BUS3140

1. BUS3140 Lecture 7

2. Agenda • Accounting Basics • Identify and describe the ongoing requirements of finances, including budgets and financial reporting • Describe the basic funding model: common shares to founders, preferred shares to third parties, stock options for employees

3. basics Income Expense Asset Liability Equity Budget Profit/revenue

4. Central ideas Accounting involves bookkeeping, which refers to the painstaking and detailed recording of economic activity and business transactions. Accountants design the internal controls in an accounting system, which serve to minimize errors in recording the large number of activities that a business engages in over the period. The internal controls that accountants design can detect and deter theft, embezzlement, fraud, and dishonest behaviour of all kinds. In accounting, internal controls are the gram of prevention that is worth a kilo of cure. Financial statements are prepared at the end of each accounting period. A period may be one month, one quarter (three calendar months), or one year.

5. Central ideas (2) • The most important financial statement and financial reporting standards and rules are called generally accepted accounting principles (GAAP): • describes the basic methods to measure profit and to value assets and liabilities • what information should be disclosed in those financial statements released outside a business • The gold standard for preparing financial statements of business entities, but not always crystal clear

6. Things to be tracked/recorded Payroll (and deductions like taxes) Cash inflows (from sales) Cash payments (for anything and everything) Purchase orders and stock items for sale Capital assets (furniture, equipment, buildings, etc)

7. People who interact with accounting Customers Employees Suppliers and vendors Debt sources (like the bank) Equity sources (investors) Government agencies (taxes)

8. The 4 basic financial statements Balance sheet Income statement Statement of retained earnings Statement of cash flows http://highered.mheducation.com/sites/0073324833/student_view0/ebook/chapter1/chbody1/the_four_basic_financial_statements__an_overview.html

10. balance sheets (2) What happens if the balance sheet isn’t balanced?

11. Income statements

13. Statement of retained earnings

14. Statement of Cash flow

16. Shares in a Corporation • When creating a corporation you must define Classes of Shares • Common Voting Shares (required) • Common Non-Voting Shares • Preferred Shares

17. Common Voting Shares • Required • Distributed among all shareholders (percentage!) • Allows for shareholder to vote • Allows for shareholder to receive dividends • Allows for shareholder to have assets of company after closure and debts paid

18. Common non-voting shares • Same as above, but cannot vote • Do this to reward (or pay) shareholders without allowing them to set company policy or direction

19. Preferred shares • Can set up multiple classes of type “preferred shares” • Can be voting or non-voting • Offers advantages to investors • Might be “first to collect dividends” • Might be “first to own assets upon dissolution (after creditors)” • Could be anything you (the owner) choose

20. Employee stock options • Typically used to retain and attract employees • When “optioned” to employee, a price per share is determined (either current price or a discount). Later (defined in the agreement), when the employee is allowed to exercise the options – meaning the employee can sell the option at current market rates. Of course, if stock price decreases, no action is taken. • Vesting: the time period where the options are held for you, but not really yours (until a time or event transpires)