Accounting
is backward-looking and risk free
Finance
is forward-looking and involes massive uncertainty
Income Statement
- show results
... [Show More] of operation over time;
- revenues - expenses = net income
- Think of the income statement as a video camera tracking performance for a period.
- usually regarded as the most difficult to analyze and interpret.
Balance Sheet
- a "snap shot" of a firm's assests & financing at a paticular point in time
- viewed as a still shot of what the firm has at one particular moment.
- Assets= Liabilities + Owner's Equity
Statement of Cash Flows
tracks all cash in and out of the firm
Cash Accounting
cash in =revenue
cash out=expense
Accrual Accounting
- revenues are recognized when the earnings process is complete;
- expenses are "matched" to recongized revenues
Cash-based income
- an informal metric based on cash in & cash out of the firm
- cash-based income is similar to what we call Cash Flow from Operations (i.e., CFO)
Income for tax purposes
based on the government's definition of income, this is the amount of income the government will tax
Accounting income
- the income calculated using accrual accounting (aka, GAAP); best
- most complicated metric for understanding the operations of the firm
= reported on the firm's income statement as net income
On the Income statement
Revenues- Cost of goods sold= Gross profit
- Operating expenses= earning before interest & taxes
- interest expenses, - taxes= Net income
Revenue
- recognized when "earned"
- Management's discretion over revenue recognition is significant.po[
Cost of Goods Sold
direct costs of materials & labor
Gross profit
revenue - cost of goods sold
Operating Expenses
expenses not directly associated with production (office expenses, administrative expenses, depreciation, research & development)
EBIT
Earnings before interest & tax; Gross profit - operating expenses
* also known as operating income
Net Income on balance sheet
EBIT - interest - taxes
Current Assets
cash, marketable securities, A/R, inventory= total current assets
Marketable securities
- short-term, high-quality securities such as US Treasury Bills and certificates of deposit (CDs).
Account receivable (AR)
- balance in AR represents cash not yet collected from customers on goods previously sold
- management should take action to reduce the AR balance.
- To the extent that management does not recognize potentially bad debt, the listed AR balance is deceiving.
Fixed Assests
gross fixed assets- accumulated depreciation = net fixed assets
Gross fixed assets
represent the original cost of the fixed assets currently owned by the firm.
Current Liabilities
A/P, accruals, notes payable
- obligations that require cash in the next year and are usually listed in order of maturity (shortest first).
Accounts Payable (AP)
- money owed to suppliers as a result of purchases made on credit
- opposite of AR
Notes Payable (NP):
involves an explicit interest-bearing arrangement with the lender.
Accrued wages
wages that the company owes to employees, but has not paid yet
Long-term liabilities
debt to be paid in more than 1 year
Equity
= Assets - Liabilities
= Common stock(CS), additional paid-in capital (APIC), retained earnings (RE)
* Value of all common stock issued by the firm = CS + APIC
Gross PP&E
orginal cost of property, plant & equipment
Accumulated depreciation
total of all depreciation claimed against the firms fixed assets
basic equation for the balance sheet is:
Equity = Assets - Liabilities
Net PP&E
original cost (Gross PP&E) - accumulated depreciation
Net Income (linking balance sheet & income statement)
= dividends + change in retained earnings
* Retain within the firm and dividends
* There are only two things a company can do with its net income: 1) pay it out as dividends to shareholders, or 2) retain it within the firm.
New Retained earnings
= old retained earnings + change in retained earnings or
= old retained earnings + net income - dividends
* represent the accumulated net income of the firm less dividends paid.
Q2 - The basic balance sheet equation states that Assets are equal to Liabilities plus Owner's equity. This is because all assets are:
Financed either by other people's money or by the firm's owners' money.
Q-4:The matching principle in accrual accounting requires that:
Revenues are matched to the expenses incurred to generate the revenues
Q-6: The evolution of retained earnings is best described by:
Change in retained earnings= net income - dividends
Net fixed assets represents:
The original cost of the firm's assets held for use less accumulated depreciation
Q-8 A firm can use retained earnings to pay bills
False
q-10: Tax expense as shown on the income statement is the amount of cash the firm paid to the taxing authority during the period.
False; Income tax expense (aka provision for taxes) is rarely the actual amount of tax paid during the period. The tax provision on the income statement is calculated as if the tax code is identical to financial accounting standards. In reality, the tax code differs in many ways from financial accounting. Hence, the actual tax liability can be higher or lower than the reported income tax expense
Q11: Accrual accounting recognizes:
Revenues when the earnings process is complete and matches expenses to revenues recognized.
Q12: An income statement always provides an accurate measure of a firm's cash flows.
false. The income statement may help you understand firm operations, but net income does not necessary show cash to the company. [Show Less]