Introduction to Accounting

Introduction to Accounting E-book

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Discussion topics


Introduction to accounting

Introduction to Accounting


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Business Cycle

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

Background

Use of...
Introduction to Accounting

Introduction to Accounting

All Rights Reserved. Corporate Bridge

www.educorporatebridge.com
...
Starting a Business: some background

Introduction to Accounting



Kartik want to start a new business. Kartik sees the ...
What is a Business Cycle?

Introduction to Accounting



Simple Business Cycle for FastTrack Inc

Kartik Infuses
Capital
...
Introduction to Accounting

For financial courses on Financial Modeling , Investment
Banking , Equity Research , CFA , Acc...
Why do we use Financial Statements?
FastTrack Movers & Packers Transactions

Introduction to Accounting



Based on Karti...
Introduction to Accounting

Income Statement

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Income Statement – Jargons introduced!

Introduction to Accounting

The income statement shows the profit for the period o...
FastTrack Movers & Packers Revenues

Introduction to Accounting

Case 1: Revenues

If Kartik delivers 200 parcels in Decem...
FastTrack Movers & Packers Revenues
Case 2: Revenues

Introduction to Accounting

When Kartik receives the $1,000 worth of...
Income Statement - Expenses

Introduction to Accounting

Case 4: Expenses

FastTrack Movers and Packers borrowed $20,000 f...
Consolidating the Income Statement

Introduction to Accounting



FastTrack Income Statement as per the transaction discu...
Introduction to Accounting

Balance Sheet

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Balance Sheet – Jargons reintroduced!
“Snapshot" of a company's financial position at a given moment



Introduction to A...
Debits and Credits


Double Entry

Introduction to Accounting






Double entry is a 500-year-old accounting procedur...
Balance Sheet

Introduction to Accounting

Case 5: Cash and Common Stock

On December 1, 2007 Kartik starts his business F...
Balance Sheet

Introduction to Accounting

Case 5: Cash and Common Stock

On December 1, 2007 Kartik starts his business F...
Balance Sheet
Case 6: Purchase of Vehicle

Introduction to Accounting

On December 2, FastTrack Movers & Packers purchases...
Balance Sheet
Case 6: Purchase of Vehicle

Introduction to Accounting

On December 2, FastTrack Movers & Packers purchases...
Balance Sheet

Introduction to Accounting

Case 7: Prepaid Expenses

On December 2 when Kartik contacts an insurance agent...
Balance Sheet

Introduction to Accounting

Case 7: Prepaid Expenses

On December 2 when Kartik contacts an insurance agent...
Balance Sheet

Introduction to Accounting

Case 4 Revisited : Raising Debt

FastTrack Movers and Packers borrowed $20,000 ...
Balance Sheet

Introduction to Accounting

Case 4 Revisited : Raising Debt

FastTrack Movers and Packers borrowed $20,000 ...
Balance Sheet

Introduction to Accounting

Case 8: Inventory

Kartik keeps an inventory of packing boxes not only to use i...
Balance Sheet

Introduction to Accounting

Case 8: Inventory

Kartik keeps an inventory of packing boxes not only to use i...
Balance Sheet

Introduction to Accounting

Case 9: Unearned Revenues

In addition to 200 parcels delivered by FastTrack Mo...
Balance Sheet

Introduction to Accounting

Case 9: Unearned Revenues

In addition to 200 parcels delivered by FastTrack Mo...
Missing links
Accounts Receivables

Introduction to Accounting

Case 1&2: Revenues

If Kartik delivers 200 parcels in Dece...
Consolidating all cases in Income Statement

Introduction to Accounting

FastTrack Movers & Packers Inc.
Income Statement,...
Consolidated Balance Sheet

Introduction to Accounting

FastTrack Movers & Packers Inc
Balance Sheet, December 31st 2007
A...
Balance Sheet – Key questions?


Balance sheet shows the company’s assets worth?

