2 AccountingAccounting Information helps individuals both working for the company and those who may have another financial interest in the company make accurate and timely decisions.
3 Users of Accounting Information Examples include…ManagersWhere can we reduce our company expenses?Is it wise for the company to stop producing a particular product.Should the company purchase another company?How much profit did we make this year?Can we afford to take on more debt?
4 Users of Accounting Information Examples include…BanksDo we want to provide a loan to this company? How much debt do they already have? What were their sales and profits like in previous years.InvestorsShould I buy shares in this company?Is this company making steady profits and paying out regular dividends.Do I want to sell my shares?
5 Accounting Defined Accounting The process of recording, analyzing, and interpreting the economic/financial activities of a business.
6 Accounting Concepts Transaction Any business activity that involves the exchange of money.Examples:Company purchases computer equipment for $Company pays an employee $300 for wages earned.A customer purchases $100 worth of merchandiseThe business pays a portion of the bank loan it owes to the bank.
7 Accounting Concepts Bookkeeping The recording of all the business transactionsMost businesses use a computer software to record and track financial information.
8 Accounting Concepts Double-Entry Bookkeeping Each transaction involves at least two changes.Examples:Employees get paid $3000 for weeks wages.Business bank account decreases.The total amount of money the company has spent to date on wages increases.The business purchases computer equipment for $500.The business bank account decreases.The amount the business has spent on computer equipment has increased.The bank receives a bank loan for $20 000The business bank account increases.The total debt the business now owes increases.
9 Accounting Concepts Net Worth Owner’s Equity The dollar value of a person after subtracting all their debts from what they own. (Own – Owe = Net Worth)Owner’s EquityThe dollar value of a business after subtracting all its debts from what the business owns.(Assets – Liabilities = Owner’s Equity)
11 Calculating Your Net Worth OWN OWE = Net WorthIndividualAssets Liabilities = Net Worth
12 Net Worth For BusinessSole Proprietorship Business:One ownerAssets Liabilities = Owner’s EquityPartnershipTwo or more ownersAssets – Liabilities = Partnership EquityCorporationShareholders are the ownersAssets – Liabilities = Shareholder’s Equity
13 Accounting Concepts Assets Item that is owned Items may be purchased with cash (equity); orItems may be purchased through debt (a loan)Items may be a giftMoney a customer owes the businessExamples may include:EquipmentFurnitureElectronicsHouseBuildingAutomobilesAccounts Receivable – money owed by a customer
14 Accounting Concepts Liabilities Debts or amounts owed to others (creditors)Examples:Bank LoanAccounts Payable – money owed to a supplierTransaction example:You received a bank loan to purchase a car.Your assets increased by the amount of the car.But the total amount you owe, your liabilities have also increased by the same amount.
15 U.S.’s Net Worth http://www.brillig.com/debt_clock/
16 Preparing Financial Statements Three Types of Financial StatementsBalance SheetIncome Statement/ Statement of OperationsCash Flow Statement
17 Balance Sheet Balance Sheet States the financial position of a company on a specific dateLists the company’s assets, liabilities and owner’s equity.
18 Preparing the Balance Sheet Step 1: Fill in the statement headingWho? The name of the businessWhat? The name of the financial statementWhen? The date the statement is prepared
19 Preparing the Balance Sheet Step 2: List the AssetsLiquidityAssets are listed in order according to how easily they can be converted into cash.For example, cash requires no conversion so it is listed first.Accounts receivable is money customers owe and is usually paid within 30 days, so it is listed second.
20 Preparing the Balance Sheet Step 3: List the LiabilitiesListed in the order by maturity date - the date which they must be repaid with the earliest being recorded first.For example, accounts payable will likely be repaid before a bank loan and a mortgage.
21 Preparing the Balance Sheet Step 4 – Complete the Owner’s Equity SectionState the owner’s equity amountStep 5 – Balancing the Balance SheetTotal Assets should be equal to Total Liabilities and Owner’s Equity.Total Assets should be indicated on the same line as Total Liabilities and Total Owner’s Equity.The totals should be double underlined.
