance of all required information
Accounting Category

 Financial Accounting
 Managerial Accounting / Cost Accounting
 Auditing – Public Accounting
 Internal Auditing
 Governmental and Not-for-Profit accounting
 Income Tax Accounting
Financial Accounting (External Use)

 Financial accounting generally refers to the process that results in the preparation
and reporting of financial statements for an entity.

 Financial accounting is primarily externally oriented and concerned with the

historical results of an entity’s performance.
Managerial / Cost Accounting (Internal Use)

 Be concerned with the use of economic and financial information to plan and
control many of the activities of the entity and to support the management
decision –making process

 Relates to the determination and accumulation of product, process, or service

costs
Public Accounting - Auditing

 Public accounting firms and individual Certified Public Accountants (CPAs)

provide auditing services and issue an independent auditor’s report.

 An independent auditor’s report usually contains four brief paragraphs and states
whether the financial statements are prepared in conformity with generally
accepted accounting principles (GAAP).
 Responsibilities scope
 Standards followed
 Opinion about financial statements
 Opinion about the effectiveness of internal control
Auditor’s Opinion

 Unqualified / Clean Opinion – present fairly, in all material respect

 Qualified opinion – A material error or if the auditor is unable to gather enough
information to verify
 An adverse opinion – material errors in the financial statement
 A disclaimer of opinion – Auditor can’t or refuses to state an opinion
Internal Auditing

 Internal auditors are professional accountants who perform functions much like
those of an external auditor.

 Internal auditors are employed in industry rather than public accounting.

Governmental and Not-for-Profit

 Governmental units (e.g. municipal, state, and federal agencies) and not-for-
profit entities (e.g. universities, hospitals, and religious organizations) require the
same accounting functions to be performed as do other accounting entities.
Income Tax Accounting

 Tax practitioners often develop specialties is the taxation of individuals,

partnerships, corporations, trusts and estates, or international tax law issues.
 Part II:

Financial Statements and

Accounting Concepts /Principles
Financial Statements

 Transactions are economic interchanges between entities that are accounted for
and reflected in financial statements.

 Procedures for sorting, classifying and presenting (bookkeeping)

 Selection of alternative methods or reflecting the effects of certain transactions

(accounting)
Accounts

 Transactions are summarized in accounts.

 Accounts are used to organize like-kind transactions.

 Account balances are then used in the preparation of financial statements.

e.g. Cash / Accounts Receivable / Accounts Payable / Short-term Debt / Common

Stock / Retained Earnings
Disclosure Requirement

Required Disclosure Financial Statement that Satisfies Requirement

Financial position at the end of the period Balance Sheet
Earning for period Income Statement
Cash flows during the period Statement of Cash Flows
Investments by and distributions to owners
Statement of Changes in Owners' Equity
during the period

In addition to financial statements, the annual report will probably include

several accompanying notes or explanations of the accounting policies
used and detailed information about many of the amounts and captions
shown in the financial statements
Balance Sheet Liabilities are amounts owned
to other entities.

Assets represent the amount of resources

owned by the entity.

Equity is the ownership right of the owners of the entity in

the assets that remain after deducting the liabilities
Balance Sheet

Assets = Liabilities + Equity

Balance Sheet: Accounting Equation
 If assets equal $300,000 and liabilities equal $125,000, what’s is owner’ equity?

Owners’ Equity = Assets – Liabilities = $300,000 - $125,000 = $175,000

 Now, suppose that total assets increases $12,000 during the year, and total
liabilities decrease $3,000 during the year. How much does owners’ equity
increase?

Owners’ Equity Increase = Assets Increase – Liabilities Increase

= $12,000 – (-$3,000) = $15,000
Balance Sheet
Current assets are those assets that are likely to be converted into ash or used up to benefit the entity within one year.