Introduction to Accounting






YES...
Introduction to Accounting

Cash Flow Statement

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Private and Confidential – Not...
Cash Flow Statement – Cash is the King!
Purpose of this cash flow statement is to identify sources & uses of cash during t...
Calculating Cash flows

Introduction to Accounting

Cases
Case 1
Case 2
Case 3
Case 4
Case 4
Case 5
Case 6
Case 7
Case 8
C...
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Introduction to accounting-Financial Accounting by eduCBA

  1. 1. Introduction to Accounting Introduction to Accounting E-book All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  2. 2. Discussion topics  Introduction to accounting Introduction to Accounting   Business Cycle   Background Use of Financial Statements Income Statement   Accrual basis of accounting  Cash basis of accounting  Revenue recognition principle   Introduction Matching principle of costs Balance Sheet   Accounting Equation  Debit and Credit  Assets / Liabilities   Introduction Key Questions Cash flow Statement  Introduction  Calculating cash flow from operations, investing and finance All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  3. 3. Introduction to Accounting Introduction to Accounting All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  4. 4. Starting a Business: some background Introduction to Accounting  Kartik want to start a new business. Kartik sees the need for “Movers and Packers” business in Mumbai. He has researched this idea and has prepared a business plan that documents the viability of his new business  Kartik met his lawyer friend to discuss the form of business he should use. Given his situation, they concluded that a corporation will be best form. Kartik names his company as FastTrack Inc?  What is a corporation?  What are other form of business types?  Kartik is a hard worker and a smart man, but admits he is not comfortable with matters of accounting  Kartik asks his banker to recommend a professional analyst who is skilled in explaining business accounting to someone without an accounting background  Kartik wants to understand financial statements and wants to keep on top of his new business  Kartik asks you the following questions  What is business cycle?  Why do we use financial statements at all? All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  5. 5. What is a Business Cycle? Introduction to Accounting  Simple Business Cycle for FastTrack Inc Kartik Infuses Capital Uses the money to purchase trucks, inventory, pay labor and admin costs Receives Money from Clients, Earns Profit/Loss Cash Inflow Shareholder of the firm Cash Outflow Provides Service “Movers and Packers”  Kartik receives money from the clients – Profit or Loss  Kartik has following options  Kartik can reinvest the profit made in the business to expand his business or  Can simply keep the money! All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  6. 6. Introduction to Accounting For financial courses on Financial Modeling , Investment Banking , Equity Research , CFA , Accounting , MS Excel , Visual Basic (VBA) , Project Finance etc. Visit our site https://www.educorporatebridge.com For Various FREE resources like online courses , E-Books , Quizzes , Downloadable pdfs etc visit this page Contd. All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  7. 7. Why do we use Financial Statements? FastTrack Movers & Packers Transactions Introduction to Accounting  Based on Kartik’s business plan, you now understand that there will likely be thousands of transactions each year  Kartik seems puzzled by the term transaction, so you gives him five examples of transactions that FastTrack Inc will need to record:   FastTrack Inc will need to buy a few transport vehicles - truck  The business will begin earning fees and billing clients for relocating their parcels from one place to another  The business will be collecting the fees that were earned   Kartik will start his business by putting some of his own personal money into it. In effect, he is buying shares of FastTrack Inc common stock The business will incur expenses in operating the business, such as a salary for Kartik, labors, expenses associated with packaging material, delivery vehicle, advertising, etc With thousands of such transactions in a given year, Kartik is being advised to make an entry of these transactions in an accounting software on a daily basis Why Accounting?   Generate sales invoices and accounting entries   Understanding of company’s profitability, assets and cash position Prepare statements for customers with no additional work Can you now explain Kartik, the content and purpose of the three main financial statements – Income Statement, Balance Sheet and Cash Flow statement All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  8. 8. Introduction to Accounting Income Statement All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  9. 