accounting by huangyuarong

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									  Unit 2 – Finance
Topic 1 - Accounting
                 Accounting
• Accounting Information
  helps individuals both
  working for the company
  and those who may have
  another financial interest
  in the company make
  accurate and timely
  decisions.
Users of Accounting Information
             Examples include…
Managers
• Where 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?
  Users of Accounting Information
              Examples include…
Banks
• Do 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.

Investors
• Should I buy shares in this company?
• Is this company making steady profits and
  paying out regular dividends.
• Do I want to sell my shares?
        Accounting Defined

Accounting
• The process of recording, analyzing, and
  interpreting the economic/financial
  activities of a business.
        Accounting Concepts
Transaction
• Any business activity that involves the
   exchange of money.
Examples:
1. Company purchases computer equipment for
   $5000.00.
2. Company pays an employee $300 for wages
   earned.
3. A customer purchases $100 worth of
   merchandise
4. The business pays a portion of the bank loan it
   owes to the bank.
        Accounting Concepts
Bookkeeping
• The recording of
  all the business
  transactions
• Most businesses
  use a computer
  software to record
  and track financial
  information.
              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 $20 000
• The business bank account increases.
• The total debt the business now owes increases.
            Accounting Concepts
Net Worth
            The dollar value of a person after
            subtracting all their debts from what
            they own. (Own – Owe = Net Worth)

Owner’s Equity
          The dollar value of a business after
          subtracting all its debts from what the
          business owns.
          (Assets – Liabilities = Owner’s Equity)
Calculating Your Net Worth
  OWN              OWE
      Calculating Your Net Worth

 OWN         -   OWE = Net Worth


Individual
  Assets     -   Liabilities = Net Worth
            Net Worth For Business

Sole Proprietorship Business:
• One owner
• Assets - Liabilities = Owner’s Equity

Partnership
• Two or more owners
• Assets – Liabilities = Partnership Equity

Corporation
• Shareholders are the owners
• Assets – Liabilities = Shareholder’s Equity
           Accounting Concepts
Assets
• Item that is owned
• Items may be purchased with cash (equity); or
• Items may be purchased through debt (a loan)
• Items may be a gift
• Money a customer owes the business

Examples may include:
• Equipment
• Furniture
• Electronics
• House
• Building
• Automobiles
• Accounts Receivable – money owed by a customer
              Accounting Concepts
Liabilities
• Debts or amounts owed to others
   (creditors)

Examples:
• Bank Loan
• Accounts Payable – money owed
  to a supplier

Transaction 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.
        Canada’s Net Worth
• http://www.brillig.com/debt_clock/

• http://www.usdebtclock.org/
Preparing Financial Statements

Three Types of Financial Statements

1. Balance Sheet
2. Income Statement/ Statement of
   Operations
3. Cash Flow Statement
              Balance Sheet
Balance Sheet
• States the financial
  position of a company
  on a specific date
• Lists the company’s
  assets, liabilities and
  owner’s equity.
  Preparing the Balance Sheet

Step 1: Fill in the statement heading
• Who? The name of the business
• What? The name of the financial
            statement
• When? The date the statement is
            prepared
  Preparing the Balance Sheet
Step 2: List the Assets
Liquidity
• Assets 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.
  Preparing the Balance Sheet

Step 3: List the Liabilities
• Listed 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.
   Preparing the Balance Sheet
Step 4 – Complete the Owner’s Equity Section
• State the owner’s equity amount

Step 5 – Balancing the Balance Sheet
• Total 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.
                          Mark’s Repair Shop
                            Balance Sheet
                          September 30, 2011


Assets                           Liabilities
Cash              $ 6 500        Accounts Payable                      $ 7 350
Accounts Receivable   8 100      Bank Loan                              11 050
Supplies               500       Mortgage Payable                      110 000
Inventory            4 000       Total Liabilities                    $128 400
Equipment           25 500
Building          175 000        Owner’s Equity
                  _______        Bianchet, Equity                      $ 91 200
Total Assets      $219 600       Total Liabilities & Owner’s Equity   $ 219 600
Report Form of a Balance Sheet
                                Marks’ Repair Shop
                                  Balance Sheet
                               September, 30, 2011

