Financial Financial StatementsStatements

Direct vs Indirect Direct vs Indirect CostsCosts

Direct Material

Direct Labor

Indirect Material/Labor

Fixed

General/Admin

Selling

Profit

Conversioncost

SellingPrice

Primecosts

Factory Overhead

Costof goods

manufactured

Costof goods

sold

TermsTerms Bookkeeping

accumulate the results of an entities financial activities

Financial Accountingexternal evaluation of financial statements of an entity

Managerial Accountinguse of economic & financial information to plan and control activities of an entity

Cost Accountingdetermines product, process, or service costs; a subset of managerial accounting

TermsTerms

Tax Accountingthe preperation of income tax returns as a specialized field within accounting - tax planning

Auditingexternal review and evaluation of an entitys’s financial records and health

internal auditsgovernment auditsIRS audits

Functions of Functions of AccountingAccounting

Internal Controlall measures used by an organization to guard against errors, waste and fraud

Audits of Financial Statementsinvestigation of a company’s financial statements to determine the fairness of these statements

Annual Reportscomparative financial statements enable user’s to identify trends in the company’s performance and financial position

Principles of Principles of AccountingAccounting

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

Transactions Transactions ApproachApproach

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

Financial StatementsFinancial Statements Balance Sheet

financial position of a company indicating resources it owns, debts, and the amount of owner’s equity

Income Statementprofitability of the business over the preceeding accounting period

Statement of Owner’s Equityexplains changes in the amount of owner’s equity in the business

Statement of Cash Flowssummarizes cash receipts and cash payments of business over the preceeding accounting period

Balance SheetBalance 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.

Balance SheetBalance Sheet Liabilities

probable future sacrifices of economic benefits as result of current obligationsCurrent Liabilities - must be paid within 1 yr.

Owner Equityownership right of proprietors or stockholdersChanges in OE by investment by owner earnings from profitable operation of business withdrawals of cash of other assets losses from business

Accounting EquationAccounting Equation

Owner Equity = Assets - Liabilities

K-Corp Consolidated Balance1997 1996

Current Assets Cash $22,300 $16,800 Accounts Receivable 46,800 38,600 Inventories 54,200 48,200 Total Current Assets $123,300 $103,600Other Assets Land 100,000 100,000 Building 85,400 94,600 Equipment 78,400 85,600

Total Assets $387,100 $383,800

Current Liabilities Accounts Payable $62,400 $55,600

Notes 5,000 20,000Total Current Liabilities $67,400 $75,600 Mortgage 125,800 132,300Total Liabilities $193,200 $207,900Owner's Equity Paid In Capital 100,000 100,000 Retained Earnings 93,900 75,900Total Liabilities & Owner Equity $387,100 $383,800

Income StatementIncome 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

K-Corp Income Statement

Net Sales $574,800Cost of Goods Sold 428,300Gross Margin 146,500Operating Expenses Sales Expenses 87,400 Depreciation Equip 7,200 Depreciation Bldg 9,200 Administrative 14,500 Utilities 4,600

Total Operating $122,900Income from Operations 23,600Taxes 5,600Net Income $18,000

Changes to Owner Changes to Owner EquityEquity

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 =

$100,000addition 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

Changes to Owner Changes to Owner EquityEquity

Balance Sheet Income Statement Balance Sheet

8/31/96 Revenues 8/31/97 - Expenses Net Income

Statement of OEA =L +OE Begin Balance

Paid in capital changes Retained earnings + Net Income - Dividends Ending Balances A = L + OE

K-Corp Income Statement

Net Sales $574,800Cost of Goods Sold 428,300Gross Margin 146,500Operating Expenses Sales Expenses 87,400 Depreciation Equip 7,200 Depreciation Bldg 9,200 Administrative 14,500 Utilities 4,600

Total Operating $122,900Income from Operations 23,600Taxes 5,600Net Income $18,000

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

K-Corp Consolidated Balance1997 1996

Current Assets Cash $22,300 $16,800 Accounts Receivable 46,800 38,600 Inventories 54,200 48,200 Total Current Assets $123,300 $103,600Other Assets Land 100,000 100,000 Building 85,400 94,600 Equipment 78,400 85,600

Total Assets $387,100 $383,800

Current Liabilities Accounts Payable $62,400 $55,600

Notes 5,000 20,000Total Current Liabilities $67,400 $75,600 Mortgage 125,800 132,300Total Liabilities $193,200 $207,900Owner's Equity Paid In Capital 100,000 100,000 Retained Earnings 93,900 75,900Total Liabilities & Owner Equity $387,100 $383,800

Statement of Cash Statement of Cash FlowsFlows

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

K-Corp Cash Flows

Net Income $18,000Add (deduct) items Depreciation Exp 16,400 Increase in Accts Rec. -8,200 Increase in Invent. -6,000 Increase in Accts. Pay 6,800 Increase in Notes Pay -15,000Net Cash from Operations $12,000Cash from Investing 0

Cash from Financing Retire long term dept -6,500 Issue of long term dept 0 Sale of common stock 0

Payment of Dividends 0Net Increase in Cash $5,500

K-Corp Cash Flows

Net Income $18,000Add (deduct) items Depreciation Exp 16,400 Increase in Accts Rec. -8,200 Increase in Invent. -6,000 Increase in Accts. Pay 6,800 Increase in Notes Pay -15,000Net Cash from Operations $12,000Cash from Investing 0

Cash from Financing Retire long term dept -6,500 Issue of long term dept 0 Sale of common stock 0

Payment of Dividends 0Net Increase in Cash $5,500

K-Corp Consolidated Balance1997 1996

Current Assets Cash $22,300 $16,800 Accounts Receivable 46,800 38,600 Inventories 54,200 48,200 Total Current Assets $123,300 $103,600Other Assets Land 100,000 100,000 Building 85,400 94,600 Equipment 78,400 85,600

Total Assets $387,100 $383,800

Current Liabilities Accounts Payable $62,400 $55,600

Notes 5,000 20,000Total Current Liabilities $67,400 $75,600 Mortgage 125,800 132,300Total Liabilities $193,200 $207,900Owner's Equity Paid In Capital 100,000 100,000 Retained Earnings 93,900 75,900Total Liabilities & Owner Equity $387,100 $383,800

K-Corp Pro-Forma Cash Flows

Cash Flows from Ops. Feb Mar Apr May JunNet Income $250 $500 $600 $750 $900 Depreciation 50 50 50 50 50 Increase in Receivables 0 (250) (475) (600) (900) Increase in Inventory (10) (100) (300) (500) (900) Increase in Current Liab 50 75 100 150 180Net Increase/Decrease $340 $275 ($25) ($150) ($670)

Beginning Cash 250 590 865 840 690

Ending Cash $590 $865 $840 $690 $20

You Can Go Broke Making Money!