Forms of Business
1. 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 Statement
How 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 Flows
Changes 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 Accounting
Cash Basis |
Accrual Basis |
= Rev recorded when cash received |
= Rev recog when earned |
= Exp recorded when cash paid |
= Exp recog when incurred |
Accrual Basis Accounting
Periodicity, 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 Inventory
MERCHANDISER = 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 Position
Balances 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 Equity
How much income was kept and how much was given to owners over a period of time |
Retained Earnings (end) = RE (start) + Net Income - Dividends |
Definitions
Account = 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 Accounts
Classification |
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
|