Assets
Cash                                   $   6 500
Accounts Receivable                        8 100
Supplies                                     500
Inventory                                  4 000
Equipment                                 25 000
Building                                 175 000
Total Assets                            $ 219 600

Liabilities
Accounts Payable                       $   7 350
Bank Loan                                 11 050
Mortgage Payable                         110 000
Total Liabilities                      $ 128 400

Owner’s Equity
Bianchet, Equity                          91 200
Total Liabilities and Owner’s Equity   $ 219 600
                 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.

Revenues
• Money received or the promise of money, received from the sale of goods
  and/or services.

Example
• Book 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)

Expenses
• Costs of operating the business on a daily basis.
• Salaries and wages expense, hydro expense, telephone expense,
   advertising expense
                  Income Statement
Service Business:
• Net Profit/Income = Total Revenues > Total Operating Expenses
• Net Loss = Total Revenues < Total Operating Expenses

Merchandise 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.
  Preparing the Income Statement

Step 1: Fill in the statement heading
• Who? The name of the business
• What? The name of the financial statement
• When? 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)
  Preparing the Income Statement
Step 2 :
• List all the sources of revenue

Step 3:
• Prepare the Cost of Goods Sold Section for a
  Merchandise Company

Step 4:
• List all the operating expenses
• This is step 3 for a Service Business.

Final Step:
• Calculate the net income/profit or net loss.
                Mark’s Repair Shop
                 Income Statement
      For the month ending September 30, 2011

Revenue
Repairs Revenue        $ 9 900
Total Revenue                      $ 9 900

Operating Expenses
Salaries               $ 2 600
Rent                     2 000
Advertising                850
Supplies                   185
Utilities                  235
Insurance                  150
Delivery Expense           770
Total Expenses                     $ 6 790
Net Income                         $ 3 110
                 Clare’s Shirt Shop
                 Income Statement
      For the month ending September 30, 2011

Revenue
Sales                  $ 5 000
Total Revenue                       $ 5 000

Cost of Goods Sold
Cost of Goods Sold                    1 000
Gross Profit                        $ 4 000

Operating Expenses
Wages                  $ 1 300
Rent                     1 000
Advertising                300
Supplies                   100
Utilities                  200
Insurance                  150
Total Expenses                      $ 3 050
Net Income                          $ 950
          Cash Flow Statement
Cash Inflow
• Lists all the cash coming
  into the business (i.e.
  cash sales, payment of
  Accounts Receivables, )

Cash Outflow
• Lists all the cash going
  out of the
  company (payment of
  Accounts
   Payable, cash payment
  of bills, or
  purchases of assets,
  payments
   made on loans)
     Cash Flow Terminology
Positive Cash Flow
• There is more money flowing into the
  company than flowing out of it.

Negative Cash Flow
• There is more money flowing out of the
  company than there is flowing into it.
               Key Points
• Just 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 debts

• Cash outflows can still exceed any net
  profits.
       Cash Flow Key Points
• A negative cash flow can lead to
  insolvency and potentially bankruptcy of a
  company if it is not managed carefully.
     7 Ways To Boost Your Cash Flow
1.    Increase the price of goods
2.    Reduce your costs and expenses
      where possible. Shop around for the
      best deal.
3.    Consider leasing instead of
      purchasing.
4.    Reduce the amount of inventory on
      hand.
5.    Use long-term debt as much as
      possible as opposed to short-term
      debt
6.    Manage your Accounts Receivables
      better
7.    Stretch your deadlines for Accounts
      Payable if possible
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.
              Resources
1. Wilson, Jack et al. The World of
   Business (5th ed.) Toronto: Nelson
   Education Ltd., 2007

								
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