9. Income Statement – Jargons introduced! Introduction to Accounting The income statement shows the profit for the period of time under consideration FastTrack Movers & Packers Inc. Income Statement, for year ended 31st December, 2007 Sales Cost of goods sold Gross Profit Selling,general and admin. expenses Income from operations Interest expense Income before taxes Net Income $ xxx $ xxx $ xxx $ xxx $ xxx $ xxx $ xxx $ xxx Earnings per share Revenues result from the entity’s operating activities (selling merchandise, selling services) $ xxx  The order of deduction of cost is as follows:  Cost of products sold  Sales, general and administrative costs  Interest Expenses   Costs and expenses are incurred in generating revenues and operating the entity Tax Expenses Lets get back to our FastTrack Inc example All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  10. 10. FastTrack Movers & Packers Revenues Introduction to Accounting Case 1: Revenues If Kartik delivers 200 parcels in December for $5 per delivery, he has technically earned fees totaling $1,000 for that month. He sends invoices to his clients for these fees and his terms require that his clients must pay by January 15  Even though Kartik’s clients won't be paying FastTrack Inc until January 15, the accrual basis of accounting requires that the $1,000 be recorded as December revenues, since that is when the delivery work actually took place   What is cash method of accounting?   What is accrual basis of accounting? What is revenue recognition principle? After expenses are matched with these revenues, the income statement for December will show just how profitable the company was in delivering parcels in December All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  11. 11. FastTrack Movers & Packers Revenues Case 2: Revenues Introduction to Accounting When Kartik receives the $1,000 worth of payment checks from his customers on January 15, he will make an accounting entry to show the money was received.  Receipts of $1,000 will not be considered to be January revenues, since the revenues were already reported as revenues in December when they were earned  This $1,000 of receipts will be recorded in January as a reduction in Accounts Receivable (In December Kartik had made an entry to Accounts Receivable and to Sales) – Don’t worry, we will explain you this in a bit! Case 3: Expenses If Kartik hires some labor to help him with December deliveries and Kartik agrees to pay him $300 on January 3 and another $100 for pakaging and other supporting material; Total expenses of $400 expense for December deliveries  The actual date of payment of $400 does not matter  What matters is when the work was done and when the corresponding expense was incurred  In our case work was done in December and hence, $400 expense is counted as a December expense even though the money will not be paid out until January 3  What is matching principle? All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  12. 12. Income Statement - Expenses Introduction to Accounting Case 4: Expenses FastTrack Movers and Packers borrowed $20,000 from a bank to start his business on 1st December and the company agrees to pay 5% in interest, or $1,000. The interest is to be paid in a lump sum on December 1st of each year.  What is the monthly interest expense that is shown for Kartik’s monthly income statement? All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  13. 13. Consolidating the Income Statement Introduction to Accounting  FastTrack Income Statement as per the transaction discussed for the month of December, 2007 FastTrack Movers & Packers Inc. Income Statement, for month ended 31st December, 2007 Accrual basis of accounting Sales Cost of goods sold Gross Profit Selling,general and admin. Expenses $1,000 $400 $600 1 Income from operations Interest expense Income before taxes Income Tax @ 33% Net Income $30 $570 $83 $487 $161 $326 Concept of Matching Principle Concept of Matching Principle Note 1: SG&A expense is assumed to be $30 in December,2007 All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  14. 14. Introduction to Accounting Balance Sheet All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  15. 15. Balance Sheet – Jargons reintroduced! “Snapshot" of a company's financial position at a given moment  Introduction to Accounting  Reports the amount of a company's  Assets – Current assets/Long term assets  Liabilities – Current liabilities/Long term liabilities  Stockholders' (or owner's) equity – Common stock / Retained earnings FastTrack Movers & Packers Inc Balance Sheet, December 31st 2007 Assets Liabilities & Stockholder's Equity Current assets Cash Accounts Receivables Inventory $ xxx $ xxx $ xxx Total current assets $ xxx $ xxx ($ xxx) $ xxx Total Assets $ xxx = Assets All Rights Reserved. Corporate Bridge $ xxx Stockholder's Equity Common Stock $ xxx Retained Earnings Total Stockholder's Equity Plant and Equipment Less:Acc depreciation Net PPE $ xxx $ xxx $ xxx Long term Liabilities Long term debt Long term assets Current Liabilities Short-term debt Accounts Payable Total current liabilities $ xxx $ xxx Liabilities & Stockholder's Equity $ xxx Liability + Shareholder’s Equity www.educorporatebridge.com TM
