Key Terms
Asset
An economic resource with positive value. Can be tangible (cash, equipment, vehicles, buildings) or intangible (patents,
Liability
An obligation to transfer assets or provide services to another party in the future. Results from past transactions.
Purpose
Reports actual cash coming in and going out during a period. Tracks operating, investing, and financing activities separ
Formula
Cost of Goods Sold / Average Inventory
Example
Turnover of 5.76 means inventory sells through about every 63 days (365 / 5.76).
Structure follows the accounting equation
Assets = Liabilities + Equity
Assets listed
Cash, Accounts Receivable, Supplies, Prepaid Rent, Equipment, Truck.
OPERATING ACTIVITIES
Cash effects of transactions that determine net income.
INVESTING ACTIVITIES
Cash related to acquiring or disposing of long- term (noncurrent) assets.
FINANCING ACTIVITIES
Cash effects of transactions with owners and creditors.
Break-even point
The level of sales at which total revenue equals total expenses. Profit is exactly $0 at this point.
Fixed costs
Costs that do not change with the level of production or sales. Examples: rent, insurance, salaried staff.
Variable costs
Costs that change in proportion to production or sales volume. Examples: raw materials, hourly labor, packaging.
What it measures
How many times a company sells through its average inventory in a period. Tests whether the company is generating suffic
To convert turnover to days
365 / Inventory Turnover = Days to sell through inventory