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Lecture 5: Accounting
•Balance sheet (page 84)
-Balance sheets supply detailed information about the accounting equation
-They show the firm’s financial position, and its assets, liabilities and owner’s equity at
a particular time
-an economic snapshot, applies at one time when it was made up, financial position of a
business at that moment.
-a look at what kind of assets we have and liabilities we have to pay and if anything is left
over for owner/us
- List in order from ease in turning them into cash, they are liquid assets, can be converted
into cash within a year. So start at the beginning with cash. Next would be marketable
securities, invested bonds in another company. Third one accounts receivable
•Assets- Current or Liquid Assets
-assets that can be converted into cash in one year
-Accounts receivable – a bill issued to a customer and within a 30 days period they will
pay you, g generate it by selling stuff
-Inventory of finished goods – want to sell but haven’t put out for sale
- Prepaid expenses – paid rent a head of time, in advance
-These have long-term use for more than one year
-you carry the market inventory at the cost or fair market value, general rule. If value of
stuff bought has fallen you adjust the cost down, if it has increased you do not adjust the
-These assets wear out
-So the value must be depreciated or decreased each year
-You may reduce the value by the useful life and take off that amount each year
-An example of this is an automobile, if go to buy a used car will not pay more who bought
it new. When buy a car worth 70% of what paid for. Used car, a car depreciates to 70%.
Equipment wares out so depreciate it; have to have a line in balance sheet for depreciation.
- Assets purchased (not developed) from outside the business
-Intangibles like patents, trademarks if purchased
-Goodwill that reflects the difference between the price paid for a business and
its asset value
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-Buy a patent from someone else, show in intangible area, same with if you buy a
corporation, goodwill is a dumping ground for extra value that isn’t recorded anywhere else.
Intangibles is purchased or you develop them yourself cost you $100 000, show this cost;
you would expense it. Would not show it in the assets side, to extent if you use it in the
business and they become profits. If develop own intangibles and you don’t sell them, they
don’t show up on the balance sheet until such time you have sold the asset. Important in
intangibles are the most important if only made them
-If you look at googles balance sheet the assets column comes to a certain figure, so does
liabilities and owners equity it comes to a larger number. Assets value of google which are
the chairs, tables and etc. that is the breakup value. If destroyed Google chairs, tables and
ECT. Would be left. If someone were to buy Google the values would be shown in goodwill.
Purchase a company there will be some residual value, you would hope.
- Current liabilities
-current liabilities are things that you have to pay within this year. The things you owe are
accounts payable, if buy something and I don’t pay for it, that is an account payable, that is
a debt. Borrow something from he bank, use credit card that is called a debt. Credit card
pay within a month or interest will add up and you will have to pay more.
-anything that has to be paid in the short term
•Liabilities – Long-Term Liabilities
•These are not due within a year, and business must usually pay interest on them
-Bank loans for specific projects
-Bonds or notes issued by the business
-Things that is due in a year or more. If go out and borrow money from the bank, to
purchase land to put up a warehouse that is a long time liability. If go to the bank to borrow
money for a particular project, maybe to buy a building that is a long term liability
-Revolving credits- suppose I am someone who buys and sells goods on a regular basis, is
eel stuff on a regular basis I need a certain amount of money to buy what I want to get so
bank gives me a revolving credit. For example, if I spend $20 000, now I owe the bank $20
000, as I start to sell that jewellery I repay part of, some of what I so what I used to repay
other expenses, but some of it to repay that credit. Buy another $20 000 and then you
eventually need to pay it off and you keep going through that process. Usually used for
inventory purchases, short term purchases, most businesses have revolving credit line.
Everyone needs money on a regular basis. Bonds are long term liabilities.
-Stated capital of each class of shares
-Any additional paid-in capital
-Owner equity is what goes up and down. What makes it balance? Contributing capital,
anyone put in extra money in and profits. For our purposes what you pay for shares in first
place you produce profits or losses because OE has to balance the equation. Maybe a lot of
extra assets there should be a lot of extra liabilities.
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