  16. 16. Debits and Credits  Double Entry Introduction to Accounting    Double entry is a 500-year-old accounting procedure Double entry is a simple yet powerful concept and each and every transactions will result in an amount recorded into at least two of the accounts in the accounting system Debit and Credit  Double entry system requires that the same dollar amount of the transaction must be entered on both the left side of one account, and on the right side of another account = Assets   + Shareholder’s Equity Left means Debit!  Liability Right means Credit! Remember these simple tips:  Increase in assets – DEBIT  Decrease in assets – CREDIT  Increase in Liability & Equity – CREDIT  Decrease in Liability & Equity - DEBIT All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  17. 17. Balance Sheet Introduction to Accounting Case 5: Cash and Common Stock On December 1, 2007 Kartik starts his business FastTrack Movers and Packers. The first transaction that Kartik will record for his company is his personal investment of $20,000 in exchange for 5,000 shares of FastTrack Movers & Packers common stock. There are no revenues because no delivery fees were earned by the company, and there were no expenses. FastTrack Movers & Packers Inc Balance Sheet, December 1st 2007 Assets Cash $20,000 Liabilities & Stockholder's Equity Liabilities Stockholder's Equity Common Stock Total Assets $20,000 Cash from Kartik’s personal investment  $0 $20,000 $20,000 Increase in its stockholders' equity account Common Stock by $20,000 Shareholder’s Equity  Common Stock will be increased when the corporation issues shares of stock in exchange for cash (or some other asset)  Retained Earnings will increase when the corporation earns a profit and there will be a decrease when the corporation has a net loss  Core link between a company's balance sheet and income statement All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  18. 18. Balance Sheet Introduction to Accounting Case 5: Cash and Common Stock On December 1, 2007 Kartik starts his business FastTrack Movers and Packers. The first transaction that Kartik will record for his company is his personal investment of $20,000 in exchange for 5,000 shares of FastTrack Movers & Packers common stock. There are no revenues because no delivery fees were earned by the company, and there were no expenses. FastTrack Movers & Packers Inc Balance Sheet, December 1st 2007 Assets Cash $20,000 Liabilities & Stockholder's Equity Liabilities Stockholder's Equity Common Stock Total Assets $20,000 $20,000 $20,000 Increase in its stockholders' equity account Common Stock by $20,000 Cash from Kartik’s personal investment  $0 Debit and Credit = Assets Cash increases by $20,000 All Rights Reserved. Corporate Bridge Liability + Shareholder’s Equity Common Stock increases by $20,000 www.educorporatebridge.com TM
  19. 19. Balance Sheet Case 6: Purchase of Vehicle Introduction to Accounting On December 2, FastTrack Movers & Packers purchases a truck for $14,000 by writing a check for $14,000. The two accounts involved are Cash and Vehicles (or Delivery Truck) FastTrack Movers & Packers Inc Balance Sheet, December 2nd 2007 Assets Cash Vehicle $6,000 $14,000 Liabilities & Stockholder's Equity Liabilities Stockholder's Equity Common Stock Total Assets $20,000 Cash reduces to $6,000 and vehicle account increases to $14,000 $0 $20,000 $20,000 No change in stockholder’s position  Kartik also needs to know that the reported amounts on his balance sheet for assets such as equipment, vehicles, and buildings are routinely reduced by depreciation  What is Depreciation    Matching principle? Depreciation of land? The accountant might match $2,800 ($14,000 ÷ 5 years) of depreciation expense with each year's revenues for five years All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  20. 20. Balance Sheet Case 6: Purchase of Vehicle Introduction to Accounting On December 2, FastTrack Movers & Packers purchases a truck for $14,000 by writing a check for $14,000. The two accounts involved are Cash and Vehicles (or Delivery Truck) FastTrack Movers & Packers Inc Balance Sheet, December 2nd 2007 Assets Cash Vehicle $6,000 $14,000 Liabilities & Stockholder's Equity Liabilities Stockholder's Equity Common Stock Total Assets $20,000 $20,000 $20,000 Cash reduces to $6,000 and vehicle account increases to $14,000  $0 No change in stockholder’s position Debit and Credit? = Assets Liability + Shareholder’s Equity Vehicle asset increases by $14,000 Cash decreases by $14,000 All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  21. 