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Chapter 5 Summary - Chapter 5 1 Describe the main financial...

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Chapter 5 1) Describe the main financial statement users and the key qualifies of useful information that are of interest to them. a) The four main financial statement users are i) Managers, who use accounting information to run the business. ii) Directors, who use accounting information to oversee the business. iii) Creditors, who use accounting information to administer business contracts. iv) Investors, who use accounting information to value the business. b) The key qualities of useful information are (1) reliability, (2) relevance, (3) consistency, and (4) comparability 2) Calculate and interpret the debt-to-assets, asset turnover and net profit margin ratios. a) The debt-to-assets ratio is calculated by dividing total liabilities by total assets. It indicated the percentage of assets financed by debt, with a higher ratio indicating a riskier financial strategy. b) The asset turnover ratio is calculated by dividing sales revenue for the period by average total assets held during the period. Average total assets usually is calculated by adding the beginning and ending total assets together and dividing by 2. the asset turnover ratio indicates how well assets are used to generate sales, with a higher ratio indicating greater efficiency. c) The net profit margin ratio us calculated by dividing net income by sales revenue. It indicated the ability to generate sales while controlling expenses, with a higher ratio indicating better performance. 3) Describe the information in press releases and SEC filings. a) Press releases typically include key figures (sales revenues, net income) management’s discussion of the results, and attachments containing a condensed income statement and balance sheet. b) Form 10-K is the SEC’s version of the annual report, which includes the annual financial statements, auditor’s report, management discussion and analysis, stock price date and other financial schedule c)
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