Forms of Business1. Sole Prop | 2. Partnership | 3. Corporation | Tax advantages | Tax advantages | Higher taxes | Easily formed | Skill of owners | Complex to organize | Owner control | Shared control | Easy transfer control | Personal liability | Personal liability | Limited liability | Limited life | Limited life | Easier to raise money |
Statement of Earnings = Income StatementHow well a business performs. Profit and loss. | Net Income = Revenue | - Expenses | Rev = asset (cash) a company gets for a good or service. Recorded at delivery to customer. | Exp = cost of assets used or liabilities created during operations. |
Statement of Cash FlowsChanges in cash over time. In/outflows & related to: | Operating | Investing | Financing | Running the business | Buy/sell LTA to run ops | Get capital to run business | Acc Rec (income) | Buy/sell P, P & E | Issuing CS, Bonds, Bank invests | Acc Pay (services, wages) | Lending $ (loans) | Pay out Divs, Retire (pay back) Debt |
SCF informs investors & creditors and assess company's:
- Ability to produce future net cash inflows
- Ability to meet obligations and pay dividends
- Need for external financing
- Reasons for diffs btn NI & cash receipts
- SFP eval of effects of cash & noncash I & F transactions. Cash vs Accrual AccountingCash Basis | Accrual Basis | = Rev recorded when cash received | = Rev recog when earned | = Exp recorded when cash paid | = Exp recog when incurred |
Accrual Basis AccountingPeriodicity, Revenue Recognition Principle, Matching Concept | - Done at end of accounting period, more meaningful comparisons btn companies & across time, predictive of future income | - Impacts 1(+) income statement account and 1 SFP account (not Cash Flow statement) | ACCRUED REVENUE = earned Rev, no cash received. Adj needed: record Rev & in A (AR). If not done: understated A (AR), Rev, NI, Profit | ACCRUED EXPENSE = incurred Exp, no cash is paid. Adj needed: record Exp & in L (AP). If not done: understated L (AP), Exp, overstated NI, SE, Profit | UNEARNED REVENUE = receive cash (in A), service not done (de L). Adj needed: record Rev & de L (unearned Rev). If not done: overstated L, understated Rev, NI, SE, Profit | PREPAID EXPENSE = cash is paid (de A, cash), service not received (in A, prepaid exp). Adj needed: record Exp & de A (prepaid Exp). If not done: overstated A, NI, SE, Profit, understated Exp. |
Revenue Recognition can occur when the Rev and Exp is reliably measurable and the following has been transferred: managerial control, risks, economic benefits Nature of InventoryMERCHANDISER = purchase inv ready to sell | MANUFACTURER = Raw M-> WIP -> Fin Goods | Inventory = Asset, Expense = COGS | PERPETUAL INV SYSTEM = cont updated, records Rev & Cost at same time, more expensive, better for decision-making | PERIODIC INV SYSTEM = balance prod at end of accounting period w/ physical count, est using gross profit method, cheaper | Analyzing Inv: 2 main KPI = GP Ratio & Inv Turnover Ratio |
| | Statement of Financial PositionBalances what co has with what it owes at specific point in time | Assets = | Liabilities | + Shareholder's Equity | Resources owned or controlled by company | Obligations incurred & need to be settled. Creditor's claim | Owners' residual interest in the company | CURRENT | CURRENT | Common Shares | Cash, supplies | Salaries | Retained Earnings | Accounts Receivable | Accounts Payable | - Revenue | Prepaid rent/ins | Unearned Revenue | - Expense | NON CURRENT | NON CURRENT | - Dividends | LTI (P, P & E) | Loans | Intangible (e.g. patent) | Notes, Bonds Payable |
Statement of Changes in EquityHow much income was kept and how much was given to owners over a period of time | Retained Earnings (end) = RE (start) + Net Income - Dividends |
DefinitionsAccount = records of in's & de's in each element of SFP | Net Income = Income from Ops - (Non-op Rev + Exp) - Income tax | Cost in Year = Inv(s) + Exp(net) | COGS = Inv(s) + Exp(net) - Inv(end) | Gross Profit (Margin) = Net Sales (Revenue) - Cost of Goods Sold | Income from Ops = Gross Margin - Op Exps | Cross Sectional Analysis = compares one corporation to another & to industry averages | Time series (Trend) Analysis = compares a corporation across time | Horizontal Analysis = SFP items are expressed as % of base yr (shows trends in time) | Vertical Analysis = SFP items are expressed as % of largest amount on SFP |
Changes in SFP AccountsClassification | Cash Effect | SFP Affected | Example | Operating | Inflow (+) | de CA | Collect AR | | | | in CL | Unearned rev | | | | in RE | Cash sale | | | Outflow (-) | in CA | Buy inv | | | | de CL | Pay AP | | | | de RE | Pay int | Investing | Inflow (+) | de LTA | Sell equip | | | Outflow (-) | in LTA | Buy equip | Financing | Inflow (+) | in LTL | Issue debt | | | | in SE | Issue CS | | | Outflow (-) | de LTL | Repay debt | | | | de SE | Pay Div | NC I & F | Inflow (+) | NC A | Deprec Exp | | | Outflow (-) | NC Rev |
Cash Flows Impact SFP
in CASH = in L + in SE + de NCA
de CASH = de L + de SE + in NCA |