21. Balance Sheet Introduction to Accounting Case 7: Prepaid Expenses On December 2 when Kartik contacts an insurance agent regarding insurance coverage for the Truck just purchased. The agent informs him that $1,200 will provide insurance protection for the next one year. Kartik immediately writes a check for $1,200. FastTrack Movers & Packers Inc Balance Sheet, December 2nd 2007 Assets Cash $4,800 Prepaid Insurance Vehicle $0 $1,200 $14,000 Total Assets Liabilities & Stockholder's Equity Liabilities $20,000 Cash reduces further to $4,800 and Prepaid insurance account increases to $1,200 Stockholder's Equity Common Stock $20,000 $20,000 No change in stockholder’s position  Between Dec 1st & Dec 31st, $100 worth of insurance premium is "used up" or "expires"  The expired amount will be reported as Insurance Expense on December's income statement  The remaining portion of unexpired insurance premium is reported as Pre-paid Insurance  What is the remaining portion of Pre-paid insurance as of Dec 31st , 2007? All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  22. 22. Balance Sheet Introduction to Accounting Case 7: Prepaid Expenses On December 2 when Kartik contacts an insurance agent regarding insurance coverage for the Truck just purchased. The agent informs him that $1,200 will provide insurance protection for the next one year. Kartik immediately writes a check for $1,200. FastTrack Movers & Packers Inc Balance Sheet, December 2nd 2007 Assets Cash $4,800 Prepaid Insurance Vehicle Stockholder's Equity Common Stock $20,000 $20,000 $20,000 Cash reduces further to $4,800 and Prepaid insurance account increases to $1,200  $0 $1,200 $14,000 Total Assets Liabilities & Stockholder's Equity Liabilities No change in stockholder’s position Debit and Credit? = Assets Liability + Shareholder’s Equity Prepaid insurance increases by $1,200 Cash decreases by $1,200 All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  23. 23. Balance Sheet Introduction to Accounting Case 4 Revisited : Raising Debt FastTrack Movers and Packers borrowed $20,000 from a bank to start his business on 1st December and the company agrees to pay 5% in interest, or $1,000. The interest is to be paid in a lump sum on December 1st of each year. FastTrack Movers & Packers Inc Balance Sheet, December 3rd 2007 Assets Cash $24,800 Prepaid Insurance $1,200 Vehicle $14,000 Total Assets $40,000 Cash increases by $20,000 (amount of debt raised from the bank) All Rights Reserved. Corporate Bridge Liabilities & Stockholder's Equity Liabilities $0 Long term debt $20,000 Stockholder's Equity Common Stock $20,000 Liabilities & Stockholder's Equity $40,000 Long term debt raised from the bank www.educorporatebridge.com TM
  24. 24. Balance Sheet Introduction to Accounting Case 4 Revisited : Raising Debt FastTrack Movers and Packers borrowed $20,000 from a bank to start his business on 1st December and the company agrees to pay 5% in interest, or $1,000. The interest is to be paid in a lump sum on December 1st of each year. FastTrack Movers & Packers Inc Balance Sheet, December 3rd 2007 Assets Cash $24,800 Prepaid Insurance $1,200 Vehicle $14,000 Total Assets $40,000 Liabilities & Stockholder's Equity Liabilities Long term debt $20,000 Stockholder's Equity Common Stock $20,000 Liabilities & Stockholder's Equity Cash increases by $20,000 (amount of debt raised from the bank)  $0 $40,000 Long term debt raised from the bank Debit and Credit = Assets + Shareholder’s Equity Long term debt increases by $20,000 Cash increases by $20,000 All Rights Reserved. Corporate Bridge Liability www.educorporatebridge.com TM
  25. 25. Balance Sheet Introduction to Accounting Case 8: Inventory Kartik keeps an inventory of packing boxes not only to use it for his business but also earn additional revenues by carrying an inventory of packing boxes to sell. Let's say that FastTrack Movers and Packers purchased 1,000 boxes wholesale for $1.00 each. FastTrack Movers & Packers Inc Balance Sheet, December 3rd 2007 Assets Cash $23,800 Liabilities & Stockholder's Equity Liabilities $0 Prepaid Insurance $1,200 Long term debt $20,000 Inventory $1,000 Stockholder's Equity Common Stock $20,000 Vehicle $14,000 Total Assets $40,000 Liabilities & Stockholder's Equity Cash decreases by $1,000 and inventory increases by $1,000  No change On 10th December, wholesale price of boxes has been risen by 20% & at today's price Kartik’s could purchase them for $1.20 each. What is the value of inventory shown on balance sheet?   $40,000 What is Cost Principle? Lets say that since the time Kartik bought inventory, the wholesale price of boxes has been cut by 40% and at today's price he could purchase them for $0.60 each. What is the value of inventory shown on the balance sheet in this case?  What is the principle of Conservatism? All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  26. 