Chapter 12
Using Accounting Information
378
In Summary
Explain the shareholders’ equity section of a corporation’s balance sheet
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Corporations use the term “shareholders’ equity” instead of “owner’s equity” to present the
equity section of the balance sheet.
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The shareholders’ equity category includes two sub categories, share capital and retained
earnings.
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The two types of share capital, which are preferred shares and common shares, are reported
separately in the shareholders’ equity section.
Explain the key items in a corporation’s income statement that are different from those in a
sole proprietorship’s income statement
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Unlike sole proprietorships, corporations tend to have multiple operating segments. When
some segments are discontinued, the income (or loss) from discontinued operations is
reported as a separate line item from the income (or loss) from continuing operations in
corporations’ income statement.
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Other comprehensive income is reported either as a separate section in a corporation’s income
statement or in a standalone statement.
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Gains or losses from the change in value of such assets as investments or property, plant and
equipment are not considered to be a part of operating income, but are instead reported as
other comprehensive income.
Conduct horizontal and vertical analysis of financial statements
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The comparative balance sheet is used to perform horizontal analysis because it compares
information from one accounting period to another.
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One way of conducting horizontal analysis is by calculating succeeding year’s balance sheet
items as a percentage of the base-year’s number.
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Another way of conducting horizontal analysis is by calculating the percentage change from
a base-year to show percentage increase or decrease of each balance sheet item over time.
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Vertical analysis is conducted by converting each separate line item in a financial statement
into percentage of the base figure within the specific year.
Assess a company’s liquidity, profitability, operations management, and leverage using
financial ratios
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Ratios measure different aspects of a company’s financial situation.They are divided into four
categories based on what they measure: liquidity, profitability, operations management and
leverage.
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A company’s liquidity can be assessed using working capital, current ratio, and quick ratio.
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