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MGCR 211 Scott September 2013.docx

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Management Core
MGCR 211
Julia Scott

September 9, 2013 Accounting is the information system which records, summarizes, and reports the underlying economic conditions of an entity. Financial accounting is used to report this information to external parties [managerial accounting is to use this information internally]. Financial statements are management’s report to owners. 3 profit-seeking entities: Sole proprietorship simple to establish, owner controlled Unlimited liability (no legal separation). All profits and losses belong to owner, report income on tax returns. Business ends if owner dies, can sell it. Easy and inexpensive to operate. No reporting requirements. Partnership simple to establish, shared control, broader skills and resources Two or more owner-managers. Want a formal agreement covering $ contributions, workload, withdrawals, decision-making. Each partner’s net income reported on his or her personal tax form. No tax advantage. General Partners: have unlimited liability (person A and B legally connected). Limited Partners: limited involvement, limited liability (LLP at the end of the name). Ends if the partners die or dissolve it, can try to sell your portion. Corporation Easier to transfer ownership, easier to attract investors, no personal liability, tax advantages possible. Separate legal entity from owners. Owners called shareholders. Limited liability. Can only lose investment, not personal assets. Taxed separately from owners: corporate income tax. Tax deferral if income not paid out but double taxation. Indefinite life: owners can sell their shares, doesn’t affect operations. Most complex (and expensive) to operate: More regulations, but easier to raise additional capital. Corporate Organization: Slide 8. IPO (initial public offer): when public company first offers shares. Shares bought on stock exchange do not “affect” corporation. **Dividends/Forced reinvestment Public companies must provide financial information publicly, private companies do not. Private corporations are not necessarily small. The amount initially invested by shareholders is called equity. Equity in a house: down payment. Liability is the mortgage, asset is the house. Increase in value of home (renos, etc.) is an increase in equity. Financial statements or reports Accounting system is reporting and summarizing information Reports prepared by management For Internal users and External users Annual report Or more frequent Or reports with different levels of details Who What Where Creditors (Lent $$) If it can be repaid Financial statements Cashflow, profit, earnings, types of assets Shareholders Profitability share price, if dividends are distributed, risk Management Performance Competition Government Regulators Financial press/analysts Financial statements cannot be bent like a CV have to meet standards, be accurate/reliable. Annual report reliable sooner information is released, the less reliable it is. Accounting Standards: GAAP: generally accepted accounting principles (not rules) Set of accounting recommendations and guidelines used to prepare financial reports. Qualitiatve Characteristics Understandability Relevance Reliability Comparability September 11, 2013 Balance Sheet Components: 1. Assets: future economic benefit to company cash, receivables, inventory, equipment 2. Liabilities: future obligations of company payables, bank loans, mortgages 3. Equity: amount invested by owners share capital, retained earnings (dividends are payouts to owners) Accrual Accounting Income statement based on the concept of accrual accounting is the best measure of performance. -Recognizes the difference between when a sale is made and when the cash is collected Or when an expense is incurred when it is paid Statement of Cash Flow Shows the cash inflows and outflows during the same period as the income statement but class…[slide 34] Responisbility for Financial Statements 1. Management: Statement of Management’s Responsibility, Management Discussion & Analysis in the annual report 2. Auditors September 16, 2013 Statement of Earnings comes first on a Financial Statement, because it has all of the bottom-line totals. Operating expenses are usually ordered with larger/more important expenses first. Management undertakes 3 types of activities:  Investing  Financing  Operating  I.e. there are 3 different types of expenses. Important Margins Gross margin = cost of sales/sales Net profit margin = net earnings/sales Payout margin = payout/net earnings Debt to equity = current liabilities + long-term debt/shareholder’s equity Current ratio (liquidity) = current assets/current liabilities Current assets are listed in order of liquidity. 1-Sided Accounting (Your Bank Account)  Bank statement is a summary of all deposits to & withdrawals from your bank account.  Doesn’t tell you where your money comes from  Need a better approach Transactions are events that must be recorded in FS. 2 Types:  External: between co. & outside party. Involves an exchange of assets, liabilities or equity  Internal: within the co. IF event results in a financial impact that you can measure with reasonable accuracy. Double Entry Bookkeeping  Account: an individual listing or record of changes in a specific asset, liability, or equity.  Transactions affect two (or more) accounts and we adjust all accounts affected.  Your bank account – need to track where $ goes (what it is spent on) when you withdraw to get a useful report. Assets = Liability + Equity T Accounts Assets [TTTT] Liabilities + Equity [TTTTT] Individual T Accounts  Create a T account for each account. 1 side of the T increases the account. The other side decreases it.  They will normally have the balance (debit/left-hand side, credit/right hand side) the same as the Balance Sheet T account.  Assets: debit balance.  Liabilities and Equity: credit balance.  Increases in an account are recorded on the same side as its normal balance. Increases in assets are debits. Increases in L & E are credits.  Decreases are the opposite. A decreases credits, L&R decreases dr. Net Earnings and Equity  Net Earnings not paid out become Retained Earnings  Things that increase net earnings therefore increase retained earnings: Revenue  Things that decrease Net Earnings decrease Retained Earnings: Expenses  The set of earnings explains the changes in retained earnings, that balances the balance sheet. Revenues, Expenses & T Accounts  If increases in revenue increase equity, increases should be credits (decreases dr.)  If increases in expenses decrease equity, increases should be debits (decreases cr.)  Revenues normally have Cr balances.  Expenses normally have Dr balances. Trial Balance  After all transactions are recorded in the T accounts prepare a summary listing of the accounts: Trial Balance  List accounts from assets, thru liabilities & equity to revenue and expenses  2 columns: Debit and Credit balances  Totals are equal (Balance) Cash Flow Statement  Cash flow statement does not come from the T accounts.  Prepared by analyzing the transactions on the balance sheet and income statement.  How much did cash increase or decrease?  Was it an Operating, Financing, or Investing Activity? GAAP: Generally Accepted Accounting Principals  So far everything has been cash accounting.  Recall: GAAP uses Accrual Accounting to measure performance  Accrual Accounting recognizes the difference between when the transaction occurs and when the cash is received or paid.  Results in additional accounts on the B/S & ST of E and requires decision about when to record some transactions (what new accounts?). Qualitative Characteristics of Accounting Information  Understandability  Relevance o Timely, predictive value, confirmatory value  Reliability o Representational faithfulness, substance over form, neutrality, prudence, completeness  Comparability (consistency) 3 Basic Principals of GAAP 1. Accrual Accounting a. Revenues and expenses recognized based on performance not when the cashflow occurs 2. Revenue Recognition a. Revenue should be matched to the period it was earned. Revenue is earned form operations (not selling shares to investors) b. Tradeoff between timely info and reliability c. Has revenue been earned? i. Has the co. performed the majority of the things it has to do for the sale? ii. Can the amount be reasonably measured? iii. Is there reasonable assurance that the amount will be collected?
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