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Warm-up

Warm-up. Read the article about the new accounting rules. Describe the impact that this rule change will have on Apple’s reporting of sales/revenue. Is this change good, bad or neutral for the business. Final Accounts. Explain the business function of accounting.

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Warm-up

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  1. Warm-up • Read the article about the new accounting rules. • Describe the impact that this rule change will have on Apple’s reporting of sales/revenue. • Is this change good, bad or neutral for the business.

  2. Final Accounts • Explain the business function of accounting. • Construct & amend accounts from information given. • Evaluate the importance of final accounts to each stakeholder group.

  3. What is Accounting? • Capturing, Recording, Configuring, Analyzing, & Reporting Financial Information • Recording financial activities • Preparing reports that summarize financial activities

  4. Who Uses Accounting Information? • People with a stake in the business’s financial activities • Insiders • Employees • Managers • Outsiders • Investors/Shareholders • Competitors • Government • Financial institutions

  5. Accounting Focuses on Transactions • Bookkeeping captures & records every transaction • Economic exchanges between the business & people or other entities • The “lifeblood” of the business • With whom does a business transact with?

  6. Business Transactions Customers Recording the selling of products & services Employees & Managers Paying Wages, Salaries, & Benefits Government Collection & payment taxes Business Entity Investors Cash receipts & payments from investors Suppliers Payment for Materials, Services, Supplies, Equipment Financiers Cash receipts & payments from borrowing

  7. The Accounting Cycle Business Transaction Profit or Loss? Financial Situation? Amount of Cash? Transaction Analysis identify accounts affected and how Source Document Prepare Financial Statements Journal Entries End of Fiscal Period Trial Balance Update the Business’s Accounts Post to Ledger “Test” that records were updated correctly Official “Books” of the Business

  8. Financial Statements • Summary of a business’s financial activities over a period of time • BALANCE SHEET = financial position of the business at a point in time • INCOME STATEMENT = profit-making activities of the business and its bottom-line profit or loss over a period of time • STATEMENT OF CASH FLOWS = cash generated & how it was used over a period of time

  9. Business Scenario

  10. Group Warm-up • Create a flow chart that illustrates the connection between the Balance Sheet and the Income Statement, include the following; • Balance Sheet • Assets • Liabilities • Owner’s Equity • Income Statement • Revenue • Expenses • Profit

  11. How a Business Makes Profit • Sell Products & Control Costs to make or re-sell products and operate the business • Sell Services & Control Costs to provide a service and operate the business • Invest in Assets that Generate Income and/or Increase in Value and Control Costs to operate the business

  12. Sales/Revenue • Money generated by “principle business” • Does not include sales taxes • Does not include “Non-business” Revenue • Reported separately (“Non-operating Income”)

  13. Expenses • Operating • Cost of Sales • Cost of products (or service) • Match revenue with its cost • Selling, General & Administrative (SG&A) • “Overhead” costs • Non-Operating • Interest if business borrows • Income Tax if business entity is taxed

  14. Profit (Loss) • Amount of Revenue Remaining • GrossProfit • After deducting production costs • Operating Profit • After deducting all Operating Costs • Earnings Before Income Taxes • After paying interest • Net Income • After deducting all costs

  15. Allocation • How remaining profit is used • Dividends • Distributed to shareholders • Retained • Stays in the business • Source of capital to expand

  16. Warm-up Use the following information to calculate the Sales/Revenue, Cost of Goods Sold & Gross Profit for Bags-R-Us Ltd. for 2010 • Sales to Customers: 3,000 bags for $35 each • Stock Value (inventory): • January 1, 2010: $15,000 • December 31, 2010: $20,000 • Stock Purchases During 2010: $50,000

  17. 3/19 Warm-up • Describe the incentive for owning a business. • Describe the incentive for a business to satisfy its customers. • Describe the incentives for a manager to manage. • Describe the incentives for an employee to work.

