Efefred - CORe - FA (53)

debit vs credit

Debits on the Left; Credits on the Right.

Financial Position vs. Financial Performance

balance sheet shows the company's financial position income statement shows the company's financial performance

EBIAT

Earnings before interest after taxes, or EBIAT, is a measure of how much income the business has generated while ignoring the effect of financing and capital structure, or the proportion of debt that the business has. As the name implies, interest expense, which is included on the income statement, is added back, and income tax expense is calculated and subtracted based on earnings before interest.

Journal Entries

Every journal entry has one line for each account affected There are always at least two accounts affected The total of all debits must equal the total of all credits Journal entries are generally formatted with the debits first, then credits Each journal entry has a date associated with the entry

FASB

Financial accounting standard board: GAAP generally accepting accounting principles

free cash flow

Free cash flow is calculated using the formula FCF = EBIAT + Depr - CAPX - ΔNWC

liquidity

How quickly and easily an item can be converted to cash.

Leap years

If it's a leap year, should we use 366 days instead of 365 days when calculating ratios?

order in a balance sheet

In the US, you will almost always see Cash listed first, followed by Accounts Receivable and then Inventory. These three accounts are generally accepted to have that order of liquidity. However, as a company adds accounts, such as Prepaid Expenses, Notes Receivable, Other Receivables, etc., the company will have to determine how to order these accounts in relation to all others, and there could easily be reasonable differences in opinion from one company to another. Another common practice is to list any accounts with the term "other" in the title, such as Other Current Assets, at the end of the section, after all other accounts have been ordered by liquidity.

IASB

International accounting standard board

IFRS

International financial reporting standards

Assets=?

Liabilities + owner's equity assets should balance liabilities and owner's equity

gross profit equation

Net Revenue - COGS = Gross Profit

Net Working Capital

Net working capital refers to the business having cash tied up in operations. As the business grows, it will typically need more cash to fund day to day operations. For example, as a business increases its sales, and services more customers, it will often need to increase the amount of inventory that it carries. This is cash that will be dedicated to the business and won't be available for other purposes. We measure net working capital as current assets less current liabilities. To calculate the change in net working capital, which we need for our calculation of free cash flows, we take the difference between net working capital for the year being projected and the net working capital from the previous year.

EBIT calculation

Once we have EBIT, we can easily calculate EBIAT. To calculate EBIAT we multiply EBIT by 1 minus the tax rate. So at this stage, we have merely taken away the impact of interest from the income statement. We have re-applied the tax rate to the EBIT in arriving at EBIAT. In our formula, FCF = (1-t) x EBIT + Dep - Capx - Δ NWC EBIAT is another name for the bolded portion: (1-t) x EBIT

prepaid expense is not an expense account

Prepaid expense will be converted into an expense at a later date, when the goods or services are provided. This, again, is an example of accrual accounting and the matching principle.

Permanent and Temporary Accounts

Real and nominal accounts are also sometimes referred to as permanent and temporary accounts, respectively. Real accounts, or permanent accounts, are asset, liability, and equity accounts, all of which end up on the balance sheet. They are considered permanent because they maintain a cumulative balance over time. Nominal accounts, or temporary accounts, are revenue and expense accounts, all of which end up on the income statement. They are considered temporary because they only reflect activity for a given accounting period, then they are closed and reset to zero. We will learn more about the closing process later in this module.

Buying on credit: IOU

Short term financing, like burrowing money from bank: 30 day pay day. increase in assets, increase in Liabilities then once they pay it both go down

income statement vs balance sheet

The income statement shows a company's financial performance over a period of time. The balance sheet shows a company's financial position as of a specific date.

The Matching Principle

The matching principle requires that a company match its expenses to the related revenues in the accounting period to which they relate.

T Account

There is a separate T-Account for each account, such as Cash or Accounts Receivable Every T-account has a beginning and an ending balance, though the balance may be zero A T-account covers activity for a period of time, for example, the month of January or the year 2014 Every transaction will affect at least two T-accounts If you add the ending balances of all T-accounts, the total of all debits must equal the total of all credits

Methods of accounting

cash-- recorded and cash: small businesses accrual-- mostly all companies use, when merchandise is delivered revenue is recorded

"closing the books"

company could tally up the totals of revenues and expenses and then record an entry in another ledger to transfer the net income to retained earnings

Owner's equity

control the business and make decisions, discretionary (not obligatory) Owners' Equity = Assets - Liabilities.

Currently, two broad sets of accounting standards exist:

US GAAP, which is used primarily within the United States, and IFRS, used by many countries throughout the world. While the standards are similar in many ways, there are some significant differences.

liabilities

accounts payable + wages payable

buys on credit

accounts receivable

conservatism

anticipate future losses, not future gains

nominal accounts

are more detailed net effect becomes earnings in CLOSING PROCESS

Suppose the Spicy Maya Hot Chocolate sold by Cardullo's was purchased for $8 from their supplier.

assets go down, owner's equity go down

Memberships for the business

assets go down. increase in assets for benefits. assets go down, owners equity goes down.

calculating present value

=PV(rate,nper,pmt) Rate is the interest rate (also known as discount rate) for the period. Nper is the number of payment periods for the given cash flow. Pmt is the payment, or cash flow, to be discounted.

CHANGE IN NWC

Always start with 0

Gift Cards

Assets go up, liabilities go up!

common stock vs. deterred earnings

COMMON STOCK Common stock reflects the amount of funding raised by issuing shares of stock to individuals that will hold a stake in the company. We would generally expect common stock to stay the same from year to year, unless the business is planning on issuing more stock or buying back its own outstanding shares. In our example below, we'll assume it is going to stay constant from one year to the next. RETAINED EARNINGS Retained earnings reflects the earnings that have been retained in the business to finance growth or future operations. For any given year, we can forecast retained earnings by adding the amount of prior year retained earnings plus current year net income, excluding amounts to be distributed to shareholders.

entity concept

do not record things that don't relate to the business

Double entry accounting

each transaction recorded has two sides—a debit and a credit. By making sure that the total of all debits always equals the total of all credits, we can also be sure that the accounting equation Assets = Liabilities + Owners' Equity will always balance.

so like yoga membership is 1200, when should this revenue be recognized?

evenly throughout the year! liabilities increase!

Realization principle

if business performs the work it can recognized revenue even if it did not receive the cash.

Liabilities

loan from a bank, wages, accounts payable to supplier: Any obligation that needs to be paid to a third bank.

revenue also means

net sales

Money Measurement

only things that are measured in monetary terms should be recorded

Materiality

really small charges that don't really need to be recorded

guiding principles of accounting

relevance and reliability (many degrees: valid, unbiased, verifiable)

what are Assets?

resources like cash or equipment that are controlled by the organization

The Going Concern

so like things will be keep going- accrual accounting allows us to assume business is a going concern

transactions

taking it out a loan, paying invoices, selling merchandise * all transactions affect balance sheet *

Because businesses should anticipate and record future losses, but not future gains.

true

current assets (same thing as current liabilities)

turn into cash in less than a year in the US these are listed first, and in the order of how fast they can be converted into cash: more liquid items come first

accrual accounting

under the accrual method of accounting, transactions are recorded in the accounting period to which they relate, regardless of when cash is exchanged.

revenue is not recorded

until company has delivered the product!!

Revenue

value that company is producing