Accounting Notes.doc

Ratio AnalysisRatio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. The relationship is expressed in terms of either a percentage, a rate, or a simple proportion.To illustrate, Best Buy has current assets of $9,081 million and current liabilities of $6,301 million. We can determine a relationship between these accounts by dividing current assets by current liabilities, to get 1.44. The alternative means of expression are:Percentage:Current assets are 144% of current liabilities.Rate:Current assets are 1.44 times as great as current liabilities.Proportion:The relationship of current assets to current liabilities is 1.44:1.Working CapitalCurrent RatioDEBT TO TOTAL ASSETS RATIOIllustration3-16Summary of debit/credit rulesThe Revenue Recognition PrincipleThe revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned.The Matching PrincipleThe practice of expense recognition is referred to as the matching principle because it dictates that efforts (expenses) be matched with accomplishments (revenues).Illustration4-1GAAP relationships in revenue and expense recognitionIllustration4-10Accounting for prepaid expensesIllustration4-13Accounting for unearned revenuesIllustration4-16Accounting for accrued revenuesIllustration4-22A