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Lecture 1

BUSI W3013 Lecture Notes - Lecture 1: Cfop Method, American Airlines, Debits And Credits


Department
Business
Course Code
BUSI W3013
Professor
Julian Yeo
Lecture
1

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INTRODUCTION
Business start with an idea of how to make $
Shareholders and debtholders
o It costs $ to borrow $
Claim of business deteriorates over time, so must make $ by investing
WHAT IS ACCOUNTING?
Read financial statements (for investors, for own planning)
Determine financial position and health
Calculating profits (first few classes)
External reporting (preparing and analyzing statements)
Language of business
o Identify, record, measure and communicate economic events in value terms
o Provide information for decision making purposes
Ultimate goal is to communicate
o GAAP: generally accepted accounting principles
Financial accounting vs. managerial accounting
o Financial: external
Less information information only according to GAAP
o Internal
More information (ex: cost) releasing more hurts competitive edge
UER OF FIRM FINANCIAL INFORMATION (DEMAND SIDE)
Equity investors
o Investment analysis
o What can you liquidate?
Debt investors
Management
Employees
Litigants
Customers
Potential buyers
Governments
o SEC (Securities and Exchange Commission) measures GAAP
o IRS (Internal Revenue Service) involves different set of statements
If taxable income is different from net income for financial reporting versus tax
puposes…
Disparity avoiding taxes
Competitors
o Read eah othe’s stateets to udestad ho a opetito is sueedig
o If gross profits at margins much higher cheaper inventory?
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THE FOUR STATEMENTS
Assumptions:
o Will continue operating
o In perspective of company
BALANCE SHEET
“tatement of financial position
Tells us what the business owns and who has claims over what the business owns
Accounting equation
o Forms the basis of the balance sheet
o A = L + Eq
Assets: what company owns
Liailit: liailit holdes’ lai
Euit: oe’s lai
T account
Owns
Owes
Assets (ex: goods, cash)
Debt holders (liabilities, equities)
o Only good for the day it is prepared (changes quickly)
INCOME STATEMENT
Net income (profit, earnings) = Revenue Expense
o Revenue
(expenses) i.e. taxes, COQS, SGRA, interest
------------------------------------------------------
Net income
Outcome = net income (net earnings / profit or loss / bottom line)
Parentheses indicates negative (e.g. expenses)
Revenue cash inflow, expenses cash outflow
o “o… et ioe cash / cash flow
Expenses
o SG&A: selling general and administrative expenses
i.e. rent, delivery, wages
o COGS: cost of goods sold
o Interest
o Taxes
Gross profit = revenue / sales COGS
Net income before interest and tax = revenues / sales COGS and SG&A
Net income = revenue / sales - expenses
STATEMENT OF CASH FLOW
Reconciles beginning and end cash balance
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find more resources at oneclass.com

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What has caused cash balance to change from beginning to end of period?
o Cash inflows and outflows are categorized under operating, investing, financing
Operating: people pay me money
i.e. collection from customers, paying back interest
Investing: interest paid to investors
i.e. oven
Financing: $ we and investors put into business
Direct vs. indirect method
o Only difference is operating cash flow section
Direct: explicitly list cash inflow and outflows that are part of operating activity
Indirect: star with net income (but must adjust to get operating cash flow #)
Depreciation affects net income but not cash flow
Interest is included in both net income and operating
STATEMENT OF SHAREHOLDER EQUITY
Ho shaeholdes’ lai of the usiess has haged
o When do shareholders get more claim of the business (of the assets)?
Net income belongs to shareholders
Produces change in equity
PIC (Paid in Capital): funds raised from equity not from ongoing operations
o More $ in business more assets / claim
Dividends: shareholders withdrawing claim from business (take out money)
Net income
o If companies making profit, who does the money belong to? Shareholders.
CHOCOLATE CAKE EXAMPLE
Cost: high-tech oven (including raw materials $500)
o Capacity: 10 cakes
Confident I can sell 10 cakes 5 cakes in year 1, other 5 cakes in year 2
o Cost is $50 on average, selling for $100
I put in $300, you will lend me $200
o 10% interest, principle repayment: 5 years
$20 a year + $200 after 5 years
Liability holders: anyone other than owner with claim
Balance Sheet Y0
Assets
Liability + Equity
Cash: 500
Loan (liability holder): 200
Equity (paid in capital): 300
Current vs. non-current liability
o Current: expected to turn around within year
E.g. accounts receivable (30-90 days)
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find more resources at oneclass.com
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