Draw an Accountant. Who/What Information needs for business/financial decisions

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1 Draw an Accountant. Who/What Information needs for business/financial decisions

2 BUS210 Session 1 Handouts: To Do List Syllabus Teaching Perspectives Inventory (TPI) Class Handout Attendance: Sign roster!!!

5 Accounting tells the story! Once upon a time, long, long ago, accounting began to reduce events to numbers to capture and bring meaning to data and it was good! Concepts were agreed upon and accounting techniques evolved to analyze & resolve business issues.

6 Measurement

7 Accounting Records

8 Trader Accounting and the Day of Reckoning The T account of each trip reducing events to numbers Traders Left Resources Responsibilities Capital Costs Unit of Measure Valuation Traders Returned Resources Discharge Responsibilities Capital Benefits Unit of Measure Valuation

Industrial Revolution adds complexity Accounting Fundamentals Resources Responsibilities

definite Evolution of Accounting Concepts Resources Responsibilities Capital Rise of

dividends to stockholders Declining values of costly long-lived resources Limited liability

9 Industrial Revolution adds complexity Accounting Fundamentals Resources Responsibilities Capital Costs & Benefits Unit of Measure Valuation Day of Reckoning- Business cycle definite Evolution of Accounting Concepts Resources Responsibilities Capital Rise of Corporations No end to the business cycle Emphasis on the amount of profit available for dividends to stockholders Declining values of costly long-lived resources Limited liability and communication Making the greatest quantity possible in a given period of time Capitalism & Financial Markets

Today and Tomorrow Industrial Revolution Resources Responsibilities Capital Rise of Corporations Going Concern & Business Entity Net Income,

Costing Accounting kept the books (locked the data up) and interpreted the data for others.

Massive quantities of financial and nonfinancial data. Making sense of business to an audience-what info important?

10 Today and Tomorrow Industrial Revolution Resources Responsibilities Capital Rise of Corporations Going Concern & Business Entity Net Income, Contributed Capital, Retained Earnings, & Dividends Depreciation, Amortization, & Depletion Financial reporting & Auditing Product & Service Costing Accounting kept the books (locked the data up) and interpreted the data for others. Transformative Technologies Now data unlocked with 24/7 access to anyone via Internet & Cloud. Massive quantities of financial and nonfinancial data. Making sense of business to an audience-what info important? Point of view of who s telling the storysingle entity or helicopter? Accountants still can be the storytellers by bringing meaning to data through the process of: Understanding the Concepts first Then applying the best Accounting Tools To analyze and make Business Decisions

11 Learning Outcome: Financial Annual Reports- Identify the Key Numbers Assets (A) Liabilities (L) Stockholders Equity (SHE or SE) Revenues (R) Expenses (E) Income Statement Balance Sheet Prove the Accounting Equation Assets=Liabilities+SHE + Revenues-Expenses

or Net sales Cost of goods sold or cost of sales Operating expenses

12 Income Statement Basics Matches benefits and efforts of business for a period of time Single step format Multi-step format Key numbers: Revenue or Net sales Cost of goods sold or cost of sales Operating expenses Operating income Other revenue and expenses Income taxes Net income or Net earnings

13 Find the following key numbers for the most current year on the next slide Net sales Cost of sales Operating expenses Operating income Other revenue and expenses Income taxes Net earnings How profitable is this business?

15 Find the following key numbers for the most current year on the next slide Total Revenue Cost of revenue Expenses other than cost of revenue Income from operations Other revenue and expenses Income taxes Net income How profitable is this business over that last 3 years?

17 Self Reporting QUIZ: Find the following key numbers for the most current year and report your answers Total Revenue Cost of revenues Expenses Income from operations Other revenue and expenses Income taxes Net income from continuing operations Net income How profitable is this business in the last 3 years?

assets Total assets Current liabilities Long-term liabilities Total

19 Balance Sheet Basics A=L+OE for Sole Proprietorships and Partnerships Key numbers: Current assets Net property, plant, & equipment Other assets Total assets Current liabilities Long-term liabilities Total liabilities Total owners equity Prove Assets=Liabilities + Owners Equity

20 Balance Sheet Basics-Corporations A=L+SHE Snapshot of financial health at a moment in time Other names: Statement of Financial Position Key numbers: Current assets Net property & equipment Other assets Total assets Current liabilities Total liabilities Total stockholders equity Prove Assets=Liabilities + Stockholders Equity

