Preparing a balance sheet, the statement of financial position

A balance sheet, also known as the statement of financial position, is one of the basic financial statements. It lists a company’s assets, liabilities, and stockholders’ equity at a given point in time, and it shows that the accounting equation works. It is used to assess a company’s liquidity and solvency. What it looks like […]
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Using gross profit margin to analyze profitability

Gross profit margin measures the proportion of profit yielded by sales. To calculate this ratio, divide gross profit by sales revenue: Gross profit margin = Gross profit⁄Sales revenue It is also knows as gross profit ratio or percentage. Calculating gross profit margin For the year ended April 2, 2016, Michael Kors Holdings Ltd. had gross profit of $2,797.2 million […]
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What are current assets?

Accountants define current assets as assets deemed to be liquid enough to be converted to cash within one year or less. The balance sheet reports this item above noncurrent assets. Types Types of current assets include: Cash and cash equivalents Short-term investments Accounts receivable Merchandise inventory Prepaid assets Current assets are “liquid” We define liquidity as […]
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What are noncurrent assets and how are they measured?

Noncurrent assets are assets that are not deemed to be liquid enough to be converted to cash within one year or less. They are listed in the balance sheet below current assets. Types of NC assets Property, plant, and equipment Long-term investments Goodwill Copyrights, trademarks, and other intangible assets Understanding operating cycles Noncurrent assets are assets […]
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Computing and interpreting inventory turnover

Inventory turnover measures how productively a company uses its merchandise inventory to generate sales and profits. Calculating inventory turnover Here is the formula for inventory turnover: Inventory turnover = Cost of goods sold⁄Average inventory Cost of goods sold measures the amount paid to purchase or manufacture items that were sold during the period. To find cost […]
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Accounting for merchandise inventory

Inventory, also called merchandise inventory, is the company’s investment in products that it plans to sell to customers. It is an asset recorded on the balance sheet along with other current assets. Manufacturers make their own inventory, while retailers and other businesses buy their inventory from suppliers. Recording inventory Under U.S. Generally Accepted Accounting Principles, companies usually […]
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