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