21 Find the following key numbers for the most current year on the next slide Current assets Net property & equipment Other assets Total assets Current liabilities Total liabilities Total stockholders equity Prove Assets=Liabilities + Stockholders Equity

23 Find the following key numbers for the most current year on the next slide Current assets Net property & equipment Other assets Total assets Current liabilities Total liabilities Total stockholders equity Prove Assets=Liabilities + Stockholders Equity

25 Self Reporting QUIZ: Find the following key numbers for the most current year and report your answers Current assets Net property & equipment Other assets Total assets Current liabilities Total liabilities Total stockholders equity Prove Assets=Liabilities + Stockholders Equity

28 Financial Statement Basics Accounting Equation Order of preparation: Income Statement Stockholders Equity and Other Comprehensive Income Balance Sheet Cash Flow Statement

29 Balance Sheet.Begin Financial statement relationships Balance Sheet.End Cash Statement of Cash Flows Cash Other CA Cash-Operating IS, changes in CA&CL Other CA LT Assets LTInvt, PP&E, Intan. Cash-Investing Changes in LTA LT Assets T Assets Cash-Financing Changes in LTL, CC T Assets? Change in Cash? C Liab. Cash.Begin? C Liab. LT Liab. Cash.End? LT Liab. Other SHE Other SHE RE Income Statement RE T L+SHE Revenue Sales,Earned,Other T L+SHE? Expenses COGS,Oper.,Other Net Income? Statement of Shareholders Equity Other SHE Retained Earnings Begin NI Dividends Changes XXXXXXXXXXXXXXX XXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX End??

30 Facebook, Inc. Financial statement relationships Balance Sheet.Begin Balance Sheet.End Cash 1512 Statement of Cash Flows Cash 2384 Other CA 3092 Cash-Operating 1612 Other CA 8883 LT Assets 1727 Cash-Investing (7024) LT Assets 3836 T Assets 6331 Cash-Financing 6283 T Assets Change in Cash 872 C Liab. 899 Cash.Begin 1512 C Liab LT Liab. 533 Cash.End 2384 LT Liab Other SHE 3293 Other SHE RE 1606 Income Statement RE 1659 T L+SHE 6331 Revenue 5089 T L+SHE Expenses 5036 Net Income 53 Statement of Shareholders Equity Other SHE Retained Earnings Begin NI XXXXXXXXXXXXXXX 53 Dividends XXXXXXXXXXXXXXX 0 Changes 6803 XXXXXXXXXXXXXXXXX End

31 Home Depot, Inc. Financial statement relationships Balance Sheet.Begin Balance Sheet.End Cash 1987 Statement of Cash Flows Cash 2494 Other CA Cash-Operating 6975 Other CA LT Assets Cash-Investing (1432) LT Assets T Assets Cash-Financing (5034) T Assets Change in Cash 507 C Liab Cash.Begin 1987 C Liab LT Liab Cash.End 2494 LT Liab Other SHE 652 Other SHE (2261) RE Income Statement RE T L+SHE Revenue T L+SHE Expenses Net Income 4535 Statement of Shareholders Equity Other SHE Retained Earnings Begin NI XXXXXXXXXXXXXXX 4535 Dividends XXXXXXXXXXXXXXX (1743) Changes (2913) XXXXXXXXXXXXXXXXX End (2261) 20038

32 Google, Inc. Financial statement relationships Balance Sheet.Begin Balance Sheet.End Cash Statement of Cash Flows Cash Other CA Cash-Operating Other CA LT Assets Cash-Investing (13679) LT Assets T Assets Cash-Financing (857) T Assets Change in Cash 4120 C Liab Cash.Begin C Liab LT Liab Cash.End LT Liab Other SHE Other SHE RE Income Statement RE T L+SHE Revenue T L+SHE Expenses Net Income Statement of Shareholders Equity Other SHE Retained Earnings Begin NI XXXXXXXXXXXXXXX Dividends XXXXXXXXXXXXXXX 0 Changes 2674 XXXXXXXXXXXXXXXXX End

