Intro Accounting: Financial Statements

Income Statement

matches revenue with expense over a period of time (financial video) aka: the operating or “the P & L” - profit and loss statement

Cost of Goods Sold

I/S

Definition: Cost of what is not there

Formula: beginning inventory plus net purchases minus ending inventory

Gross Profit

I/S

Net revenue minus costs of goods sold

SG & A

I/S

Selling, general, and administrative expense (aka operating expenses

Operating Income

I/S

Gross profit minus S, G, & A; income from the core business

Non-Operating Income (aka other)

I/S

Income from the core business

Balance Sheet

Shows assets equal liabilities plus stockholders’ equity at a point in time (financial snapshot)

Current

B/S

within 12 months or one operating cycle

Current Assets

B/S

Assets that will be used up or converted to cash within one year

Current Liabilities

B/S

Liabilities which are due within one year

Statement of Changes in Cash Position

difference between two balance sheets expressed in cash

“Capitalize it“

put the amount on the balance sheet; generally, as an asset to be depreciated or amortized

increases net income

“Expense It “= “Write It Off “

Deduct the amount on the income statement

Decreases net income

“Capitalize It” versus” Expense It” versus “Write It Off”

Why Important?

Want net income to be

Book Value of an Asset

B/S in assets

Original cost minus accumulated depreciation

Market Value of an Asset

Value paid by a willing buyer and willing seller

not found on the financial statements

Book Value of a company

B/S under stockholders’ equity

common stockholders’ equity

Market Value of a Company

Value paid by a willing buyer and willing seller

not found on the financial statements

Sales vs. Revenue

There is no difference

Accrued

Estimated

Net Income

revenue minus expense

expense

expired asset

prepaid expense

paid cash but have not yet received the goods and services

Unearned revenue

(aka customer deposit) Received cash but have not yet rendered the goods and services

Depreciation, Amortization, and Depletion

method of cost allocation of long-term assets over the estimated useful life under the Matching Principle

• Dose NOT represent wear and tear or loss of value

Formulas: Depreciation

Allocation of original costs over the estimated useful life of a tangible asset

Formulas: Amortization

Allocation of original costs over the estimated useful life of an intangible asset

Formulas: Depletion

Allocation of original costs over the estimated useful life of a natural resource asset

Depreciation, amortization or depletion versus accumulated depreciation, accumulated amortization,

or accumulated depletion:

xpense for the period (expense on I/S) versus sum of the expense across all

periods since the asset was placed in service (contra asset account on the B/S)

Six Elements of Internal Control

1. Establishment of responsibility – “who” is responsible

2. Segregation of duties – for “what” is “who” responsible

3. Documentation procedures – required paperwork to trace the transaction

4. Physical Controls – physical barriers

5. Independent internal verification – check by someone independent of the process

6. Human resource control – hiring people with the appropriate skills

Check and balance

organizing work so people naturally check on each other

(Both for internal control as well as to catch mistakes)

“It is easier/cheaper to keep a customer than to find a new one”

Calendar Year

accounting year ends December 31

Fiscal Year

accounting years ends on any other month

Other Income and Expense (Non-operating portion of the income statement)

Interest income and interest expense

Gain or loss on the sale of assets

Freight In versus Freight Out

Normal assumption

buyer pays freight

Freight In versus Freight Out

FOB

Free on Board” (maritime reference)

▪ point at which title transfers: FOB Plant, FOB destination

▪ not to be confused with who ultimately pays the shipping cost

Freight In

part of inventory which is a current asset on B/S

cost of getting materials to the plant or warehouse

Freight Out

part of SG&A – sales/marketing expense of getting product to the customer;

deduction from gross profit on I/S

Value Chain

All the processes and procedures which add value to product or service in the customers eyes

Value Chain: Value Added

dd value in the customer’s eyes

Value chain; non-value added

don’t add value in the customer’s eyes

Supply Chain

All the activities to get the product made and in the hands of the customer.

Tax Expense

– expense to company

-appears on income statement

- examples: income tax, employer payroll taxes, sales tax paid by company on its purchases

Tax Pass Through

- taxes collected on behalf of a governmental entity and passed through to the entity

- neither a revenue nor an expense

- may appear on balance sheet as liability if not yet paid

-examples: sales taxes, excise taxes, employee payroll taxes