Current liabilities are those liabilities that are to be paid within one year.
Income Statement
Income Statement shows the profit /loss for the period of item under consideration.
INCOME STATEMENTS
(In millions, except per share amounts)
Revenues result from the entity’s
operating activities (e.g., selling Year Ended June 30, 2023 2022 2021
merchandise) Revenue: $
Product 64,699 72,732 71,074
Service and other 147,216 125,538 97,014
Total revenue 211,915 198,270 168,088
Cost of revenue:
Product 17,804 19,064 18,219
Service and other 48,059 43,586 34,013
Costs and expenses are incurred in Total cost of revenue 65,863 62,650 52,232
generating revenues and operating Gross margin 146,052 135,620 115,856

the entity Research and development 27,195 24,512 20,716

Sales and marketing 22,759 21,825 20,117
General and administrative 7,575 5,900 5,107
Operating Expense 57,529 52,237 45,940
Operating income 88,523 83,383 69,916
Other income, net 788 333 1,186
Income before income taxes 89,311 83,716 71,102
Provision for income taxes 16,950 10,978 9,831
Gains and losses are also reported on the Net income 72,361 72,738 61,271
income statement and result from non-
Earnings per share:
operating activities, rather than from day- Basic 9.72 9.7 8.12
to-day operating activities that generate Diluted 9.68 9.65 8.05
Weighted average shares outstanding:
revenues and expenses. Basic 7,446 7,496 7,547
Diluted 7,472 7,540 7,608
Statement of Changes in Stockholders’ Equity
It shows details of stockholders’ equity and explains the changes that occurred in the
components of stockholders’ equity the period of item under consideration.

Paid-in-Capital represents the total

amount invested by the stockholders.

Retained Earnings represents

the cumulative net income of
the entity that has been retained
for use in the business.

Accumulated other comprehensive

Income (AOCI) represents special
gains and losses which have not been
realized yet and placed in the other
comprehensive income category.
Statement of Cash Flows
CASH FLOWS STATEMENTS
(In millions)
Year Ended June 30, $ 2023 2022 2021
Operations
Net income 72,361 72,738 61,271
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other 13,861 14,460 11,686
Stock-based compensation expense 9,611 7,502 6,118
Net recognized losses (gains) on investments and derivatives 196 -409 -1,249
Deferred income taxes -6,059 -5,702 -150
Changes in operating assets and liabilities:
Accounts receivable -4,087 -6,834 -6,481
Inventories 1,242 -1,123 -737
Other current assets -1,991 -709 -932
Other long-term assets -2,833 -2,805 -3,459

The purpose of this financial

Accounts payable -2,721 2,943 2,798
Unearned revenue 5,535 5,109 4,633
Income taxes -358 696 -2,309

statement is to identify the sources

Other current liabilities 2,272 2,344 4,149
Other long-term liabilities 553 825 1,402
Net cash from operations 87,582 89,035 76,740

Financing
Cash premium on debt exchange 0 0 -1,754
and uses of cash during the year.
Repayments of debt -2,750 -9,023 -3,750
Common stock issued 1,866 1,841 1,693
Common stock repurchased -22,245 -32,696 -27,385
Common stock cash dividends paid -19,800 -18,135 -16,521
Other, net -1,006 -863 -769
Net cash used in financing -43,935 -58,876 -48,486

Investing
Additions to property and equipment -28,107 -23,886 -20,622
Acquisition of companies, net of cash acquired, and purchases of
-1,670 -22,038 -8,909
intangible and other assets
Purchases of investments -37,651 -26,456 -62,924
Maturities of investments 33,510 16,451 51,792
Sales of investments 14,354 28,443 14,008
Other, net -3,116 -2,825 -922
Net cash used in investing -22,680 -30,311 -27,577

Effect of foreign exchange rates on cash and cash equivalents -194 -141 -29
Net change in cash and cash equivalents 20,773 -293 648
Cash and cash equivalents, beginning of period 13,931 14,224 13,576
Cash and cash equivalents, end of period 34,704 13,931 14,224
Financial Items – Balance Sheet
Account Definition
Cash Cash on hand and in the bank
Accounts receivable Amounts due from customers
Merchandise inventory Cost of merchandise acquired and not yet sold
Equipment Cost of equipment purchased and used in business
Accumulated depreciation Portion of the cost of equipment that is estimated to have
been used up in the process of operating the business
Short-term debt Amounts borrowed that will be repaid within one year of the
balance sheet date
Accounts payable Amounts due to suppliers
Other accrued liabilities Amounts owed to various creditors
Long-term debt Amounts borrowed from banks or other creditors that will
not be repaid within one year from the balance sheet date
Owners' equity Residual claim of owners, computed as "assets minus
liabilities"

