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Management II Chapter 4ii.doc

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Management (MGT)

Chapter 4 Pt2: Understanding Accounting Issues FINANCIAL STATEMENTS Financial statements: any of several types of status; most often used in reference to balance sheets, income statements and/or statements of cash flow. o Balance Sheets—a type of financial statement that summarize a firm’s financial position on a particular date in terms of its assets, liabilities and owner’s equality.  Assets • Current assets—cash and other assets that can be converted into cash within a year; normally listed in order of liquidity—the ease and speed with which an asset can be converted to cash; cash is perfectly liquid. Business debts can usually be satisfied only through payments of cash. Market able securities as short term investments are slightly less liquid but can be sold quickly if necessary. These include stocks or bonds of other companies, gov’t securities, and money market certificates. There are 3 important non-liquid assets held by many companies: accounts receivable, merchandise inventory and prepaid expenses. o Accounts receivable --amounts dues to the firm customers who have purchased goods or services on credit. Most businesses expect to receive payment within 30 days of a sale. Read example. Total accounts receivable assets are decreased accordingly. o Merchandise inventory—cost of merchandise that has been acquired for sale to customers but is still on hand. Assumptions must be made about which ones were sold and which ones remain in storage. o Prepaid expenses—includes supplies on hand and rent paid for the period to come. They are assets b/c they have are available to the company. • Fixed assets—have long-term use or value to the firm such as land, buildings, and machinery. But as buildings and equipment wear out or become obsolete, their value decreases  depreciation—distributing the cost of a major asset over the years in which it produces revenues; calculated by each year subtracting the asset’s original value divided by the number of years in its productive life. • Intangible Assets—non-physical assets such as patents, trademarks, copyright, and franchise fees that have economic value but whose precise value is difficult to calculate. Goodwill—the amount paid for an existing business beyond the value of its other assets.  Liabilities • Current liabilities—any debts owed by the firm that must be paid within one year. Include accounts payable— amounts due from the firm to its suppliers for goods, and/or services purchased on credit; a form of current liability. Long-term liabilities—any debts owed by the firm that are not due for at least one year.  Owner’s Equity • The final section of the balance sheet shows owner’s equity broken down into stated capital, paid-in capital, and retained earnings. Paid-in capital—any additional money invested in the firm by the owners. Retained earnings –a company’s net profits less any dividend payments to shareholders. o Income (profit-and-loss) statements –a type of financial statement that describes a firm’s revenues and expenses and indicates whether the firm has earned a profit or suffered a loss during a given period. REVENUES – EXPENSES = PROFIT  Revenues—any monies received by a firm as a result of selling a good or service or from other sources such as interest, rent, and licensing fees.  Cost of Goods Sold—any expenses directly involved in producing or selling a good or service during a given time period. • Gross Profit (gross margin)—a firm’s revenues (gross sales) less its cost of goods sold.  Operating Expenses—costs incurred by a firms other than those included in cost of goods sold. These are resources that must flow out of a company for it to earn revenues. Selling expenses result from activities related to selling the firm’s goods or services. These many include salaries for the sales force, delivery costs, and advertising expenses. General and administrative expenses (e.g. management salaries, insurance expenses, and maintenance costs) are expenses related to the general management of the company. • Operating Income and Net Income: managers must determine operating income—compares the gross profit from business operations against operating expenses. Subtracting income taxes from operating income reveals net income (net profit or net earnings)—a firm’s gross profit less its operating expenses and income taxes. o Statement of Cash Flows—a financial statement that describes a firm’s generation and use of cash during a given period.  Cash flows from operations: is concerned with the firm’s main operating activit
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