Financial Accounting 7/24/18

2. Financial Accounting 7/24/18 Kevin J. Collins, CPA/PFS, MST Tobin & Collins, CPA, P.A. 201-487-7744 www.tccpa.net

3. What is Financial Accounting? Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

4. Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). • In the U.S., the Financial Accounting Standards Board (FASB) is the organization that develops the accounting standards and principles. Corporations whose stock is publicly traded must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government.

5. Financial Statements • Financial accounting generates the following general-purpose, external, financial statements: • Income Statements Also referred to as “Results of Operations”, “Earnings Statement” or “Profit and Loss” (P&L) Statement • Balance Sheet Sometimes referred to as “Statement of Financial Position” • Statement of Cash Flows Referred to as “Cash Flow Statement” • Statement of Stockholders Equity

6. Income Statement Reports a company’s profitability during a specified period of time which could be one year, one month, three months, 13 weeks, or any other time interval chosen by the company. The main components of the income statement are Revenues, Expenses, Gains, and Losses • Revenues include things such as sales, service revenues, and interest revenue • Expenses include the cost of goods sold, operating expenses (such as salaries, rent, utilities, & advertising)and non-operating expenses such as interest expense If a corporation’s stock is publicly traded, the earnings per share of its common stock are reported on the income statement

8. Balance Sheet • The balance sheet is organized into 3 parts: • (1) Assets • (2) Liabilities • (3) Stockholders’ Equity at a specified date • (typically this date is the last day of an accounting period) • The first section of the balance sheet reports the company’s assets, which includes things such as cash, • accounts receivable, inventory, prepaid insurance, buildings, and equipment • The next section of the balance sheet reports the company’s liabilities. These are obligations that are due • at the end of the balance sheet and often include the word “payable.” For example, Notes Payable, Accounts Payable • Wages Payable, and Interest Payable. • The final section of the balance sheet is stockholders’ equity, defined as the difference between the amount • of assets and amount of liabilities.

10. Statement of Cash Flows The statement of cash flows explains the change in a company’s cash during the time interval indicated in the heading of the statement. • The change is divided into three parts • (1) Operating Activities • (2) Investing Activities • (3) Financing Activities

12. Statement of Stockholders’ Equity • The changes will include items such as Net Income, Other comprehensive income, dividends, the repurchase of common stock, and the exercise of stock options. The statement of stockholders' (or shareholders') equity lists the changes in stockholders' equity for the same period as the income statement and the cash flow statement.

14. Double Entry • At the heart of financial accounting is the system known as double entry bookkeeping (or "double entry accounting"). Each financial transaction that a company makes is recorded by using this system. • The term "double entry" means that every transaction affects at least two accounts. For example, if a company borrows $50,000 from its bank, the company’s cash account increases, and the company’s Notes Payable account increases.

15. What is the advantage of double entry? • The advantage of double entry accounting is this: • at any given time, the balance of a company's asset accounts • will equal the balance of its liability and stockholders' (or owner's) equity accounts.

16. Financial Accounting vs. “Other” Accounting • Financial accountingrepresents just one sector in the field of business accounting. • Another sector, managerial accounting, is so named because it provides financial information to a company's management. This information is generally internal (not distributed outside of the company) and is primarily used by management to make decisions. • Other sectors of the accounting field include cost accounting, tax accounting, and auditing.

18. Income Statement Sources Sales - Cost of Goods Sold • Owner $ • Lending / Loans • Investment $ Gross Profit - Selling Expense - General Administration Expenses Uses • Start Up Costs • Market Research • Legal • Patents / Trademark • Incorporate business or form LLC • Federal Tax ID Number • Permits & Licenses • Accounting • Purchase Inventory • Purchase Equipment = Net Income Return on Investment • Investor buys $1,000 worth of stocks • Sells shares 2 years later @ $1,200 • Net profit from investment is $200 • ROI = (200/$1,000) x 100 = 20%

19. Break Even! Compares the amount of revenues or units that be sold to cover fixed and variable costs associated with making the sales Sales – Fixed Expense – Variable Expense = 0 Sales (S) = Price per unit X Sale Units Solve for “S” • Sales Expense • Cost of Goods Sold • General Administration Expenses • Fixed / Variable Costs

20. Fixed Expense Variable Expense Costs associated with your business’ product that must be paid regardless of the volume of that product/service being sold Directly related to sales volume. As sales go up, so do variable costs; as sales go down, variable costs go down • Rent • Insurance • Salaries / Benefits • Professional Fees (Accountant, Lawyer, etc.) • Equipment • Depreciation • Marketing • Production Costs • Utilities – Manufacturing • Raw Materials • Inventory of products to be sold No change with the activity but per unit fixed cost changes with rise and fall in the level of activity Cost changes in total dollar amount as well as the change in the level of activity

21. Loan Principle • The amount you originally borrowed • The balance on the loan account • The original investment in a personal or business asset • + Loan Interest (Expense) • = Total Payment • Cash Flow (Operating, Investing, & Financing) • Items that don’t hit the income statement

22. Balance Sheet Assets = Liability + Owner’s Equity • An asset increase during the period decreases cash flow from profit • A liability decrease during the period decreases cash flow from profit • An asset decrease during the period increases cash flow from profit • A liability increase during the period increases cash flow from profit Assets (Short & Long Term) Liabilities (Short & Long Term • Cash (most liquid – Available immediately • Accounts receivable – Money owed to the business • Inventory • Notes Receivable – Due within one year are current assets • Notes that cannot be collected within one year are long-term assets • Land, Buildings, Equipment, Vehicles – Long – Term Assets • Accounts payable – Short term obligations • Notes Payable – Short term collection 1 year < • Accrued payroll & withholding Owner’s Equity • Common Stock – Stock remains fixed as its initial valuation • Retained Earnings – Earnings reinvested in the business after deduction of distributions to shareholders • Equity – Common Stock = Retained Earnings

23. Assumptions Expenses – Fixed Expense - Variable Expense (% of Sales) – Sale starts at 0 – Cost – Sale Price Salary Costs Sale Distribution  Cost of goods  Sale Price  Mark-Ups, Market Assume initial sales • Assume Growth Rate