2-30
Financial Items – Statement of Changes in Shareholders’ Equity

Captions Explanation
Paid-in capital Represents the total amount invested in the entity by
the owners
Common stock Reflects the number of shares authorized by the
corporation's charter, the number of shares issued to
stockholders, and the number of shares still held by
the stockholders
Additional paid-in capital Difference between the total amount invested by the
owners and the par value or stated value of the stock
Retained earnings Represents the cumulative net income of the entity
that has been retained for use in the business
Dividends Distributions of earnings to the owners
Financial Items – Income Statement
Captions Explanation
Net sales Amount of sales of merchandise to customers, less the
amount of customer returns of merchandise
Cost of goods sold Represents the total cost of merchandise removed from
inventory and delivered to customers as a result of sales
Gross profit Difference between net sales and cost of goods sold;
Represents the seller's maximum amount of "cushion"
from which all other expenses of the business must be
deducted before it is possible to have net income
Selling, general, and Represents the operating expenses of the entity
administrative expenses
Income from operations Represents one of the most important measures of the
firm's activities
Interest expense Represents the cost of using borrowed funds
Income taxes Shown after all of the other income statement items have
been reported because income taxes are a function of the
firm's income before taxes
Net income per share of A significant item in evaluating the market value of a share
common stock of common stock; Often referred to as "earnings per
outstanding share" or EPS
Financial Items –Cash Flows
Captions Explanation
Cash flows from operating Shown first; Net income is the starting point for this
activities measure of cash generation
Depreciation expense Added back to net income because it is subtracted to
arrive at net income, but does not require the use of cash
Increase in accounts Deducted because it reflects sales revenues, included in
receivable net income, but not yet received in cash
Increase in merchandise Deducted because cash was spent to acquire the
inventory increase in inventory
Increase in current Added because cash has not yet been paid for the
liabilities products and services that have been received during the
current fiscal period
Cash flows from investing Shows the cash sources and uses related to long-lived
activities assets
Cash flows from financing Shows the cash sources and uses related to transactions
activities with creditors and stockholders
Accounting Concepts and Principles

1. Accounting Entity
Every economic entity can be separately identified and accounted for.

2. Going Concern Concept

The presumption that the entity will continue to operate in the future – it’s not being liquidated.

3. Unit of Measurement/stable dollar principle

Only transactions denominated in dollars (currency) are recorded in the accounting records.

4. Cost Principle
Transactions are recorded at their original cost to the entity as measured in dollars.
Accounting Concepts and Principles

5. Objectivity
Th accountants’ desire to have a given transaction recorded in the same way in all situation.

6. Accounting Period
The period of time selected for reporting results of operations and changes in financial position.

7. Matching Concept
All expenses incurred to generate that period’s revenues be deducted from revenues earned.

8. Accrual Accounting
Recognize revenue at the point of sale and recognize expenses when incurred, even through the
cash receipt or payment may occur at another time.
Accounting Concepts and Principles

9. Consistency
Provides meaningful trend comparisons over several years.

10. Full Disclosure

Circumstances and events that make a difference to financial statement users should be disclosed.

11. Materiality
The benefit of increased accuracy should outweigh the cost of achieving the increased accuracy.

12. Conservatism
When in doubt, make judgements and estimates that result in lower profits and asset valuations.
GAAP – Generally Accepted Accounting Principles

 IFRS VS U.S.GAAP
 Part III:

Fundamental Interpretations Made

from Financial Statement Data
Financial Ratios and Trend Analysis

The large dollar amounts reported on the financial statements of many companies,
and the varying size of companies, make ratio analysis the only sensible method of
evaluating various financial characteristics.

