(4.2) Practice: Infographic-Accrual Accounting & Financial Statements

Accrual Accounting & Financial Statements

Reporting Financial Transactions

There are two accounting methods: Cash and Accrual Accounting. Click the info button below to learn more!

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Click on the "+" sign in each of the sections below to explore each concept

Financial Statements Overview

Inventory & Gross Profit

Statement of Cash Flows

How Performance is Evaluated

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There are two main techniques to evaluating performance. Click the info button below to learn more about these two techniques.

Financial Condition Ratios

Profit Margin Ratios

Types of Financial Ratios

Click on each "+" sign to learn more about each type of financial ratio

Management Effectiveness Ratios

Management Efficiency Ratios

💰 Profit Margin Ratios

Shows how much profit remains from each sales dollar

• Gross Profit Margin
• Net Profit Margin

• Revenue recorded when cash is received.
• Expenses recorded when cash is paid.

Cash Accounting

Accrual Accounting

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• Revenue recorded when earned.
• Expenses recorded when incurred.
• Timing of cash does not matter.

⚙️ Management Efficiency Ratios

Measures how well assets are used.

• Inventory Turnover

• How efficiently inventory is sold

🎯 Management Effectiveness Ratios

Measures overall business performance.Return on Assets (ROA)

• Net profit ÷ total assets

Shows how profitable a company is over time.

• Reports revenues, expenses, and profit.

Includes:

• Cost of Goods Sold (COGS)
• Depreciation expense

Income Statement

Shows what a company owns and owes at a specific point in time.

• Assets = what the company owns
• Liabilities = what the company owes

📂 Classified Balance Sheet

• Current Assets: converted to cash within 1 year
• Long-Term Assets: used for more than 1 year
• Current Liabilities: due within 1 year
• Long-Term Liabilities: due after 1 year

Balance Sheet

Shows how cash moves in and out of the business.

• Explains why cash changed, even if profit did not

Organized into three sections:

1. Operating Activities – cash from daily business operations.
2. Investing Activities – cash from buying/selling long-term assets.
3. Financing Activities – cash from loans, owners, and repayments.

Statements of Cash Flows

🛡️ Financial Condition Ratios

Measures financial strength and risk.

• Current Ratio
• Ability to pay short-term obligations
• Debt-to-Equity Ratio
• Risk level of company financing
• Interest Coverage Ratio
• Ability to pay interest on debt

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1.) Vertical Percentage Analysis

2.) Ratio Analysis

• Compares one financial number to another
• Used to:
• Track performance over time
• Compare companies
• Compare to industry averages

• Each income statement item expressed as a % of sales

• Helps compare changes over time

Cash flow statements track cash in and cash out from:

Operating Activities

Daily business operations

Investing Activities

Buying/selling long-term assets

Financing Activities

Loans, owner investment, dividends

• Appears on the balance sheet as an asset.

Balance Sheet

Income Statement

Inventory

When Inventory is Sold

• Becomes an expense on the Income Statement
• Called Cost of Goods Sold (COGS)

Gross Profit Formula:

Sales – Cost of Goods Sold = Gross Profit

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