Basic Accounting Principles - gpvec(-51)

1、Basic Accounting PrinciplesThe Financial StatementsAccounting TermsAccount A group of items having common characteristicsTypes of Accounts Asset Liability Income Expense EquityChart of AccountsListing of all of the accounts used by a businessAsset AccountsItems of ValueCharacterized as current and n

2、on-currentLiability AccountsClaims that others have against the assetsHave a known: Amount Date to be paid Person to whom payment owedAlso current and non currentEquity AccountsClaims that the owner has against the assetsSometimes called net worthDifference between value of assets and liabilitiesInc

3、ome and Expense AccountsTypes of equity accountsSimple accounting systems often only contain these accountsDouble vs Single Entry AccountingSingle One account entry for each transactionDouble Two account entries for each transaction One debit and one creditHybrid systems May not match income with ex

4、penses May not distinguish cash, check, or creditBasic Accounting EquationAlways maintained in double entry accountingAssets will always equal liabilities plus equityTransactionsWill be equal and offsettingTwo types: Income & Expenses Transfers between accountsCash and Accrual AccountingRefers t

5、o the timing of entries into the accounting systemCash Based RecordsTransactions are recorded when cash is received or paid outAccrual Based RecordsTransactions are recorded when they take placeRegardless of whether cash is involvedAccrual Adjusted StatementsCash based records are kept throughout th

6、e yearNon-Cash adjustments are made to the cash based income statement at the end of the yearAccount ValuationIncome Accounts Value received is recordedExpense Accounts Value paid is recordedLiability Accounts Value is dollar amount owedAccount ValuationAsset Accounts More difficult because they may

7、 not be traded routinelyAsset ValuationCost BasisMarket Value BasisCost Basis Asset ValuationOriginal cost minus depreciationMust establish a depreciation methodMarket Basis Asset ValuationRecorded as the price they could bring if sold, less selling expensesBased on recent auctions, appraisals, etc.

8、DepreciationSection II page 29, (FFSTF Guidelines)Allocation of the expense that reflects the “using up” of capital assets employed by the businessConceptually, this is done over the useful life of the asset in a “systematic and rational” mannerDepreciationAllocation applied to original cost minus s

9、alvage valueAccelerated versus straight line methods Example of difference between management records and tax recordsCan overstate or understate true incomeFinancial ReportsBalance SheetIncome StatementStatement of Cash FlowsStatement of Owner EquityBalance SheetRepresents a financial situation at a

10、 single point in timeHas a date on itBroken down by: Type of Asset or liability Time or life of the account typeBalance SheetCurrent Assets Cash and other assets that will be converted into cash during one operating cycleNon-Current Assets Those not expected to be converted into cash in one operatin

11、g cycleBalance SheetCurrent Liabilities Debts that will come due within one year from the balance sheet dateNon-Current Liabilities Those debts due more that one year from the balance sheet dateBalance SheetIntermediate Assets and LiabilitiesLong term Assets and LiabilitiesCan use cost or market val

12、uations or bothSupporting Schedules are very helpfulWill need a balance sheet for beginning and ending of accounting periodIncome StatementSummary of income and expensesRepresents a period of time between two balance sheetsExplains the change in equity between two balance sheetsCan be divided into e

13、nterprise reportsCan be cash or accrualAssetsLiabilitiesEquityAssetsLiabilitiesEquity+/- Net Income+/- Valuation Changes- Family living withdrawals+ Capital contributionsBeginning Balance SheetEnding Balance SheetIncome StatementWill have more than one profit lineDefinition of Profit Financial profi

14、t is the net return to business equityAccrual Adjusted Income StatementCash incomes and expenses must be adjusted by: Changes in non-cash assets Inventories Pre paid expenses Receivables Changes in non-cash liabilities Payables Accrued interestStatement of Cash FlowsNot the same as a cash flow plan

15、(Budget)Is a historical record of sources and uses of fundsDivisions of Statement: Cash from operating activities Cash from investing activities Cash from financing activitiesStatement of Owner EquityExplains the change in owners equity between two balances sheetsChanges due to : Net income Change i

16、n inventory valuation Family living withdrawals Capital contributions Capital distributionsFinancial AnalysisAll business owners should have a basic set of financial statements at their disposal and they should know how to analyze and interpret them.Financial AnalysisTwo Objectives Measure financial

17、 condition of the business Measure financial performance of the businessFinancial AnalysisHorizontal AnalysisVertical AnalysisRatio AnalysisHorizontal AnalysisLooks at trends in performance and strength over time For example, percent change in net income from year to yearVertical AnalysisLooks at wi

18、thin year events rather than over time For example, interest expense as a percent of total expensesRatio AnalysisAllows for consistent comparison of a single business over time as well as comparison between businessesConverts nominal dollar amounts to a common basisSource of data for Ratio AnalysisB

19、alance SheetIncome StatementFarm Financial Standards Council (Five Criteria)LiquiditySolvencyProfitabilityFinancial EfficiencyRepayment CapacityRatio Analysis16 different ratios commonly usedEach has limitationsProper interpretation is criticalLiquidityAbility of a business to pay current liabilitie

20、s as they come dueLiquidityCurrent Ratio Current Assets/Current Liabilities Less than one is badWorking capital Current assets minus current liabilities Negative number is badSolvencyAbility of the firm to repay all of its financial obligationsSolvencyDebt to Asset Ratio Total liabilities/total assets Greater than one badEquity to Asset Ratio Total equity/total assetsDebt to Equity Ratio Leverage ratio Less than one betterProfitabilityRate of return on assetsRate of return on equityOperating profit margin ratioFinancial EfficiencyMeasures t