  18. How does a business know it is satisfying its customers?

  19. A Question • What is needed in order for the baby (A) to grow and become a physically healthy adult (E)? A E

  20. Businesses have different “shapes”

  21. New Born Business

  22. 3/26 Warm-up • Explain the purpose of a business’s Final Accounts (Balance Sheet & Income Statement.

  23. Financial Statements • Key sources of information for making financial decisions • Trading and Profit & Loss Accounts (Income Statement): performance over a period of time • Money received & spent from sales (Trading) • Money spent operating & financing business (Profit & Loss Account) • How profit is allocated (Appropriation Account) • Balance Sheet: snapshot of financial structure • What it owns (Assets) • What it owes (Liabilities) • Difference between Assets & Liabilities (Capital & Reserves)

  24. The Balance Sheet Liabilities Current Long-term Borrowing • Assets • Current • Cash • Stock • Debtors • Fixed • Equipment • Machinery • Intangibles • Investments Sources of Financing Capital & Reserves Share Capital Retained Profit Reserves Investment Capital Employed Total Assets Liabilities + Capital&Reserves

  25. Constructing a Balance Sheet Current Assets Current Liabilities Total Liabilities Long-term Liabilities Total Assets Fixed Assets Capital & Reserves Residual Value

  26. (1) Net Working Capital Current Assets – Current Liabilities Current Assets Current Liabilities Current Liabilities Long-term Liabilities Net Working Capital Fixed Assets Capital & Reserves

  27. Net Assets = Capital Employed Fixed Assets + Net Working Capital Long-term Liabilities Net Working Capital Fixed Assets Net Assets Capital Employed Capital & Reserves

  28. Assets Value of what is OWNED • Fixed Assets • Not intended for re-sale • Used to generate sales/revenue now & in the future • Tangible & Intangible • Current Assets • Cash • Expected to be turned into cash within 1-year

  29. Liabilities Value of what is OWED • Current Liabilities • Debts that must be paid within 1-year • Immediate Cash Needs • NOT expenses! • Long-term Liabilities • Debts that are due to be paid after 1-year • Part of financing

  30. Net Assets Value of Assets Remaining After Paying Current Liabilities • Fixed Assets • Net Working Capital • Current Assets – Current Liabilities • Positive = can pay debts coming due with some leftover • Negative = does not have cash to pay debts (“eat” into fixed assets)

  31. Capital Employed Capital Investment Needed for Business to Function • Long-term Liabilities • Capital & Reserves

  32. What Balance Sheet Tells You • Liquidity situation = enough cash to pay debts coming due? • Asset structure = what is business investing its capital in? • Capital structure = which sources of financing are being used? • Capital employed = what is the size of the business?

  33. What Balance Sheet Doesn’t Tell You • Book values used, not market values • Varying formats, difficult to compare businesses • True value of some important assets not captured • Intangibles • Employees • Brands

  34. Trading Account Sales/Revenue, Direct Costs Profit & Loss Account Indirect & Financing Costs Appropriation (Allocation) Account Taxes, Dividends, Business

  35. 3/27 Warm-up • Explain how management uses the information on a balance sheet. • What does it tell them about the business?

  36. Revenue Money received from satisfying CUSTOMER’SNEEDS. Operating Expenses Money spent producing products that satisfy customer’s needs. Cost of Revenue Gross Profit SG&A Expenses Operating Income (Loss) Revenue Remaining Non-operating Revenue & Expenses Money spent or gained from activities not directly related to satisfying customers. Interest* Taxable Income Taxes* Net Income (or Loss) Revenue Remaining – Available to Owners or Reinvestment

  37. Partner Warm-up • Identify an asset for this business. • Explain where the money came from to purchase this asset.

  38. Financing Balance Sheet Borrowing Liabilities Assets Cash, Stock, Equipment, Factories Invested Capital Retained Earnings Capital & Reserves Income Statement Generate Revenue Sell Stuff Pay Expenses Operating & Non-operating Profit (Loss) Revenue - Expenses Pay Dividend Retained Earnings

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