Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Sample Statement of Cash FlowsSlide 23Slide 24Slide 25Slide 26Slide 27SENIOR OUTCOMES SEMINAR(BU385)ACCOUNTINGBASIC CONCEPTS•Going concern concept•Cost principle•Revenue principle•Matching principle•Cash basis accounting•Accrual basis accountingTYPES OF BUSINESSORGANIZATIONSA. ProprietorshipB. PartnershipC. CorporationTYPES OF BUSINESSORGANIZATIONSA. Proprietorship: 1. Usually small retail business or individual professional business (Lawyer and CPA) 2. Single owner with personal liabilityTYPES OF BUSINESSORGANIZATIONSB. Partnership: 1. More than one owner 2. Each owner is a partner with personal liability (general partnership)TYPES OF BUSINESSORGANIZATIONSC. Corporation: 1. Owned by stockholders with limited liability 2. Dominant form of business in the USThe Accounting Equation•ASSETS = LIABILITIES + OWNERS’ EQUITYOr•NET WORTH = ASSETS – LIABILITIES(DEBT)Also•Current assets + Fixed assets = Total assets•Short term debt + Long term debt = Total debt/liab.FINANCIAL STATEMENTSA. Balance SheetB. Income StatementC. Statement of Cash FlowsD. Statement of Retained Earnings51-52-5U.S. Corporation Balance Sheet –Table 2.1BALANCE SHEET ITEMS(Assets)A. Market value vs. Book valueB. Inventory1. LIFO/FIFO2. Beg. Inv. + Production – COGS=Ending InventoryC.Fixed Assets1. MACRS vs. Straight LineBALANCE SHEET ITEMS(Depreciation)Straight Line: $100,000 over 5 yearsYear Annual Deprec. Book ValueCost $100,0001 $20,000 80,0002 $20,000 60,0003 $20,000 40,0004 $20,000 20,0005 $20,000 0BALANCE SHEET ITEMS(Depreciation)7 year MACRS: $100,000 over 8 yearsYear Annual Deprec. Book Value (amount) (rate)Cost $100,0001 $14,290 14.29% 85,7102 $24,490 24.49% 61,2203 $17,490 17.49% 43,7304 $12,490 12.49% 31,2405 $ 8,930 8.93% 22,310 6 $ 8,920 8.92% 13,3907 $ 8,930 8.93% 4,4608 $ 4,460 4.46% 0BALANCE SHEET ITEMS(Liabilities/Equity)A. Liabilities1. Short term (AP, NP)2. Long term (Bonds)B. Stockholders’ Equity1. Retained Earnings = Net Income - Dividends91-92-9U.S. Corporation Income Statement - Table 2.2INCOME STATEMENT•Fixed Costs (FC) vs Variable Costs(VC)•Breakeven point: Revenues = Expenses•Contribution Margin(CM) = Price - VC•Net Income (Op Prof) = Sales – VC - FC•Breakeven point = FC / CMBreakeven Point (example)•Fixed Costs (FC) = $9,000 •Variable Costs (VC) = $2.40/gal•Price = $4.00/gal•Breakeven point: Revenues = Expenses•Contribution Margin(CM) = Price – VCCM = $4.00 - $2.40 = $1.60•Breakeven point = FC / CM Breakeven = $9,000/$1.60 = 5,625 •Total Rev = $4.00 * 5625 = $22,500INCOME STMT ITEMS(Operating Leverage)A. Operations: 1. Sales – FC – VC = Operating Profit2. Increased FC increases operating leverage. 3. A small change in sales leads to large change in EBIT-operating profit.B. Increasing leverage increases returns to investors.INCOME STMT ITEMS(Financial Leverage)A.Financing (financial leverage):1. Interest charges (fixed cost of debt)2. EBIT – I – T = EAT (net income)3. Increased debt increases interest charges and financial leverage.B. Increasing leverage increases returns to investors.STATEMENT OF CASH FLOWS(Source/Use)A.Funds flow income statementNet Cash Flow = NI + DepreB. Funds flow balance sheet1. Increase Assets: use2. Decrease Assets: source3. Increase Liability: source4. Decrease Liability: useOr Changes in balance sheet 1.Credits = Sources of funds2.Debits = Uses of fundsSample Statement of Cash FlowsCash, beginning of year 58 Financing ActivityOperating Activity Decrease in Notes Payable -93 Net Income 689 Decrease in LT Debt -248 Plus: Depreciation 116 Decrease in C/S (minus RE) -94 Decrease in A/R 36 Dividends Paid -206 Decrease in Inventory 60 Net Cash from Financing -641 Increase in A/P 4 Net Increase in Cash 638 Increase in Other CL 309 Cash End of Year 696 Less: Increase in other CA -39 Net Cash from Operations 1,175Investment Activity Sale of Fixed Assets 104 Net Cash from Investments 104Numbers in millionsStatement of Retained EarningsBalance of RE, 12/31/05 $710.0 Add: Net Income, 2006 113.5 Less: Common Dividends (57.5)Balance of RE, 12/31/06 $766.0TYPES OF ACCOUNTING METHODSA. Job order cost: job specific, geared towards customized, unique cost object.B. Process cost: used in mass production environment.C. Activity based cost: refines costing system by identifying individual activities as cost objects.D. Standard cost: budgeted amounts.TYPES OF BUDGETSA. Strategic BudgetsB. Capital BudgetsC. Operating BudgetsC. Cash BudgetsCASH BUDGETCollections: 30% cash, 70% creditCredit collections: 65% current month,20%/10% next two months respectivelyMonth: 1 2 3 4 collections month 4Sales 500 600 800 1000Cash 300 (1000*.3)CreditCurrent 455 (700*.65)One month lag 112 (800*.70*.2)Two months lag 42 (600*.70*.1)Total collections (month 4)