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

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

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.

Measurement

Accounting Records

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 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, 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

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

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

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?

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?

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?

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

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

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

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

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

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??

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 15103 Change in Cash 872 C Liab. 899 Cash.Begin 1512 C Liab. 1052 LT Liab. 533 Cash.End 2384 LT Liab. 2296 Other SHE 3293 Other SHE 10096 RE 1606 Income Statement RE 1659 T L+SHE 6331 Revenue 5089 T L+SHE 15103 Expenses 5036 Net Income 53 Statement of Shareholders Equity Other SHE Retained Earnings Begin 3293 1606 NI XXXXXXXXXXXXXXX 53 Dividends XXXXXXXXXXXXXXX 0 Changes 6803 XXXXXXXXXXXXXXXXX End 10096 1659

Home Depot, Inc. Financial statement relationships Balance Sheet.Begin Balance Sheet.End Cash 1987 Statement of Cash Flows Cash 2494 Other CA 12533 Cash-Operating 6975 Other CA 12878 LT Assets 25998 Cash-Investing (1432) LT Assets 25712 T Assets 40518 Cash-Financing (5034) T Assets 41084 Change in Cash 507 C Liab. 9376 Cash.Begin 1987 C Liab. 11462 LT Liab. 13244 Cash.End 2494 LT Liab. 11845 Other SHE 652 Other SHE (2261) RE 17246 Income Statement RE 20038 T L+SHE 40518 Revenue 74754 T L+SHE 41084 Expenses 70219 Net Income 4535 Statement of Shareholders Equity Other SHE Retained Earnings Begin 652 17246 NI XXXXXXXXXXXXXXX 4535 Dividends XXXXXXXXXXXXXXX (1743) Changes (2913) XXXXXXXXXXXXXXXXX End (2261) 20038

Google, Inc. Financial statement relationships Balance Sheet.Begin Balance Sheet.End Cash 14778 Statement of Cash Flows Cash 18898 Other CA 45676 Cash-Operating 18659 Other CA 53988 LT Assets 33344 Cash-Investing (13679) LT Assets 38034 T Assets 93798 Cash-Financing (857) T Assets 110920 Change in Cash 4120 C Liab. 14337 Cash.Begin 14778 C Liab. 15908 LT Liab. 7746 Cash.End 18898 LT Liab. 7703 Other SHE 23373 Other SHE 26047 RE 48342 Income Statement RE 61262 T L+SHE 93798 Revenue 59825 T L+SHE 110920 Expenses 46905 Net Income 12920 Statement of Shareholders Equity Other SHE Retained Earnings Begin 23373 48342 NI XXXXXXXXXXXXXXX 12920 Dividends XXXXXXXXXXXXXXX 0 Changes 2674 XXXXXXXXXXXXXXXXX End 26047 61262

Financial statement relationships-self reporting quiz Balance Sheet 12.31.2013 Balance Sheet 12.31.2014 Cash 420 Statement of Cash Flows 12.31.2014 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-12.31.2013 7.=? C Liab. 995 LT Liab. 1,000 Cash-12.31.2014 6.=? LT Liab. 1,200 Other SHE 1,000 Other SHE 1,200 RE 500 Income Statement (year ending 12.31.2014) RE 3.=? T L+SHE 3,120 Revenue 4,200 T L+SHE 4.=? Expenses 4,050 Self-Reporting QUIZ Solve for unknowns 1.-8. and report answers to the email address given. Net Income 1.=? 1. Statement of Shareholders Equity (year ended 12.31.2014) 2. Other SHE Retained Earnings 3. 12.31.10 1,000 500 4. NI 1.=? 5. Dividends (70) 6. Changes 200 7. 12.31.11 2.=? 3.=? 8.

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

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?

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?

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

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?

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?

Company X

What do you remember?

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

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

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

Balance Sheet 12.31.Begin F/S & Accounting Equation A=L+SHE+R-E Balance Sheet 12.31.End Cash Statement of Cash Flows 12.31.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-12.31.Begin? C Liab. LT Liab. Cash-12.31.End? LT Liab. CC CC RE Income Statement (year ending 12.31.) RE T L+SHE Revenue Sales,Earned,Other T L+SHE? Expenses COGS,Oper.,Other Net Income? Statement of Shareholders Equity (year ended 12.31.) Contributed Capital Retained Earnings 12.31.Begin NI Dividends Stock Issue XXXXXXXXXXXXXXX XXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX 12.31.End??

P2-5 BS and IS relationships across 5 years 2011 2010 2009 2008 Assets: Cash 500 200 300 300 Acct receivable 700? 300 200 Inventory 400 400? 500 Land 400 400 200 100 PP&E 800 700 600 700 Liabilities & SHE Accts payable? 500 300 200 Bonds payable 700 800 600 500 Contrib Capital 600 600 400? RE 600 300 800 400 Sales? 700 1,100 1,000 Expenses 600?? 400 Net Income? (100) 400? Dividends 200???

Economic Events--> Transactions Reducing events to numbers

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.

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.

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.

E2-13 Financial statement relationships Balance Sheet 12.31.Begin Balance Sheet 12.31.End Cash Statement of Cash Flows 12.31.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-12.31.Begin? C Liab. LT Liab. Cash-12.31.End? LT Liab. CC CC RE Income Statement (year ending 12.31.) RE T L+SHE Revenue T L+SHE? Expenses Net Income? Statement of Shareholders Equity (year ended 12.31.) Contributed Capital Retained Earnings 12.31.Begin NI Dividends Stock Issue XXXXXXXXXXXXXXX XXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX 12.31.End??

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?

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?

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

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?

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

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. 2. 20 units of inventory are purchased from suppliers on account for $12,000. 3. The utility bill is paid at the end of the month, $5,200. 4. Services are performed, and customers are billed for $13,000. 5. 5 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.

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 $4,000. 3. Paid wages of $1,600. 4. Purchased land as a long-term investment for $9,000. 5. Paid a $2,000 dividend. 6. Sold land with a book value of $3,000 for $3,500. 7. 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.

T-account for cash to Statement of Cash Flows

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.

E2-12 Statement of Cash Flow-Direct

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 $10,000. 5. Made payments of $5,000 to suppliers. 6. Declared and paid dividends of $2,000. 7. Paid rent of $6,000 for the last six months of 2011 and $6,000 for the first six months of 2012. 8. 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.

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

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?