Accounting for Managers

1. Accounting for Managers Module 4:

2. Financial Statements

3. Account Categories • Accounts are the categories into which transactions are classified (assets, liabilities, equity) • Assets (current, long-term, intangible) • Current: checking, savings, accounts receivable, inventory, prepaid expenses • Long-term: equipment, land, buildings, vehicles • Intangible: intellectual property, goodwill, investments • Liabilities (current, long-term) • Current: accounts, sales tax, income tax, wages, unearned revenue • Long-term: debt • Equity (owner’s capital, withdrawals, revenue, expenses • Revenue: sales, service • Expenses: salaries/wages rent, insurance, taxes

4. Account Categories (cont.) • Control accounts (accounts receivable, inventory), backed up with subsidiary ledgers • Equity accounts: capital contributions by owner and withdrawals • equity is value of owner’s investment in business • Common business expenses (rent, salaries, advertising, administrative expenses, insurance)

5. Accounting Equation • Accounting Equation: • Assets = Liabilities + Equity • Assets – Liabilities = Equity • Expanded Accounting Equation: • Equity = Owner Contributions – Owner Withdrawals + Revenues – Expenses • Assets = Liabilities + Owner Contributions – Owner Withdrawals + Revenues – Expenses • Equation is basis for entire set of financial statements • shows what company owns, how much debt there is • Can be further broken down into subaccounts for data collection and informational purposes

6. Transactions • Transaction: economic event that has a monetary impact on financial statements • Recorded in a journal, sorted by account & posted to ledger, and transferred to financial statements • Pay cash for inventory, purchase display case on account, place advertisement in weekly newspaper, pay employees to work in store stocking shelves

7. Double Bookkeeping System • System of bookkeeping, where every entry to an account requires corresponding and opposite entry to different account • Left-hand side (debit), right-hand side (credit) • Accounting cycle: begins with transactions and ends with completed financial state

8. Entering Transactions in the Journal • Once transactions for month are journalized, they are posted to ledger pages • Journal entry is transferred to appropriate account • In cash account, debit represents increase, and credit represents decrease • Reference number is account number to which journal entry is posted • Next step is to create trial balance to make sure debit is balanced out by credit (equity on right, wages left) • Then accountant runs final check (adjusted trial balance) and then it can move onto financial statements

9. Key Financial Statements

10. Structures of Key Financial Statements • Income statement: shows revenues less expenses (net income) • always begins with revenue and continues with list of expenses for a period of time • Bottom line on income statement is either increase in owners’ equity (expenses exceed revenues) or decrease • Statement of Owners’ Equity: shows beginning owner capital, additions and subtractions to capital • Equity – Owner Contributions – Owner Withdrawals + Revenues – Expenses • Balance Sheet: indicates specific date that is always last day of time period covered by prior two statements

11. Relationships Between Financial Statements • Income Statement (the bottom line): flows to Statement of Owners’ Equity • Statement of Owners’ Equity: reconciles beginning capital to ending capital • Balance Sheet • Statement of Cash Flow: beginning cash and cash equivalents from balance sheet to ending cash

12. Key Information in Financial Statements • Multiple-step income statement begins with Net Sales • Cost of Goods sold directly matches cost of products sold against Net Sales • Publicly traded corporations raise capital by borrowing or selling stock on the open market • Balance sheet shows company’s assets, liabilities, and net worth • Statement of cash flows shows how changes in balance sheet accounts and income affect cash & cash equivalents

13. Analyzing Data from Financial Statements

14. Reporting Current Assets • Current assets include cash (bank account balances) & cash equivalents (safe assets readily converted into cash), accounts receivable, and inventory • Companies often sell products to customers on credit • Most liquid assets listed on balance sheet and will turn into cash fairly soon • Accounts receivable collected within 30 days • Some current assets are not converted to cash (prepaid expenses such as insurance)

15. Reporting Inventories • Inventory includes raw materials, work-in-progress goods, and finished goods held for sale • Exact makeup of inventory account will differ by company • manufacturing firm (raw materials) • Hope Depot or Lowe’s (finished goods only)

16. Reporting Stockholder Equity • Account on company’s balance sheet that consists of capital plus retained earnings • When business is not a corporation and has no stockholders, it will be reflected as Owners Equity • Also represents residual value of assets minus liabilities

17. Reporting Unearned Revenue • Revenues that make up gross income of business are reported on company’s income statement

18. Reporting Expenses • Expenses that are deducted from gross income to get net income are reported on income statement • Connection between balance sheet and income statement results from use of double-entry accounting or bookkeeping and accounting equation, Assets = Liabilities + Owner’s Equity

19. Quick Review Accounting is language of businessManager will be responsible for performance of your company, division, or departmentBeing informed consumer for accounting information may one day be the secret to your success