SENIOR OUTCOMES SEMINAR (BU385) ACCOUNTING. BASIC CONCEPTS Going concern concept Cost principle...

SENIOR OUTCOMES SEMINAR

(BU385)

ACCOUNTING

BASIC CONCEPTS

•Going concern concept

•Cost principle

•Revenue principle

•Matching principle

•Cash basis accounting

•Accrual basis accounting

TYPES OF BUSINESSORGANIZATIONS

A. Proprietorship

B. Partnership

C. Corporation

TYPES OF BUSINESSORGANIZATIONS

A. Proprietorship: 1. Usually small retail business

or individual professional business (Lawyer and CPA)

2. Single owner with personal liability

TYPES OF BUSINESSORGANIZATIONS

B. Partnership: 1. More than one owner

2. Each owner is a partner with personal liability (general partnership)

TYPES OF BUSINESSORGANIZATIONS

C. Corporation: 1. Owned by stockholders with

limited liability

2. Dominant form of business in the US

The Accounting Equation

•ASSETS = LIABILITIES + OWNERS’ EQUITY

Or•NET WORTH = ASSETS – LIABILITIES(DEBT)

Also•Current assets + Fixed assets = Total assets

•Short term debt + Long term debt = Total debt/liab.

FINANCIAL STATEMENTS

A. Balance Sheet

B. Income Statement

C. Statement of Cash Flows

D. Statement of Retained Earnings

5

1-5 2-5

U.S. Corporation Balance Sheet –Table 2.1

BALANCE SHEET ITEMS(Assets)

A. Market value vs. Book value

B. Inventory1. LIFO/FIFO2. Beg. Inv. + Production –

COGS=Ending Inventory

C.Fixed Assets1. MACRS vs. Straight Line

BALANCE SHEET ITEMS(Depreciation)

Straight Line: $100,000 over 5 years

Year Annual Deprec. Book ValueCost $100,0001 $20,000 80,000

2 $20,000 60,0003 $20,000 40,0004 $20,000 20,0005 $20,000 0

BALANCE SHEET ITEMS(Depreciation)

7 year MACRS: $100,000 over 8 yearsYear Annual Deprec. Book Value

(amount) (rate)Cost $100,0001 $14,290 14.29% 85,710

2 $24,490 24.49% 61,2203 $17,490 17.49% 43,7304 $12,490 12.49% 31,2405 $ 8,930 8.93% 22,310 6 $ 8,920 8.92% 13,3907 $ 8,930 8.93% 4,4608 $ 4,460 4.46% 0

BALANCE SHEET ITEMS(Liabilities/Equity)

A. Liabilities1. Short term (AP, NP)2. Long term (Bonds)

B. Stockholders’ Equity1. Retained Earnings = Net

Income - Dividends

9

1-9 2-9

U.S. Corporation Income Statement - Table 2.2

INCOME STATEMENT

•Fixed Costs (FC) vs Variable Costs(VC)

•Breakeven point: Revenues = Expenses

•Contribution Margin(CM) = Price - VC

•Net Income (Op Prof) = Sales – VC - FC

•Breakeven point = FC / CM

Breakeven Point (example)

•Fixed Costs (FC) = $9,000 •Variable Costs (VC) = $2.40/gal•Price = $4.00/gal

•Breakeven point: Revenues = Expenses

•Contribution Margin(CM) = Price – VCCM = $4.00 - $2.40 = $1.60

•Breakeven point = FC / CM Breakeven = $9,000/$1.60 = 5,625

•Total Rev = $4.00 * 5625 = $22,500

INCOME STMT ITEMS(Operating Leverage)

A. Operations: 1. Sales – FC – VC = Operating Profit

2. Increased FC increases operating leverage.

3. A small change in sales leads to large change in EBIT-operating profit.

B. Increasing leverage increases returns to investors.

INCOME STMT ITEMS(Financial Leverage)

A.Financing (financial leverage):1. Interest charges (fixed cost of debt)2. EBIT – I – T = EAT (net income)3. Increased debt increases interest

charges and financial leverage.

B. Increasing leverage increases returns to investors.

STATEMENT OF CASH FLOWS(Source/Use)

A.Funds flow income statementNet Cash Flow = NI + Depre

B. Funds flow balance sheet1. Increase Assets: use2. Decrease Assets: source3. Increase Liability: source4. Decrease Liability: useOr Changes in balance sheet 1.Credits = Sources of funds2.Debits = Uses of funds

Sample Statement of Cash Flows

Cash, beginning of year 58 Financing Activity

Operating Activity Decrease in Notes Payable -93

Net Income 689 Decrease in LT Debt -248

Plus: Depreciation 116 Decrease in C/S (minus RE) -94

Decrease in A/R 36 Dividends Paid -206

Decrease in Inventory 60 Net Cash from Financing -641

Increase in A/P 4 Net Increase in Cash 638

Increase in Other CL 309 Cash End of Year 696

Less: Increase in other CA -39

Net Cash from Operations 1,175

Investment Activity

Sale of Fixed Assets 104

Net Cash from Investments 104

Numbers in millions

Statement of

Retained Earnings

Balance of RE, 12/31/05 $710.0 Add: Net Income, 2006 113.5 Less: Common Dividends (57.5)

Balance of RE, 12/31/06 $766.0

TYPES OF ACCOUNTING METHODS

A. Job order cost: job specific, geared towards customized, unique cost object.

B. Process cost: used in mass production environment.

C. Activity based cost: refines costing system by identifying individual activities as cost objects.

D. Standard cost: budgeted amounts.

TYPES OF BUDGETS

A. Strategic Budgets

B. Capital Budgets

C. Operating Budgets

C. Cash Budgets

CASH BUDGET

Collections: 30% cash, 70% creditCredit collections: 65% current month,20%/10% next two months respectively

Month: 1 2 3 4 collections month 4Sales 500 600 800 1000Cash 300 (1000*.3)CreditCurrent 455 (700*.65)One month lag 112 (800*.70*.2)Two months lag 42 (600*.70*.1)Total collections (month 4) 909