33 Financial statement relationships-self reporting quiz Balance Sheet Balance Sheet Cash 420 Statement of Cash Flows Cash 6.=? Other CA 1,300 Cash-Operating 275 Other CA 1,550 LT Assets 1,400 Cash-Investing (200) LT Assets 1,600 T Assets 3,120 Cash-Financing 330 T Assets 5.=? Change in Cash 8.=? C Liab. 620 Cash =? C Liab. 995 LT Liab. 1,000 Cash =? LT Liab. 1,200 Other SHE 1,000 Other SHE 1,200 RE 500 Income Statement (year ending ) RE 3.=? T L+SHE 3,120 Revenue 4,200 T L+SHE 4.=? Expenses 4,050 Self-Reporting QUIZ Solve for unknowns and report answers to the address given. Net Income 1.=? 1. Statement of Shareholders Equity (year ended ) 2. Other SHE Retained Earnings , NI 1.=? 5. Dividends (70) 6. Changes =? 3.=? 8.

34 Six key numbers Revenue Total Assets Net Income (Loss) Income Statement Total Liabilities Balance Sheet Cash Flow from (used by) Operating Activities Statement of Cash flows Total Equity

35 Four Key Ratios: Profit Margin PROFITABILITY: Ability to earn a satisfactory net income Revenue Net Income (Loss) Cash Flow from (used by) Operating Activities Total Assets Total Liabilities Total Equity Net Income Revenue How well does management control expenses?

36 Four Key Ratios: Asset Turnover TOTAL ASSET MANAGEMENT: Ability to utilize all the assets of a company in a way that maximizes revenue and minimizes investment. Revenue Net Income (Loss) Cash Flow from (used by) Operating Activities Total Assets Total Liabilities Total Equity Revenue Average Total Assets How efficiently do assets generate revenue?

37 Return on Assets Net Income Average Total Assets Profit Margin x Asset Turnover = Return on Assets Net Income Revenue Revenue X = Average Total Assets Income Average Total Assets Return on Equity Net Income Average Total SHE Net Income Revenue Revenue X = Average Total SHE Income Average Total SHE

38 Four Key Ratios: Current Ratio LIQUIDITY: Ability to manage daily business Revenue Net Income (Loss) Cash Flow from (used by) Operating Activities Total Assets Total Liabilities Total Equity Current Assets Current Liabilities How well does management manage working capital?

39 Four Key Ratios: Debt to Equity FINANCIAL RISK: Ability to use debt effectively without jeopardizing the future of the company. Revenue Net Income (Loss) Cash Flow from (used by) Operating Activities Total Assets Total Liabilities Total Equity Total Liabilities Total Equity Who controls the company? What is the company s level of financial risk?

41 Company X

42 Company X

47 What do you remember?

48 Classifications Assets: Current & Long-term (Property, Plant, & Equipment; Investments; Intangibles) Liabilities: Current & Long-term Shareholders Equities: Contributed Capital and Retained Earnings Revenues: Sales, Income, Gains, & Losses Expenses: Operating (selling, administrative, & General), Other

49 E2-3 Balance sheet or Income statement account? For each account, indicate whether a company would ordinarily disclose the account on the balance sheet or the income statement. a. Equipment b. Fees Earned c. Retained Earnings d. Wages Expense e. Patent f. Cost of Goods Sold g. Common Stock h. Dividends Payable i. Accumulated Depreciation j. Prepaid Expense k. Gain on Sale of Shortterm Investments l. Rent Revenue m. Supplies Inventory n. Accounts Receivable o. Land p. Insurance Expense q. Interest Payable r. Deferred Revenue

50 P2-1 Classifying balance sheet accounts Presented below are the main section headings of the balance sheet: a. Current assets; b. Long-term investments; c. Property, plant, & equipment; d. Intangible assets; e. Current liabilities; f. Long-term liabilities; g. Contributed capital; h. Retained earnings 1. Dividends payable 2. Payment received in advance 3. Allowance for uncollectible accounts 4. Inventories 5. Capital stock 6. Accumulated depreciationbuilding 7. Bond payable 8. Machinery and equipment 9. Accounts receivable 10. Short-term investments 11. Buildings 12. Patents 13. Property 14. Investment fund for plant expansion 15. Wages payable 16. Cash 17. Accumulated depreciationequipment 18. Prepaid rent 19. Trademarks 20. Land held for investment 21. Current portion due of longterm debt 22. Accounts payable 23. Short-term notes payable

