MICEP – Accounting I Tuesday, October 8, 2016 Presented by: Daljeet Cheema

McMaster Investment Council Agenda Purpose of accounting The general idea The statements What’s next Thursday, September 15, 2016 McMaster Investment Council

I Theory of accounting

Theory of accounting – The language of business Many people say: “Math is the language of God” Math describes objective reality of world Accounting is the language of business Accounting describes objective reality of a business Thursday, September 15, 2016 McMaster Investment Council

Theory of accounting – Objectives The goal is to help make decisions Thousands of things exist in business to make better decisions Performance Measurement Systems Customer Satisfaction Etc… Accounting is the most essential decision making tool Thought experiment: What happens if a business has no accounting? Thursday, September 15, 2016 McMaster Investment Council

Theory of accounting – Framework of tradeoffs and characteristics Decision Usefulness Relevance Predictive Value Feedback value Timeliness Reliability Verifiability Neutrality Representational Faithfulness Comparability Consistency Thursday, September 15, 2016 McMaster Investment Council

Theory of accounting – Finance & managerial Decision Usefulness Relevance Predictive Value Feedback value Timeliness Reliability Verifiability Neutrality Representational Faithfulness Comparability Consistency Thursday, September 15, 2016 McMaster Investment Council

Theory of accounting – Financial accounting Decision Usefulness Relevance Predictive Value Feedback value Timeliness Reliability Verifiability Neutrality Representational Faithfulness Comparability Consistency Thursday, September 15, 2016 McMaster Investment Council

II The general idea

The general idea – How accounting really works System of “books” that classify transactions Accounts in the books are affected by transactions Transaction types (simplified) Revenues Expenses Capital expenditures Gains Losses Each transaction results in something and is balanced in the books We’ll revisit this in the statements Thursday, September 15, 2016 McMaster Investment Council

The general idea – Examples of transactions Purchase some supplies (an expense) Supplies Expense 500 Cash 500 Purchase some equipment (a capital expense) Equipment 5000 Cash 5000 Sell some goods (a revenue) Sales revenue 1000 Cash 1000 Thursday, September 15, 2016 McMaster Investment Council

III The statements

McMaster Investment Council The statements Income Statement Add revenues: Sales revenue 1000 Subtract expenses: Supplies expense 500 Net Income: 500 How the company did over a period of time Thursday, September 15, 2016 McMaster Investment Council

McMaster Investment Council The statements Balance Sheet Assets Equipment 5000 Cash 1000 Liabilities Accounts payable 500 Shareholders Equity Retained Earnings 5500 A snapshot of a specific time Thursday, September 15, 2016 McMaster Investment Council

McMaster Investment Council The statements Cash flows Operating Sales revenue 1000 Investing Equipment (5000) Financing Nothing x How the company did over a period of time Thursday, September 15, 2016 McMaster Investment Council

McMaster Investment Council The statements Retained earnings Retained earnings beginning 5000 Net income 500 Retained earnings ending 5500 How the company did over a period of time Thursday, September 15, 2016 McMaster Investment Council

IV What’s next?

What’s next – Valuations How do we use the financial statements? Determining the dollar value of a company Enterprise value vs. equity value Thursday, September 15, 2016 McMaster Investment Council

What’s next – Accounting II More details of real account and account types E.g. depreciation expenses Gains and losses Contra accounts Book value vs. market value More details of how statements interact Normalizing financial statements Ratio analysis Capital structure Thursday, September 15, 2016 McMaster Investment Council

Thank you