 A ratio is simply the relationship between two numbers.

 Trend analysis compares a single observation over several years.

 Common size analysis

Rate of Return

 This ratio provides the return on a given investment alternative. All other things
being equal, the higher the rate of return, the more profitable the alternative.
Project A will return 75 dollars, and project B will return 90 dollars. Which project will be selected?
 If the initial investment amounts are same.
 Or if the initial investment amounts are $500 and $1,000.

 The rate of return calculation is derived from the interest calculation.

 Higher rates of return are associated with great risk!

Rate on Investment/Assets (ROI/ROA)

 This ratio describes the rate of return management was able to earn on the assets
that it has available during year.

 An informed judgement about the firm’s profitability requires relating net income
to assets used to generate that net income.
The DuPont Model

 An expansion of the basic ROI calculation.

 The developers of the model reasoned that profitability from sales and utilization
of assets to generate sales revenue were both important factors to be considered
when evaluating profitability.
The DuPont Model

Emphasizes that from every

Relates efficiency with which
dollar of sales revenue, some
the firm’s assets are used in the
amount must work its way to
revenue-generating process.
net income.
Return on Equity (ROE)

 Owners are interested in expressing the profits of the firm as a rate of return on
the amount of owners’ equity.
Working Capital

 Working capital is the excess of a firm’s current assets over its current liabilities.
Current Ratio

 This ratio measures the ability of the company to pay current debts as they
become due.

 As a rule of thumb, a current ratio of 2.0 is considered indicative of adequate

liquidity.
Acid-Test Ratio

 Quick assets are cash (including temporary cash investments) and accounts
receivable.

 This ratio provides information about an almost worst-case situation- the firm’s
ability to meet its current obligation even if none of the inventory can be sold. As a
rule of thumb, an acid-test ratio of 1.0 is considered indicative of adequate
liquidity.
Trend Analysis
 This table illustrates the trend analysis of return on investment, return on equity
and working capital.

Source: Intel Corporation, 2008 Annual Report, pp.26, 56-57.

Year
Item 2008 2007 2006 2005 2004
Return on investment 10.80% 13.40% 10.40% 18.00% 15.80%
Return on equity 12.90% 17.50% 13.80% 23.20% 19.70%
Working capital $ 12,053 $ 15,314 $ 9,766 $ 11,960 $ 16,052
Trend Analysis
 This table illustrates the trend analysis of return on investment, return on equity
and working capital.
Source: Intel Corporation, 2008 Annual Report, pp.26, 56-57.

Year
Item 2008 2007 2006 2005 2004
Return on investment 10.80% 13.40% 10.40% 18.00% 15.80%
Return on equity 12.90% 17.50% 13.80% 23.20% 19.70%
Working capital $ 12,053 $ 15,314 $ 9,766 $ 11,960 $ 16,052

Working Capital ($)

25.00% $20,000
20.00% Return on $15,000
Return (%)

15.00% Investment
$10,000
10.00% Return on Equity $5,000
5.00% $0
0.00%
2004 2005 2006 2007 2008
2004 2005 2006 2007 2008
Year Year
Common-Size Analysis
 A financial analysis tool expresses each line items as a percentage of the base
amount for a given period.
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐼𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙 𝐼𝑡𝑒𝑚
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝐵𝑎𝑠𝑒 = ∗ 100%
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝐵𝑎𝑠𝑒

 For Balance Sheet Total Assets is mostly used as the base item.
 For Income Statement Total Revenue is mostly used as the base item.
 Part IV:

Financial Statement Ratios

Financial Statement Ratios

Ratios are used to interpret the financial position and results of operations of an
entity and may be grouped in the following four categories:

1. Liquidity
2. Activity
3. Profitability
4. Debt, or financial leverage
Liquidity Measures

 Creditors:
Is the firm paying its bills promptly? Are call cash discount taken?