53 Balance Sheet Begin F/S & Accounting Equation A=L+SHE+R-E Balance Sheet End Cash Statement of Cash Flows End Cash Other CA Cash-Operating IS, CA, CL Other CA LT Assets LTInvt, PP&E, Intan. Cash-Investing LTA LT Assets T Assets Cash-Financing LTL, CC T Assets? Change in Cash? C Liab. Cash Begin? C Liab. LT Liab. Cash End? LT Liab. CC CC RE Income Statement (year ending ) RE T L+SHE Revenue Sales,Earned,Other T L+SHE? Expenses COGS,Oper.,Other Net Income? Statement of Shareholders Equity (year ended ) Contributed Capital Retained Earnings Begin NI Dividends Stock Issue XXXXXXXXXXXXXXX XXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX End??

55 P2-5 BS and IS relationships across 5 years Assets: Cash Acct receivable 700? Inventory ? 500 Land PP&E Liabilities & SHE Accts payable? Bonds payable Contrib Capital ? RE Sales? 700 1,100 1,000 Expenses 600?? 400 Net Income? (100) 400? Dividends 200???

56 Economic Events--> Transactions Reducing events to numbers

57 a. Spring Winter opened the Winter Repair Service by investing $4,300 in cash and $1,600 in repair equipment for shares of common stock. b. Paid $400 for current month's rent. c. Purchased repair supplies on credit, $500. d. Purchased additional repair equipment for cash, $300. Using the Accounting Equation for: Accounts payable, Cash, Common stock, Dividends, Rent expense, Repair equipment, Repair fees earned, Salaries expense, and Supplies accounts; show the effect of the following transactions for the month of June on the accounts. Use the letter to identify the transaction. Determine the balance in each account and prove the Accounting Equation balances.

58 e. Paid salary to a helper, $450. f. Paid $200 of amount purchased on credit in c. g. Paid $600 dividends from business. h. Accepted cash for repairs completed, $860. Using the Accounting Equation for: Accounts payable, Cash, Common stock, Dividends, Rent expense, Repair equipment, Repair fees earned, Salaries expense, and Supplies accounts; show the effect of the following transactions for the month of June on the accounts. Use the letter to identify the transaction. Determine the balance in each account and prove the Accounting Equation balances.

59 E2-13 Preparing financial statements from simple transactions George began a business, and after collecting $6,000 from an equity investor and borrowing $5,000 from a bank, he purchased a piece of land for $8,000. During the year, he leased the land to Sheila and received $3,000 in cash. He paid $2,500 cash for expenses during the year and paid a $800 dividend to the equity investor. Prepare an income statement, statement of stockholders equity, a balance sheet, and a statement of cash flows for the period. What did George do that may have concerned the bank? Explain.

60 E2-13 Financial statement relationships Balance Sheet Begin Balance Sheet End Cash Statement of Cash Flows End Cash Other CA Cash-Operating Other CA LT Assets Cash-Investing LT Assets T Assets Cash-Financing T Assets? Change in Cash? C Liab. Cash Begin? C Liab. LT Liab. Cash End? LT Liab. CC CC RE Income Statement (year ending ) RE T L+SHE Revenue T L+SHE? Expenses Net Income? Statement of Shareholders Equity (year ended ) Contributed Capital Retained Earnings Begin NI Dividends Stock Issue XXXXXXXXXXXXXXX XXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX End??

61 Cash Flow Basics Ways a business gets and gives cash Two Statement Formats-Direct and Indirect Operating- from daily operations: Income Statement, current asset & current liability activities Investing- noncurrent asset activities Financing- long-term liabilities and stockholders equity activities Key Numbers: Net Cash provided by operating activities Net Cash used in investing activities Net Cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year In your opinion, what are the primary ways the company gets cash and spends cash?

62 Find the following key numbers for the most current year Net Cash provided by operating activities Net Cash used in investing activities Net Cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 In your opinion, what are the primary ways the company gets cash and spends cash?

63 Link between income statement and cash flow from operating activities Revenue Net Income (Loss) Cash Flow from (used by) Operating Activities Total Assets Total Liabilities Total Equity Revenue -Expenses = Net Income (Loss) +Non-cash Expenses +Operating Working Capital Cash Flow Operating Activities

64 Another Key Ratio: Cash Flow Yield LIQUIDITY: Ability to generate sufficient cash to pay bills when due and to meet unexpected needs for cash. Revenue Net Income (Loss) Cash Flow from (used by) Operating Activities Total Assets Total Liabilities Total Equity Cash Flow Operating Activities Net Income Are operating activities generating sufficient cash flows?

