Ing. Ivan Souček, Ph.D. Kurz „Enterprise Economics“ VŠCHT, Ústav ekonomiky a řízení chemického a potravinářského průmyslu

Accounting information can be used to assess past financial performance of a company and help predict its future performance. All kinds of organizations— government agencies, nonprofit organizations, and others —rely on accounting to gauge their progress. The accounting process begins with a transaction. A transaction is any event that affects the financial position of an organization and requires recording.

Many concepts, conventions, and rules determine what events a company records as accounting transactions and how accountants measure the financial impact of each transaction. Financial statements are used to summarize the recorded accounting transactions.

Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform? Where does the organization stand?

Accountants answer these questions with three major financial statements: Income statement Balance sheet Statement of cash flows Learning Objective 1

- the value of an ownership interest in property - synonym: owners’ equity Total capital = Equity + Debt - German Eigenkapital or Danish egenkapitalen, i.e. own capital, is more self-explanatory - debt is Fremdkapital in German and fremmed- kapital in Danish, i.e. foreign capital

The balance sheet (also called statement of financial position or statement of financial condition) is a snapshot of the financial status of an organization at a point in time. The balance sheet has two sections (1) assets and (2) liabilities plus owners’ (stockholders’) equity.

Assets are economic resources that are expected to benefit future activities of the organization. Liabilities are the entity’s economic obligations to nonowners. Owners’ equity is the excess of the assets over the liabilities.

Stockholders’ equity Paid-in capital Retained earnings The owners’ equity of a corporation is called stockholders’ equity.

Learning Objective 2 King Hardware Company began business as a corporation—a business organized as a separate legal entity and owned by its stockholders. The company’s first transaction occurred on February 28, 20X1, when its stockholders invested a total of $100,000 cash.

The following additional transactions occurred during March:

144,000 King Hardware Transactions Analysis of Transactions (in dollars) for March

Balance Sheet The balance sheet for King Hardware

Balance Sheet Unipetrol Group 2015

Assets − Liabilities = Equity capital Assets = Liabilities + Equity capital

Revenues are increases in ownership claims arising from the delivery of goods or services. Recognize revenue by formally recording it in the accounting records during the current period only after it meets two tests: 1.The company must earn the revenues. That is, it must deliver the goods or render the services to customers. 2.The revenue must be realized or realizable.

Expenses are decreases in ownership claims (stockholders’ equity) arising from delivering goods or services or using up assets. Income (also called net income, profits, or earnings), is the excess of revenues over expenses. It increases stockholders’ equity. An income statement summarizes revenues and expenses. It measures an organization’s performance by matching its revenue and its expenses for a span of time, often a month, a quarter, or a year.

Expenses (Cost) consist from: - Variable cost (cost of raw material, utilities, …) - Fixed Cost (Wages, Maintenance, Financial Cost, …) - Depreciation

Income Statement Unipetrol Group 2015

The balance sheet equation can highlight the link between the income statement and balance sheet. Assets (A) = Liabilities (L) + Stockholders’ equity (SE) A = L + Paid-in capital + Retained income A = L + Paid-in capital + Revenue – Expenses

To account for long-lived assets, assets that will provide services for more than one year: (2) predict the residual value (1) predict the length of the asset’s useful life (3) allocate the cost of the equipment to the years of its useful life in a systematic way.

Dividends are distributions of assets to stockholders that reduce retained earnings. Cash dividends are distributions of cash rather than some other asset. The distribution reduces both assets and owners’ equity and is made possible by profitable operations. Learning Objective 5

Dividends reduce retained earnings, But they are not expenses. Companies do not deduct dividends from revenues when measuring income because they do not help generate sales or conduct operations.

Retained earnings and paid-in capital result from profitable operations. Equity is not a pot of cash awaiting distribution to stockholders. Stockholders’ equity represents the claims of owners arising out of their initial investment (paid-in capital) and subsequent profitable operations (retained earnings). Retained earnings and paid-in capital represent a general claim against, or undivided interest in, total assets, not a specific claim against any asset.

Retained earnings and paid-in capital result from profitable operations. Equity is not a pot of cash awaiting distribution to stockholders. Do not confuse retained earnings and cash. Cash can increase while retained earnings decreases, and vice versa. There is no direct relationship between retained earnings and available cash.

King Hardware Company Balance Sheet as of April 30, 20X1

King Hardware Company Income Statement for the Month Ended April 30, 20X1

King Hardware Company Changes in Retained Earnings for the Month Ended April 30, 20X1 This statement shows the linkage between the balance sheet and income statement. It starts with the beginning balance, adds net income for April, and deducts cash dividends, to arrive at an ending balance.

The monetary unit (for example, the dollar in the United States, the yen in Japan, or the euro in the European Union) is the principal means for measuring assets, liabilities, and stockholders’ equity. This measurement assumes that the monetary unit— the dollar, for example—is an unchanging yardstick. Yet, a 2010 dollar does not have the same purchasing power as a 2000 or 1990 dollar. Therefore, users of accounting statements that include dollars from different years must recognize the limitations of the basic measurement unit.

- usually one year (somewhere 52 weeks possible) - usually a calendar year in Denmark - since 1976, usually 1 October-30 September in U.S. - many synonyms, e.g. fiscal year, financial year, budget year - sometimes “fiscal year” refers to the year in which the period ends, not to the period per se

 Return on Assets ◦ Assets / (Revenues / 365)  Return on Inventory ◦ Inventory / (Revenues / 365)  Time of collection of Receivables ◦ Receivables / (Revenues / 365)

 Equity Ratio ◦ Equity/ Assets  Debt Equity Ratio ◦ Liabilities/ Equity  Interest Coverage ◦ EBIT/ Interests

 Current Liquidity ◦ Current Assets/ Short-term debts  Quick Liquidity ◦ (Short-term receivables + Financial assets) / Short-term debt  Cash Liquidity ◦ Financial Assets / Short-term debts