FINANCIAL STATEMENT ANALYSIS ：THE BASICS.doc

FINANCIAL STATEMENT ANALYSIS ：THE BASICS FINANCIAL STATEMENT ANALYSIS:THE BASICS THE BASICSThe following material offers students with limitedoutcome statements in this study session. Those withbackgrounds in this topic area an overview of some ofadequate preparation in this topic area can proceedthe basic concepts and definitions necessary todirectly to the topic review for the first requiredunderstand the material covered by the learningreading in this study session.THE MEASUREMENT OF BUSINESS INCOMEWhen evaluating a company’s performance, the focus is on profit. The term “profit” can be defined many ways. Throughout this book you will find definitions for gross profit, operating profit, net income from continuing operations, and net income. However, the most common definition is that of simply net income.Net income is computed as the difference between revenues and expenses. The distinction between the various definitions of profit listed above depends on the expenses that are included in the computation. Also, keep in mind that revenues and expenses may not coincide with cash flows.Income Measurement and the Accrual Basis of AccountingReporting of financial accounting data is done in periods of time—based on the time-period principle—and these periods may be of any length of time. Companies tend to use the year as the primary length of the period but also report for periods less than a year (e.g., quarterly) on an interim basis.The statements are prepared at the end of a uniform period of time to allow comparisons across time. Financial statements are prepared at the conclusion of each of these accounting periods, summarizing the activities that occurred during the period. It is important to note that the 12-month reporting period (i.e., the fiscal year) that is chosen by management may or may not coincide with the calendar year ending December 31.The basic assumption in preparing financial statements is that the firm will continue in operation; that is, it is a