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Accounting & financial decisions

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Engineering Economy.
Engineering Economy, Engineering, Economy, Business and Economy, Business, Economics, Finance, Accounting,

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Accounting & financial decisions

  1. 1. 1. Accounting1. Accounting 11
  2. 2. 2. Basic Question & Financial2. Basic Question & Financial StatementsStatements 22
  3. 3. 33 FINANCIAL STATEMENTS  Financial statements are the principal means of reporting financial information to people outside a business organization through a set of accounting reports.  Financial statements are reports that summarize the results of a company’s accounting transactions for a fiscal period.  A Fiscal Period is any time period for which a company wants to report its financial activities.  Financial statements prepared for a period of time shorter than one year (e.g. 1 month or 3 months) are referred to as Interim Financial Statements.
  4. 4. 44 FOUR BASIC FINANCIAL STATEMENTS 1. Balance Sheet – provides a snapshot of a firm’s financial position at one point in time. 2. Income Statement – summarizes a firm’s revenues and expenses over a given period of time. 3. Statement of Retained Earnings – shows how much of the firm’s earnings were retained, rather than paid out as dividends. 4. Statement of Cash Flows – reports the impact of a firm’s activities on cash flows over a given period of time.
  5. 5. 3. Balance Sheet3. Balance Sheet 55
  6. 6. Quadrants of Balance SheetQuadrants of Balance Sheet Assets = Liabilities Current Assets Current Liabilities Long Term Assets Long Term Liabilities Equity 1.Owner Contributions 2.Retained Earnings ACCOUNTING EQUATION 66
  7. 7. AssetsAssets 77
  8. 8. LiabilitiesLiabilities 88
  9. 9. Stockholder’s equityStockholder’s equity 99 Stockholder’s equity is the liability of a company to its owners
  10. 10. 1010 BALANCE SHEET: ASSETS Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets 2002 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 2001 57,600 351,200 715,200 1,124,000 491,000 146,200 344,800 1,468,800
  11. 11. 1111 BALANCE SHEET: LIABILITIES AND EQUITY Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E 2002 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592 2001 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800
  12. 12. 1212 THE BALANCE SHEET: LIABILITIES VS. STOCKHOLDERS’ EQUITY  The common stockholders’ equity, or net worth, is a residual. For example, at the end of 2002, Common Stockholders’ Equity = Assets – Liabilities – Preferred Stock = 2,866,592 – 2,374,000 - 0 = 492,592
  13. 13. 1313 THE BALANCE SHEET: LIABILITIES VS. STOCKHOLDERS’ EQUITY  Suppose assets decline in value (for example, some of the accounts receivable are written off as debts), liabilities and preferred stock remain constant, so the value of the common stockholders’ equity must decline.  Therefore, the risk of asset value fluctuations is borne by the common stockholders.  However, if assets’ value rises (perhaps because of inflation), these benefits will be accrued exclusively to the common stockholders.
  14. 14. 1414 THE BALANCE SHEET: PREFERRED VS. COMMON STOCK  Therefore, when the term “equity” is used in finance, it means “common equity” unless the word “total” is included.
  15. 15. 1515 THE BALANCE SHEET: IMPORTANCE OF BREAKDOWN OF THE COMMON EQUITY ACCOUNTS The breakdown of common equity accounts is important for two reasons: 1) A potential stockholder would want to know whether the company actually earned the funds reported in its equity accounts or whether the funds came mainly from selling stock. 2) A potential creditor, on the other hand, would be more interested in the total equity the owners have in the firm and would be less concerned with the source of the equity.

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