65 E14-4 Cash Management Policies Kraft Foods, Kellogg s, General Mills For each company compute the missing dollar amounts, and briefly describe the cash management policy. Company Cash from Operations Cash from Investments Cash from Financing Net Change in Cash Kraft Foods $5,084? ($2,988) $857 Kellogg s 1,643 (370) (1,194)? General Mills? (289) (1,450) 89

66 E2-2 Identifying financing, investing, and operating transactions Listed below are 8 transactions. In each case, identify whether the transaction is an example of financing, investing, or operating activities and which of the financial statements it would affect. 1. Company borrowed $50,000 in cash, signed a 10-year note payable units of inventory are purchased from suppliers on account for $12, The utility bill is paid at the end of the month, $5, Services are performed, and customers are billed for $13, parcels of real estate are purchased for a total of $55,000 in cash. 6. A long-term investment in a equity security is sold for $4,500 cash. 7. Principal payments are made on outstanding debts. 8. Cash is received from customers for services completed in the previous period.

67 E4-9 Preparing T-account for cash Prepare the cash T-account (assume beginning balance is $5,000). 1. Issued 600 shares of stock for $25 each. 2. Sold services for $4, Paid wages of $1, Purchased land as a long-term investment for $9, Paid a $2,000 dividend. 6. Sold land with a book value of $3,000 for $3, Paid $1,500 to the bank: $900 to reduce the principal on the outstanding loan and $600 as an interest payment. 8. Paid miscellaneous expenses of $1,800.

68 T-account for cash to Statement of Cash Flows

69 E2-12 Preparing a statement of cash flows From the following transactions, prepare a statement of cash flows for Emory Inc. in the proper form. The company began the year with a cash balance of $25,000. Describe and evaluate the company s cash management activities during the year. 1. Borrowed $30,000 from a bank, signing a long-term note. 2. Performed services for $45,000, receiving $40,000 in cash and a $5,000 receivable. 3. Incurred expenses of $34,000; paid $23,000 in cash and $11,000 is still payable. 4. Purchased equipment for $28,000; paid $23,000 in cash and signed a long-term note payable for the remainder. 5. Paid the shareholders a dividend in an amount that ensured an ending cash balance of $25,000.

70 E2-12 Statement of Cash Flow-Direct

71 E14-9 Cash Flows from Transactions-Direct method Prepare a statement of Cash flows (direct method) from Driftwood Shipbuilders following transactions during 2012: 1. Sold $6,000 of no-par common stock. 2. Purchased $6,000 of inventory on account. 3. Purchased new equipment for $5,000 cash. 4. Collections on accounts receivable totaled $10, Made payments of $5,000 to suppliers. 6. Declared and paid dividends of $2, Paid rent of $6,000 for the last six months of 2011 and $6,000 for the first six months of Made sales totaling $100,000; $35,000 on account and the remainder in cash. 9. Paid $40,000 in cash for miscellaneous expenses. 10. Sold investments with a cost of $20,000 for $25,000.

73 Cash Conversion Cycle OPERATING ASSET MANAGEMENT: Ability to utilize current assets and liabilities in a way that supports growth in revenues with minimum investment. Measures the time it takes from cash invested in inventory to cash received from customers versus the time it takes to pay suppliers. (The time required to make or buy products, finance the products, and to sell & collect for them.) Days Inventory + Days Receivables - Days Payables Cash Conversion Cycle Operating Cycle If Operating Cycle is > Days Payables then Financing Gap If Operating Cycle is < Days Payables then able to Self-finance

74 Example In 2009 Coca-Cola had the following ratios: Days Inventory = 75 days Days Receivables = 40 days Days Payables = 45 days Was there a financing gap?

BUS :30 Fall TA Office Hours T&R 5-6pm W520

BUS :30 Fall TA Office Hours T&R 5-6pm W520 BUS210 9.3.14 8:30 Fall 2014 TA Office Hours T&R 5-6pm W520 After putting your name on your papers, Turn in TPI (only if attended first class), Student Consent form, and VARK Learning styles Financial