26. Balance Sheet Introduction to Accounting Case 8: Inventory Kartik keeps an inventory of packing boxes not only to use it for his business but also earn additional revenues by carrying an inventory of packing boxes to sell. Let's say that FastTrack Movers and Packers purchased 1,000 boxes wholesale for $1.00 each. FastTrack Movers & Packers Inc Balance Sheet, December 3rd 2007 Assets Cash $23,800 Liabilities & Stockholder's Equity Liabilities $0 Prepaid Insurance $1,200 Long term debt $20,000 Inventory $1,000 Stockholder's Equity Common Stock $20,000 Vehicle $14,000 Total Assets $40,000 Liabilities & Stockholder's Equity $40,000 Cash decreases by $1,000 and inventory increases by $1,000  No change Debit and Credit? = Assets Liability + Shareholder’s Equity Inventory asset increases by $1,000 Cash decreases by $1,000 All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  27. 27. Balance Sheet Introduction to Accounting Case 9: Unearned Revenues In addition to 200 parcels delivered by FastTrack Movers and Packers in December, they enters into an agreement with one of its customers stipulating that the customer prepays $600 in return for the delivery of 30 parcels every month for 6 months. Assume FastTrack Movers & Packers receives $600 payment on Dec 1,2007 for deliveries to be made between Dec 1,2007 and May 31,2007 FastTrack Movers & Packers Inc Balance Sheet, December 4th 2007 Assets Cash $24,400 Liabilities & Stockholder's Equity Liabilities $0 Prepaid Insurance $1,200 Unearned Revenue Inventory $1,000 Long term debt $20,000 Stockholder's Equity Common Stock $20,000 Vehicle $14,000 Total Assets $40,600 Cash increases by $600  Liabilities & Stockholder's Equity $600 $40,600 Liability increases by $600 Other liabilities  For the loan Kartik received from Bank (Notes Payable or Loan Payable), the interest on the loan he owes to his bank (Interest Payable)  Amount he owes to the supply store for items purchased on credit (Accounts Payable)  Wages he owes an employee but hasn't yet paid to him (Wages Payable) All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  28. 28. Balance Sheet Introduction to Accounting Case 9: Unearned Revenues In addition to 200 parcels delivered by FastTrack Movers and Packers in December, they enters into an agreement with one of its customers stipulating that the customer prepays $600 in return for the delivery of 30 parcels every month for 6 months. Assume FastTrack Movers & Packers receives $600 payment on Dec 1,2007 for deliveries to be made between Dec 1,2007 and May 31,2007 FastTrack Movers & Packers Inc Balance Sheet, December 4th 2007 Assets Cash $24,400 Liabilities & Stockholder's Equity Liabilities $0 Prepaid Insurance $1,200 Unearned Revenue Inventory $1,000 Long term debt $20,000 Stockholder's Equity Common Stock $20,000 Vehicle $14,000 Total Assets $40,600 $600 Liabilities & Stockholder's Equity Liability increases by $600 Cash increases by $600  $40,600 Debit and Credit = Assets Cash increases by $600 All Rights Reserved. Corporate Bridge Liability + Shareholder’s Equity Unearned revenues increases by $600 www.educorporatebridge.com TM
  29. 29. Missing links Accounts Receivables Introduction to Accounting Case 1&2: Revenues If Kartik delivers 200 parcels in December for $5 per delivery, he has technically earned fees totaling $1,000 for that month. He sends invoices to his clients for these fees and his terms require that his clients must pay by January 15 Accounts Payable Case 3: Expenses If Kartik hires some labor to help him with December deliveries and Kartik agrees to pay him $300 on January 3 and another $100 for pakaging and other supporting material; Total expenses of $400 expense for December deliveries Interest Payable Case 4: Expenses FastTrack Movers and Packers borrowed $20,000 from a bank to start his business on 1st December and the company agrees to pay 5% in interest, or $1,000. The interest is to be paid in a lump sum on December 1st of each year. Balance Sheet Assets = Liabilities Income Statement + Owners' Equity Net income = Revenues - Expenses The arrow indicates that net income affects retained earnings, which is a component of owners’ equity All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  30. 30. Consolidating all cases in Income Statement Introduction to Accounting FastTrack Movers & Packers Inc. Income Statement, for month ended 31st December, 2007 Sales Cost of goods sold Gross Profit $1,100 $400 $700 Selling,general and admin. Expenses 1 Depreciation Expense Insurance Expense Income from operations Interest expense Income before taxes Income Tax @ 33% Net Income Note 1: SG&A expense is assumed to be $30 in December,2007 All Rights Reserved. Corporate Bridge $30 $233 $100 $337 $83 $254 $84 $170 Case 1 (accrual) + Case 9 (earned revenue for December) Case 6, monthly depreciation = $2,800/12 = $233 Case 7, insurance premium worth $1,200/12 =$100 is utilized per month www.educorporatebridge.com TM
