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Financial Statements

Financial Statements

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Financial Statements

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  1. Financial Statements

  2. Direct Material Direct Labor Indirect Material/Labor Fixed General/Admin Selling Profit Prime costs Cost of goods manufactured Conversion cost Factory Overhead Selling Price Cost of goods sold Direct vs Indirect Costs

  3. Terms • Bookkeeping accumulate the results of an entities financial activities • Financial Accounting external evaluation of financial statements of an entity • Managerial Accounting use of economic & financial information to plan and control activities of an entity • Cost Accounting determines product, process, or service costs; a subset of managerial accounting

  4. Terms • Tax Accounting the preperation of income tax returns as a specialized field within accounting - tax planning • Auditing external review and evaluation of an entitys’s financial records and health internal audits government audits IRS audits

  5. Functions of Accounting • Internal Control all measures used by an organization to guard against errors, waste and fraud • Audits of Financial Statements investigation of a company’s financial statements to determine the fairness of these statements • Annual Reports comparative financial statements enable user’s to identify trends in the company’s performance and financial position

  6. Principles of Accounting • Principles of accounting dictate that financial statements must show • financial position at end of accounting period • earnings for the accounting period • cash flows during that period • investments by & distribution to owners

  7. Transactions Approach • In recording economic activities, accountants focus on completed transactions - those that cause an immediate change in the financial resources or obligations of a company • purchasing raw materials • sales of finished goods • Strength - the reliability of the information that is recorded, based on past events, objectivity

  8. Financial Statements • Balance Sheet financial position of a company indicating resources it owns, debts, and the amount of owner’s equity • Income Statement profitability of the business over the preceeding accounting period • Statement of Owner’s Equity explains changes in the amount of owner’s equity in the business • Statement of Cash Flows summarizes cash receipts and cash payments of business over the preceeding accounting period

  9. Balance Sheet • Statement of financial position • does not show the current market value of an entity’s assests • Assets economic resources owned by a business and are expected to benefit future operations • cost principle • going concern • objectivity principle • stable dollar assumption Current Assets - convertible to cash within 1 yr.

  10. Balance Sheet • Liabilities probable future sacrifices of economic benefits as result of current obligations Current Liabilities - must be paid within 1 yr. • Owner Equity ownership right of proprietors or stockholders Changes in OE by • investment by owner • earnings from profitable operation of business • withdrawals of cash of other assets • losses from business

  11. Accounting Equation Owner Equity = Assets - Liabilities

  12. Income Statement • Projects profit/loss of an entity over a period of time • Net Sales - gross sales less returns, defects, etc. • Cost-of-Goods sold - cost of raw material & direct labor • Selling, Gen, Admin - operating expenses of an entity which do not directly contribute to product (sales people, managers, ...) • Interest Expense - interest paid on long/short term debt. • Net Income/share - net income (after tax) divided by outstanding shares

  13. Changes to Owner Equity • Begin Balance - last year’s ending balance • Paid-in Capital - sold 10,000 shares at $19 /share stock par value of $10 / share. common stock = 10,000 x $10 = $100,000 addition paid in =10,000 x ($19-$10) = $ 90,000 • Retained Earnings - cumulative net income which has been retained for business • Dividends - distribution of earnings to stockholders

  14. Changes to Owner Equity Balance Sheet Income Statement Balance Sheet 8/31/96 Revenues 8/31/97 - Expenses Net Income Statement of OE A =L +OE Begin Balance Paid in capital changes Retained earnings + Net Income - Dividends Ending Balances A = L + OE

  15. Retained (97) = Retained (96) + $18,000 = $93,900

  16. Statement of Cash Flows • Identify the sources and use of cash during year • Operating Activities • net income $18,000 from income statement • depreciation expense $16,400 from balance sheet added back in because it is not an actual cash outlay

  17. You Can Go Broke Making Money!