1. Economics /Management 4 Financial Accounting Financial Reporting

2. Starting a Business Firms Need? 1.A Value Proposition – an idea that offers a benefit to customers at a cost to the firm such that: $Benefit > $Cost 2.A Business Plan – a document that describes on the Value Proposition will be developed, advertised, and distributed. 3.A Funding Plan – a portion of the Business Plan that describes on the Firm will be financed, i.e. where the money to get started will come from and how it will be used.

3. Firms Need Cash to acquire Assets Financial Capital Financial Capital represents the Cash raised when firms sell Financial Securities 1.Stocks – shares of the Firm sold to investors, also called Share-holders – Equity Capital 2.Bonds – loans from creditors, bond-holders – Debt Capital

4. Stock & Bond Holders want Information Financial Reports are that information 1.The Annual Report to Shareholders 2.Form 10K (audited, annual) 3. Interim (unaudited, quarterly) 10-Q’s 4. Other Disclosures, e.g. Press Releases

5. The Form 10K Issued 45 days after the end of the Firm’s Fiscal Year (“FY”) and contains 1.Selected Financial Data 2.MD&A 2.Quantitative & Qualitative Disclosures about Risk 3.Financial Statements & Footnotes 4.Disagreements with Accountants 5.Controls and Procedures 6.Executive Compensation

6. Financial Statements Stylized Quantitative Summaries of the Firm’s Financial Health 1.Statement of Financial Position, called the Balance Sheet 2.Statement of Earnings, called the Income Statement 3.Statement of Cash Flows “SCF” 4.Statement of Shareholder’s Equity

7. Financial Statements Accrual-based Accounting Independent but connected Periodic Summaries of: 1.What the firm owns and owes 2.The firm’s financial performance 3.Its sources and uses of Liquidity 4.The firm’s owners claims

8. Accounting A formal process that transforms commercial events into financial statements … There are five basic elements of Accounting: 1)Assets 2)Liabilities 3)Equity 4)Revenue 5)Expense

9. A S E T S L I A B I L I T I E S E Q U I T Y Balance Sheet

10. A = L + Eq The Balance Sheet Equation Financial Capital Debt and Equity Monetary – cash, receivables Non-monetary = Fixed assets

11. Cash Receivables Inventory Supplies Pre Paid Expenses Long-lived Assets Accum. Depreciation Customer Advances Payables Accrued expenses Other CL Bonds, Loans Paid in Capital Retained earnings Trade Credit Interest- bearing Debt Capital Stock Earnings The 4 sources of capital Balance Sheet

12. Single Step Income Statement For the 3 months ending March 31, 2015 Revenue 18,000 Expenses(13,900)77.2% Profit 4,10022.8%

13. Revenue : inflows of cash or claims to cash from primary activities * Cash received when? 1.in Advance – received but not yet earned 2.at Delivery – received and earned 3.the Next accounting period – earned but not received * Revenue is earned when products are “delivered”.

14. Expenses : Costs related to primary activities Three categories*: 1.Direct – outflows matched to the product 2.Indirect – outflows not proportional to the product 3.Periodic – related to the accounting period * Many types - look at the Chart of Accounts in the Reader.

15. Expenses : O utflows of cash – costs - or uses of assets or new obligations Cash paid when? 1.in Advance – service paid-for but not-yet used. Booked as a pre-paid Expense 2.at time of Use – paid-for and consumed 3.the Next accounting period – consumed but not paid-for. Booked as accrued Expense * Revenue is earned when products are “delivered”.

16. Four-step Income Statement For the 3 months ending March 31, 2015 Revenue18,000 COGS( 6,000) Gross Profit12,000 Operating expenses( 7,600) Operating Earnings 4,400 Interest ( 300) Pre-tax Income 4,100 Tax expense 0 Net Earnings 4,10022.8% (13,900)

17. Types of Expenses

18. Multi-step Income Statement For the 3 months ending March 31, 2015 Revenue18,000 Margins COGS(6,000) Gross Profit12,00066.7% SG&A(6,600) EBITDA 5,40030.0% Depreciation(1,000) EBIT 4,40024.4% Interest (300) EBT 4,100 Taxes 0 Net Income 4,10022.8%

19. A = L + Eq + P-in-K + RE 0 +( Rev 1 – Ex 1 ) RE 1 The Components of Equity