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ADM1300 (206)

Introduction to Accounting.docx

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Matthew Archibald

Accounting Accounting is an information system for the complete processing of financial information Financial  Serves external users, relates to activities of firm as a whole  As a shareholder, you are external to the company  Looks at historical aspects of a business (annual reports) Managerial Accounting  Serves internal users, helps in planning forward looking rather historical  Look at how one can budget  Forward looking (how are we going to control costs) Financial Statements Statement of Cash Flow Statement of returned earnings Balance sheet Income statement What is focused on in this course? Balance Sheet & Income Statement Financial Ratios Balance Sheet: Keeps records of assets and liabilities Shareholder equity The assets must equal the liabilities + shareholder equity  A snapshot of the financial condition of the business at a point in time  In the example given, it is December 31 , 2007  Liabilities are what the company owes Left hand side is broken up into assets  What the company owns are its asset o Are a result of past events for which we expect to derive some future benefit Liabilities: the debt to the company Shareholder equity: what is the residual interest in the company’s offering (assets) Current Assets Assets that are expected to be turned into cash within a period of one year (365 days or less) The way that they appear on a balance sheet is in declining liquidity. (How easily that asset can be converted into cash) Cash Most liquid (cheques and money orders) always listed first because that is what you have Marketable Securities (an example is a These are short terms investments in our treasury bill) money which we expect to turn into cash in a year, but typically less than 6 months. Accounts receivable (something we have Money that is owed to you for services or paid for) products already provided If you sell a product, how long should you typically wait for that money to come into the business? 30 days, because when someone goes into the company and buys products, and give you a visa card. Notes receivable (money we expect to Money that is owed to you from other get back from other businesses) businesses. You expect to receive within a period of one year Inventories (December 31 you have an Amount of goods that you have on hand. inventory figure ) Prepaid Expenses (insurance; we expect Only expense item that we see on the to derive some future value from this. It is balance sheet (it is an asset) Expenses an asset because you can get rid of the that we have paid for as a company and insurance. Another example are office they are recorded as assets before they supplies.) are used or consumed. Fixed Assets (when you buy a piece of Tangible assets for continued use over the land that is an asset to an individual long term. We will have them for more because you own that land. When you than one year. Tangible means you can purchase a building, that building is touch it. now an asset to you. Buying equipment, car, computer) Three main fixed assets: With the exception of land, they all have this idea of being a depreciation asset. When we put the value of the asset on the balance sheet it is at its book value. Book Value vs Market Value What the assets are bought for and market value is what the market believes the asset is really worth. Does not have a depreciation factor. Depreciation Loss of a particular asset over a period time. Value that the asset decreases over time. In our case, we assume straight line depreciation. Straight line depreciation: The value that the asset decreases over time. Value of the asset decreases by the same amount each year. At the end of the useful life of the asset Salvage value: the value that we can derive at the end of the useful life of the asset YOU WILL HAVE TO DO THIS ON FINAL Calculate the accumulated depreciation on EXAM the balance sheet Where did the 2.4 million come from? We must be given two pieces of information is: Useful life of the buildings (10 years) Age of the buildings (3 years) Salvage value at the end of the useful life is:0 Now how do you get 2.4 million? Initial Value: 8 million Final value: 8 million Initial value-Final value/useful life 8 000 000 – 0 ----------------- x 3= 2.4 million 10 What does the 800k represent? How much the asset decreases every year The building is 3 years old You multiply the 800 000 by 3 Equipment Information given Useful Life: 15 years Age of equipment: 5 years old Salvage value: 0 7 500 000/15 (this gives you yearly depreciation) x 5(age of equipment) Element in good will in purchase in balance sheet: for instance, if a baron is overtaking a company and pays them 500k a little more because they believe the brand loyalty and the respective customer base has future value. Very complicated Liabilities Current Liability Payable- something that you must pay back Accounts payable If you make purchases on credit and you must pay them back. You have to pay that in 31 days Notes payable Taxes payable Government money Interest payable Interest payable in the next year Wages Wages that you have to pay Total Current Liabilities - It will be indicated what year he wants the future liabilities to pe paid Notes payable Bonds payable Long Term Liabilities Shareholders’ Equity Common stock When you issue the stock, how much is it originally worth Retained earnings At the end of the day, the money that is available in the company. You can “retain” it in the company or you can distribute it as dividends to shareholders. Retained earnings figure can be received from the income statement st Balance Sheet as of December 31 , 1993 Exercise Accounts payable 40,000 Accounts Receivable 35,000 Cash 20, 000 Notes payable 25, 000 Inventory 60, 000 Office Supplies 2, 000 Wages payable 1,5000 Retained earnings 28, 000 Interest payable 500 Land 10, 0000 Notes 55, 000 (due 1998) Building 80, 000 Store Equipment 35, 000 Goodwill 8, 000 Common Stock 100, 000 1. Ensure that you write that it is from ABC balance sheet as of December 31 , 1993 2. Assets on left hand side, and liabilities on the right 3. Indicate current assets: a. (suggestion: when doing balance sheet on an exam, that when you have this data, indicate where would the given data will go) Accounts payable CL- current liabilities Accounts Receivable CA
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