The Elements Position and Performance. 2007/01/16International Business Program Financial Accounting 1 The elements Assets – what it has Liabilities –

The Elements

Position and Performance

2007/01/16 International Business ProgramFinancial Accounting

2

The elements

• Assets – what it has

• Liabilities – what it owes

• Equity – what’s left over

• Revenues - resources coming in

• Expenses – resources going out

• Cash flow – Money!These definitions are simplistic but a beginning


3

Financial statements tell us

• Cash movements

• Wealth generated

• Wealth accumulatedUsing:

• Balance sheet

• Income statement

• Cash flow statement


4

Filippo’s Kites

• Look at the example pp. 38-40

• You should notice– Don’t know how many kites nor how

much each one costs. Don’t need to.

– Flow of cash and flow of wealth are different


5

Balance Sheet

• Let’s start here

• What does it show?– Financial position

– Assets, liabilities, owner’s equity

– Specific point in time

– Status, not flow


6

adidas-Salomon pg. 41

• NB! You will see this company again!

• Two initial observations:– In terms of money

– Going concern

• Accounting Equation A = L + OE

• Introduce concept of minority interest


7

Basic Accounting Equation

• One of Br. Paciolo’s greatest contributions

• Duality concept – two piles of tabletsAssets = Liabilities + Owners’ Equity

• Every transaction and event has two sides


8

Day to Day Transactions

• Paolo’s shop pp. 45 – 51.

• Things to observe– Cash and cash equivalents

– Current vs. non-current assets

– Current vs. non-current liabilities

We will get more specific definitions shortly


9

Basic concepts

• Business cycle or operating cycle– Cash, acquire goods, sell goods or

services, cash again

– For most businesses is one year; occasionally longer

– More about this later


10

Basic concepts (Continued)

• Current assets – used or consumed in one business cycle or one year.

• Non-current assets – more than one cycle

• Current liabilities – one cycle or use current assets

• Non-current – after one cycle or do not use current assets


11

Financial Structure

• Three sources to pay for total assets:– Owners’ contributions (also minority)

– Borrow long-term

– Short-term credit

• Remember assets can be– Current

– Non-current


12

Financial Structure (Continued)

• Leverage or gearing– Examples from physics and mechanics– Use borrowed money to finance assets

and enhance return to investors– Can be risky– Balance sheet discloses information to

assess risk(More about this in later chapters)


13

Financial Structure (Continued)

• Working capital– Current assets vs. current liabilities

– Another indicator of risk and potential

– Balance sheet discloses information to assess

(More about this later also)


14

Format

• Examples in textbook

• Varies considerably, but basic concepts are the same

• One element of dealing with ambiguity


15

Definitions Again

• Assets– Acquired in a transaction– Economic resource; future benefits– Controlled by enterprise; not necessarily

owned– Cost or value at acquisition can be

measured– Activity 3-1 pg. 57


16

Definitions Again (Continued)

• Liabilities– Pay money or use resources

– Result from past transaction

• Owners’ equity– Contributed

• Issued and reserves

– Earned (Retained earnings)


17

Balance sheet conventions

• Money measurement

• Historic cost– Exception for impairment (later chapter)


18

Structure of statement and ratios

• Textbook pp. 61-64

• Varies with industry – ambiguity

• NB Puma and adidas-Solomon; you will see them again!– Same industry

– Percentage analysis

– Current ratio vs. quick ratio


19

Income Statement

• Results of operations

• Flow, not position

• Economic resources, not Cash!!

• Based on natural business cycle, which is almost always one year or less


20

Purpose of income statement

• Wealth generated or destroyed over a period

• Based on equation Profit = Revenue -Expenses– Revenue-inflow of resources from

business activity– Expenses-outflow of resources to

generate revenue


21

Accounting Equation

• Brother Paciolo again

• A = L + OE

• A=L + (capital + profit)

• A = L + (capital + (revenues – expenses))

• Look at Paolo’s shop again pp 71-75


22

Layout of income statement

• Start with revenues first– Why? Hint: go back and look at

purpose of business

• Otherwise, variation – ambiguity

• Look at adidas-Solomon and Puma pg. 76. NB! You will see them again


23

Income Statement Conventions

• Prudence and realization– Recognize revenues when earned

• Examples page 78

• Matching – most fundamental of all– First recognize revenues– Then match expenses when the expense

contributed to earning revenue– Basis of accrual accounting

• Examples pp 79-81; know well!


24

Income statement Ratios

• Profit margin– Portion of revenues that becomes profit– Varies considerably among industries– Related to leverage and gearing

• Gross profit margin– Portion of revenues that is gross profit– Applies to certain industries, e.g.

retailing

Documents

The Elements Position and Performance. 2007/01/16International Business Program Financial Accounting 1 The elements Assets – what it has Liabilities –