 Suppliers:
What are the firm’s working capital and liquidity ratios?
Activity Measures

Focus primarily on relationships between asset levels and sales. The general model
for calculating turnover is:

Turnover is often calculated for

 Accounts receivable
 Plant and equipment
 Total operating assets
 Toal Assets
 Inventories
Accounts Receivable Turnover
Amounts at year end, in thousands except for shares, $
Cash 30,00
Accounts Receivable, net
Beginning of year 17,000
End of year 20,000
Inventory
Beginning of year 10,000
End of year 12,000
Total Current Assets 65,000
Plant and Equipment
Beginning of year 50,000
End of year 56,000
Total Assets
Beginning of year 139,000
End of year 150,000
Total Current Liabilities 42,000
Total Liabilities 28,000
Shareholders' Equity 80,000
Sales 500,000
Cost of Goods Sold 140,000
Interest Expense 10,000
Earnings Before Interest and Taxes 150,000
Net Income 98,000
Earning Per Share 1.5
Dividend Per Share 0.2
Plant and Equipment Turnover
Amounts at year end, in thousands except for shares, $
Cash 30,00
Accounts Receivable, net 𝑆𝑎𝑙𝑒𝑠
Beginning of year 17,000 𝑃𝑙𝑎𝑛𝑡 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
End of year 20,000 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑙𝑎𝑛𝑡 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡
Inventory
Beginning of year 10,000
End of year 12,000
Total Current Assets 65,000
Plant and Equipment
$ 500,000
Beginning of year 50,000 𝑃𝑙𝑎𝑛𝑡 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
End of year 56,000 ($ 50,000 + $ 56,000)/2
Total Assets
Beginning of year 139,000 𝑃𝑙𝑎𝑛𝑡 𝑎𝑛𝑑 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 9.43
End of year 150,000
Total Current Liabilities 42,000
Total Liabilities 28,000
Shareholders' Equity 80,000
Sales 500,000
Cost of Goods Sold 140,000
Interest Expense 10,000
Earnings Before Interest and Taxes 150,000
Net Income 98,000
Earning Per Share 1.5
Dividend Per Share 0.2
Inventory Turnover
Amounts at year end, in thousands except for shares, $
Cash 30,00
Accounts Receivable, net
Beginning of year 17,000
End of year 20,000
Inventory
Beginning of year 10,000
End of year 12,000
Total Current Assets 65,000
Plant and Equipment
Beginning of year 50,000
End of year 56,000
Total Assets
Beginning of year 139,000
End of year 150,000
Total Current Liabilities 42,000
Total Liabilities 28,000
Shareholders' Equity 80,000
Sales 500,000
Cost of Goods Sold 140,000
Interest Expense 10,000
Earnings Before Interest and Taxes 150,000
Net Income 98,000
Earning Per Share 1.5
Dividend Per Share 0.2
Other Activity Measures

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

𝐷𝑎𝑦𝑠 𝑖𝑛 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 ÷ 365 𝐷𝑎𝑦𝑠

A measure, on average, of how many days it takes to collect an account receivable.

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐷𝑎𝑦𝑠 𝑖𝑛 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 =
𝐶𝑂𝐺𝑆 ÷ 365 𝐷𝑎𝑦𝑠

A measure, on average, of the number of times inventory is sold and replaced..

Price / Earnings Ratio (P/E Ratio)

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝑃𝑟𝑖𝑐𝑒/𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

A measure often used by investors as a general guideline in evaluating stock values.

e.g. if the closing market price is $37.5, what is the P/E Ratio?
Dividend Yield & Dividend Payout Ratio

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

e.g. if the closing market price is $37.5, what is the dividend yield and dividend payout Ratio?
Debt Ratio & D/E Ratio

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

Measures the percent of assets being provided by creditors.

Measures the relative portion of contribution from owners and creditors.

Times Interest Earned / Interest Coverage

𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠

𝑇𝑖𝑚𝑒𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

A common measure of ability of a firm to provide protection to the long-term creditor.

$ 150,000
𝑇𝑖𝑚𝑒𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 = = 15 𝑋
$ 10,000