  31. 31. Consolidated Balance Sheet Introduction to Accounting FastTrack Movers & Packers Inc Balance Sheet, December 31st 2007 Assets Current assets Cash $24,370 Liabilities & Stockholder's Equity Current Liabilities Unearned Revenue $500 Prepaid Insurance $1,100 Accounts Payable $400 Accounts Receivable $1,000 Interest Payable $83 Inventory $1,000 Income Tax Payable $84 Total Current Assets $27,470 Total Current liabilities Vehicle $14,000 Long term debt Accumulated depreciation Net $233 $13,767 Unpaid expenses, classified as liabilities Stockholder's Equity $20,000 Common Stock $20,000 Retained Earnings Total Assets $41,237 Liabilities & Stockholder's Equity Insurance premium worth $1,200/12 =$100 is utilized for December Cash receipt on January 15th, however, sales has been completed and booked as Accounts Receivables All Rights Reserved. Corporate Bridge $1,067 $170 $41,237 Net Income Flows through the Income Statement Revenues worth $100 earned in December, hence Unearned revenue of $600 adjusted for the earned revenues www.educorporatebridge.com TM
  32. 32. Balance Sheet – Key questions?  Balance sheet shows the company’s assets worth? Introduction to Accounting    YES? NO? Balance sheet does not provide us with the fair market value of the company?   The asset Land is not depreciated, so it will appear at its original cost even if the land is now worth one hundred times more than its cost   Long-term assets reported at their cost minus amounts already sent to Income Statement as depreciation expense However, Short-term asset amounts are likely to be close to their market values, since they tend to "turn over" in relatively short periods of time Is reputation cost captured in Balance Sheet – Brand, Logo etc?  Bill Gates  Nike  BMW All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  33. 33. Introduction to Accounting Cash Flow Statement All Rights Reserved. Corporate Bridge TM Private and Confidential – Not for Circulation www.educorporatebridge.com
  34. 34. Cash Flow Statement – Cash is the King! Purpose of this cash flow statement is to identify sources & uses of cash during the year  Introduction to Accounting  Cash Flow is divided into three parts  Cash flow from operations: Include all the transactions and other events related to its earnings process  Cash flow from Investments: Include all the transactions involving acquiring and selling long-term investment, property, plant, and equipment  Cash Flow from Finance: Include all the transactions involved in obtaining and disbursing resources from and to owners and repaying the amounts borrowed Net Cash Cash flow from Operations + Cash flow from Investing Cash Inflows: Cash Inflows:  Generation of funds in normal operations  Sale of plants and equipments Cash Outflows:  Liquidation of long term investments  Expenditure of funds in normal operations Cash Outflows:  Purchase of plants and equipments  Investments in long term investments All Rights Reserved. Corporate Bridge + Cash flow from Finance Cash Inflows:  Debt issuance, common stock, preferred stock and other securities Cash Outflows:  Retirement of debt, common stock and preferred stock  Payment of cash dividend www.educorporatebridge.com TM
  35. 35. Calculating Cash flows Introduction to Accounting Cases Case 1 Case 2 Case 3 Case 4 Case 4 Case 5 Case 6 Case 7 Case 8 Case 9 Others Cash flows Cash Impact (yes/no) No No No No Yes Yes Yes Yes Yes Yes Yes Cash Amount Classification $0 $0 $0 $0 $20,000 $20,000 ($14,000) ($1,200) ($1,000) $600 ($30) $24,370 Cash flow from operations Cash flow from investing Cash flow from financing Operation Operation Operation Operation Finance Finance Investing Operation Operation Operation Operation Comments Revenues earned but not paid Revenues earned but not paid Expenses incurred but not paid Interest expense incurred but not paid FastTrack borrows from the bank Kartik infuses capital Purchase of truck Prepaid expenses Purchase of Inventory (boxes) Customer Prepays SG&A expenses incurred and paid ($1,630) ($14,000) $40,000 Total Change in cash $24,370 = End Cash Cash at the beginning + Change in cash during the period Flows into the Balance Sheet as “Cash” All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  36. 36. For FREE Resources Introduction to Accounting https://www.educorporatebridge.com/free-courses/ Like Corporate Bridge Facebook Page Finance News, Articles, Interview Tips etc https://www.facebook.com/CorporateBridgeGroup For Online Finance Courses https://www.educoporatebridge.com Follow us at twitter https://twitter.com/corporatebridge All Rights Reserved. Corporate Bridge www.educorporatebridge.com TM
  37. 37. Introduction to Accounting Thank You..!! All Rights Reserved. Corporate Bridge TM Private and Confidential – Not for Circulation www.educorporatebridge.com

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