| Understanding
Financial Statements |
There are 2 Main Financial Statements
- The Balance Sheet
- reports the financial condition of a business at a
point in time
- Assets = Liabilities + Owners'
Equity
- The Income Statement
- shows the operating results of a business over a
period of time
- Revenues - Expenses = Net Income
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Direct versus Indirect Costs
- Direct Costs
- costs that are directly traceable to a
specific department or division
- Departmental Revenues - Direct Costs =
Departmental Contributory Income
- Indirect Costs
- are not easily traceable to a specific department
and are not directly incurred by the department
- indirect costs are incurred by supporting departments
such as administration, marketing, maintenance, and energy
- indirect costs are allocated using a
number of different bases (e.g., percentage of revenues, square
footage, or percentage of employees)
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Calculating Inventory Value
- Specific Identification
- records the actual cost of each item
- assumes the cost of each unsold item can be accurately
identified
- typically used for high priced items
- FIFO
- assumes the first units purchased are the first items sold
- LIFO
- assumes the last items purchased are sold first
- Weighted Average
- calculates a weighted average cost for all items
available for sale in a category
Note:
each of the 4 methods will produce a different value for ending
inventory,
which in turn will produce a different cost of sales
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Cost of Sales Equation
beginning inventory
+ purchases
- ending inventory
---------------------------
gross cost of sales
+/- transfers of inventory
---------------------------
cost of sales
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Depreciation Methods
- Straight Line
- (cost of asset - residual value of the asset) / life of
asset in time
- Units of Production
- (cost of asset - residual value of the asset) / life of
asset in units
- Sum-of-the-Years Digits
- (cost of asset - residual value of the asset) * SYD
fraction
- this is an accelerated method allowing greater amounts of
depreciation in the early years of the asset
- Double Declining Balance
- (2 / years of asset life) * net book value of the asset
- this method ignores residual value
- this is an accelerated method allowing greater amounts of
depreciation in the early years of the asset
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6 Major Categories of Accounts on the Balance
Sheet
- Current Assets
- primary operating accounts representing a major part of
working capital
- cash, account receivables, marketable securities,
inventories, and prepaid expenses
- Fixed Assets
- land, buildings, FF&E, other inventories not for
resale
- Other Assets
- assets that cannot be easily classified as either current
or fixed
- Current Liabilities
- the other major part of working capital
- accounts payable, accrued expenses payable, customer
deposits, current amounts due on long-term debt
- Long-term Liabilities
- mortgage payable, notes payable
- Owners' / Stockholders' Equity
- stockholders' equity infers a corporate business form
- typical accounts are: capital or common stock,
preferred stock, retained earnings
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Retained Earnings
- chronological record of the stockholders' equity
- describes earnings, losses, cash and stock dividends paid
- Retained Earnings Equation:
beginning retained earnings
+ Net Income (note: this is negative if we
have a net loss)
- Dividends
--------------------------------
ending retained earnings
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Balance Sheet Limitations
- shows all non-current fixed assets at its historical price
- the actual fair market value may be much higher than the
historical price
- reports the financial condition of a business at a specific
point in time
- a business may be in a strong cash position today and in
a poor cash position tomorrow
- the method used to determine inventories and depreciation
are left to the judgment of management
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