Business Administration 1220E Lecture 1: BUS - Sept 9, Pg. 7 - 54, Readings Notes

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Business Administration
Business Administration 1220E
Raza Khan

Bus1220E Readings Notes 1 18:49 Topic: Introduction to Financial Statements Financial Statements: Statement of Earnings, Balance Sheets, and Statement of Retained Earnings (Page 7-54) Statement 1: Income Statement (Statement of Earning or a (consolidated statement of Operations) - Shows how profitable the corporation during a particular period of time - Income statement is in the greater interest of investor because it shows a record of the company’s activities over an entire operating cycle (typically 1 Year) whereas a balance sheet shows the financial position on a given date - Income Statement: Revenue – Expense = Net Earning or Net Loss - Revenue and Expense must be recorded, if it falls under a specific period (even they haven’t paid for the item yet) Exhibit 1: Benson Retail Corporations (Income Statement) Net Sales Revenue Earned by the company from its customers for goods sold or service rendered (For goods) - For service based business, it’s referred as Operating Revenue - Always consider the value of returned goods and amount of cash discount for quick payment by credit customers. (Ex. $1000 - $100(Returned goods) = $900) - Net sales refers to sales not cash collected during this period Cost of Goods Sold (COGS) the total cost of merchandise sold during the period - In order to figure COGS, 1. Determine the cost of goods available to be sold (Inventory) Plus Purchases 2. Determine the cost of goods sold subtract goods in inventory on December 31, 2013 General Formula: Beginning Inventory + Purchases = Cost available to be Sold (COGAS) – Ending Inventory = COGS Exhibit 2: Benson Retail Corporations (Income Statement) For merchandiser or Retailer, there are associated cost of transportation / delivery known as freight. Also due to damages during the transportation process there may be purchase discounts or purchase return and allowances Formula: Inventory + ((Purchases + Freight – (Cost associated with delivery: Purchase discounts + Purchase Return and Allowance))/Net Purchases = COGAS – Ending Inventory = COGS Service Based Business - Gross Income: $$ earned by subtracting COGS from net sales - Operating Expense: Cost to operate business/administrative or selling expense - Deprecation Expense: Over time stuff becomes useless and must be “written down” or deprecated based on the expected useful life of the asset and its estimated residual or salvage value. This is deprecation is recorded as a expense because of IFRS. It’s cost is not charged in the year of the its purchase - Income from operations: Income from operation (operating profit or operating income) from net gain subtract expenses - Other income: other source of revenue (investment, interest, etc.) - Other expense: Other expense not deemed part of the company’s routine operations (Ex. Paying back borrowed Money) -Net Income Before Tax: Amount before tax - Net Tax Expense: Corp earning income must pay income tax. Calculated by a set tax rate -Net income After tax: The final profit after everything Statement 2: Balance Sheet - It’s a snapshot of a firm financial position on a given date - The 3 parts include Assets (Own), Liability (Owe) , and Shareholder’s Equity (Ownership/interest/claim) - Asset broken down to 2 parts: Current Assets and Property, Plant, and equipment Current Assets: normal course of business that will be converted to cash within a year. It is placed in order of liquidity. This section serves the reader the likelihood of the company committing its debt obligations -Cash – Money on hand in the bank - Marketable Securities: The investment of temporary cash surpluses in some form of short-term, interest-earning investments. It is a general practice to show marketable securities at lower prices to ensure conservatism. They can emphasize value using parenthesis - Accounts Receivable: Money that is owed to the company that will be paid in 30, 60 or 90 days for people paying on credit. There’s provision for people who may not pay back known as doubtful accounts. Formula (A/R – Less: Allowance for doubtful accounts = Net A/R) - Inventory (For non-manufacturer or Merchandiser): They are finished products that will be sold within a year and they are valued at their original cost or market value, whichever is lower. There are not changed and merchandising business does not add value to it. - Inventory (For manufacturer): It’s more complex, due to changes to the process. Accounting system for these must be modified and expanded in order to capture and record these additional activities. 3 parts are raw material inventory, goods-in-process, and finished goods inventory - Prepayments: It’s pay for an item in advance. They are expected to be used up in the short term. The value is not fully received when the payment is made, “the unused portion” is considered an asset. Investment in subsidiary: represents a controlling interest in a company (50% or more). Common stocks are not tangible asset and therefore it is not included with the property, plant, and equipment. Other Investments: Investments in other business with no controlling stake. They are listed at cost rather than market value. Property, Plant, and Equipment They are tangilble assets expected to last more than one operating period. They are intended to be used for ope
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