Understanding GAAP, FASB, PCAOB, and Financial Ratios

School: Fayetteville State University - Course: FINC 311 - Subject: Accounting

3-1. The purpose of GAAP is to standard the recording and reporting of cash flows. GAAP is a set of laws that covers the issues, problems, and legalities of business and company accounting. FASB bases its large range of accredited accounting techniques and practices on GAAP. Accounting guidelines are set by the FASB. General recognized accounting rules for major corporations could be set and applied by the Financial Accounting Standards Board. The goal of PCAOB is to control major company auditors, defend investors' interests, and advance the common good through creation of fair, accurate, and informative audit reports. The PCAOB does this through its outreach, inspection, enforcement, and basic programs. The PCAOB is always trying to find ways to improve its standards and the way auditors apply them even while achieving the desired results. 3-3. Because they provide extensive information that is not immediately available in the income accounts, the comments to income statement are significant to professional security analysts. The financial reporting' ways of dealing, calculations, accounting practices, and methods are described with in notes. 3-5 While bankers are often more concerned in short-term cash measurements of debt, present and potential shareholders prioritize the firm's current and future risk level and profit as return on assets. So, cash flows measures also are valuable to owners, and balance sheet measures are most important to creditors. Management is worried about all ratio measurements because they know that in order to keep a stock price and raise more funds, creditors and shareholders must see positive numbers. 3-6 When making cross-sectional comparisons, business within the same industry or the market rate as at a specific period of time are compared to the same ratios. Comparing similar figures for a firm taken at a few times in life seems to be how time-series studies are made. 3-8 Due to the impact of timing, compared income reports from different points in the year might provide inaccurate and misleading information. In order to make exact comparisons of performance, reports from the same month a year or an ending must be used in the study. Levels of current assets can differ wildly dependent on a company's business. 3-9. When a company's inventory cannot be quickly turned into cash, the current ratio would only be the preferred indicator of total funded in those instances.

The current ratio shows the link between current liabilities and current assets. The fast ratio excludes inventories as well as other financial assets which are more challenging to dispose, giving a more conservative picture of a firm's cash or ability to pay its simple liabilities with it's own short-term assets. 3-12. Financial leverage is utilizing debt. When a company takes out debt to borrow money, financial leverage is produced. 3-13. The firm's total debt as hard debt based on total resource the amount of debt the company is subject to. The ability of the business to service its debt is evaluated by the EBITDA or earnings before interest, taxes, depreciation, and amortization coverage ratio, also known as the interest coverage ratio. The higher the interest coverage ratio, the better the business is from the point of view of the lenders. 3-14,Gross profit as a percentage of sales, the ratio of net income to revenue, and Ebit/sales is the operating margin. 3-16. When a business uses only equity for investment, its ROA and ROE will be equal. As a result that each of these ratios' base period are the same, when a business does not use debt, its assets and equity will be equal, resulting in an equal ROA and ROE ratio. 3-17. The P/E ratio will show how much investors are prepared to pay to get more profits per share. The M/B ratio reveals how the traded goods the business more highly or less favorably. Investors must be mindful of some limits while considering these ratios.