22 Mark’s Repair Shop Balance Sheet September 30, 2011 Assets LiabilitiesCash $ Accounts Payable $Accounts Receivable Bank LoanSupplies Mortgage PayableInventory Total Liabilities $EquipmentBuilding Owner’s Equity_______ Bianchet, Equity $Total Assets $ Total Liabilities & Owner’s Equity $
23 Report Form of a Balance Sheet Marks’ Repair ShopBalance SheetSeptember, 30, 2011AssetsCash $Accounts ReceivableSuppliesInventoryEquipmentBuildingTotal Assets $LiabilitiesAccounts Payable $Bank LoanMortgage PayableTotal Liabilities $Owner’s EquityBianchet, EquityTotal Liabilities and Owner’s Equity $
24 Income Statement Income Statement States the revenues and expenses of a business and its net profit/income and/or loss over a specific period of time.RevenuesMoney received or the promise of money, received from the sale of goods and/or services.ExampleBook Store sold $30 worth of books for cash.Book Store sold $1 000 worth of text books on credit. The school will pay the book store in 30 days. (Accounts Receivable)ExpensesCosts of operating the business on a daily basis.Salaries and wages expense, hydro expense, telephone expense, advertising expense
25 Income Statement Service Business: Net Profit/Income = Total Revenues > Total Operating ExpensesNet Loss = Total Revenues < Total Operating ExpensesMerchandise Business:Businesses purchase merchandise and then sell it at a higher price to consumers.Cost of the merchandise/inventory sold must also be subtracted from the total revenues.Net Profit = Total Revenues – Cost of Goods Sold – Operating Expenses; when Total Revenues > than Cost of Goods Sold + Operating Expenses.
26 Preparing the Income Statement Step 1: Fill in the statement headingWho? The name of the businessWhat? The name of the financial statementWhen? The period of time which the statement is covering.i.e. (For the year ended December 31, 2009)(For the month ended November 30, 2009)(For 3 months ended July 30, 2009)
27 Preparing the Income Statement Step 2 :List all the sources of revenueStep 3:Prepare the Cost of Goods Sold Section for a Merchandise CompanyStep 4:List all the operating expensesThis is step 3 for a Service Business.Final Step:Calculate the net income/profit or net loss.
28 Mark’s Repair Shop Income Statement For the month ending September 30, 2011 RevenueRepairs Revenue $Total Revenue $Operating ExpensesSalaries $RentAdvertisingSuppliesUtilitiesInsuranceDelivery ExpenseTotal Expenses $Net Income $ 3 110
29 Clare’s Shirt Shop Income Statement For the month ending September 30, 2011 RevenueSales $Total Revenue $Cost of Goods SoldCost of Goods SoldGross Profit $Operating ExpensesWages $RentAdvertisingSuppliesUtilitiesInsuranceTotal Expenses $Net Income $
30 Cash Flow Statement Cash Inflow Lists all the cash coming into the business (i.e. cash sales, payment of Accounts Receivables, )Cash OutflowLists all the cash going out of the company (payment of Accounts Payable, cash payment of bills, or purchases of assets, payments made on loans)
31 Cash Flow Terminology Positive Cash Flow There is more money flowing into the company than flowing out of it.Negative Cash FlowThere is more money flowing out of the company than there is flowing into it.
32 Key PointsJust because a company has made a profit, does not mean it has a positive cash flow.Where does the cash from sales go to?- purchasing assets- paying expenses- paying off debtsCash outflows can still exceed any net profits.
33 Cash Flow Key PointsA negative cash flow can lead to insolvency and potentially bankruptcy of a company if it is not managed carefully.
34 7 Ways To Boost Your Cash Flow Increase the price of goodsReduce your costs and expenses where possible. Shop around for the best deal.Consider leasing instead of purchasing.Reduce the amount of inventory on hand.Use long-term debt as much as possible as opposed to short-term debtManage your Accounts Receivables betterStretch your deadlines for Accounts Payable if possible
35 Interpreting Financial Statement Comparing information from one year to the next or from one company to the next.Information is then used to help make effective business and financial decisions.
36 ResourcesWilson, Jack et al. The World of Business (5th ed.) Toronto: Nelson Education Ltd., 2007