Financial Statements

Direct vs Indirect Costs Direct Material Direct Labor Indirect Material/Labor Fixed General/Admin Selling Profit Conversion cost Price Prime costs Factory Overhead Cost of goods manufactured sold

Terms Bookkeeping accumulate the results of an entities financial activities Financial Accounting external evaluation of financial statements of an entity Managerial Accounting use of economic & financial information to plan and control activities of an entity Cost Accounting determines product, process, or service costs; a subset of managerial accounting

Terms Tax Accounting the preperation of income tax returns as a specialized field within accounting - tax planning Auditing external review and evaluation of an entitys’s financial records and health internal audits government audits IRS audits

Functions of Accounting Internal Control all measures used by an organization to guard against errors, waste and fraud Audits of Financial Statements investigation of a company’s financial statements to determine the fairness of these statements Annual Reports comparative financial statements enable user’s to identify trends in the company’s performance and financial position

Principles of Accounting Principles of accounting dictate that financial statements must show financial position at end of accounting period earnings for the accounting period cash flows during that period investments by & distribution to owners

Transactions Approach In recording economic activities, accountants focus on completed transactions - those that cause an immediate change in the financial resources or obligations of a company purchasing raw materials sales of finished goods Strength - the reliability of the information that is recorded, based on past events, objectivity

Financial Statements Balance Sheet financial position of a company indicating resources it owns, debts, and the amount of owner’s equity Income Statement profitability of the business over the preceeding accounting period Statement of Owner’s Equity explains changes in the amount of owner’s equity in the business Statement of Cash Flows summarizes cash receipts and cash payments of business over the preceeding accounting period

Balance Sheet Statement of financial position does not show the current market value of an entity’s assests Assets economic resources owned by a business and are expected to benefit future operations cost principle going concern objectivity principle stable dollar assumption Current Assets - convertible to cash within 1 yr.

Balance Sheet Liabilities probable future sacrifices of economic benefits as result of current obligations Current Liabilities - must be paid within 1 yr. Owner Equity ownership right of proprietors or stockholders Changes in OE by investment by owner earnings from profitable operation of business withdrawals of cash of other assets losses from business

Owner Equity = Assets - Liabilities Accounting Equation Owner Equity = Assets - Liabilities

Income Statement Projects profit/loss of an entity over a period of time Net Sales - gross sales less returns, defects, etc. Cost-of-Goods sold - cost of raw material & direct labor Selling, Gen, Admin - operating expenses of an entity which do not directly contribute to product (sales people, managers, ...) Interest Expense - interest paid on long/short term debt. Net Income/share - net income (after tax) divided by outstanding shares

Changes to Owner Equity Begin Balance - last year’s ending balance Paid-in Capital - sold 10,000 shares at $19 /share stock par value of $10 / share. common stock = 10,000 x $10 = $100,000 addition paid in =10,000 x ($19-$10) = $ 90,000 Retained Earnings - cumulative net income which has been retained for business Dividends - distribution of earnings to stockholders

Changes to Owner Equity Balance Sheet Income Statement Balance Sheet 8/31/96 Revenues 8/31/97 - Expenses Net Income Statement of OE A =L +OE Begin Balance Paid in capital changes Retained earnings + Net Income - Dividends Ending Balances A = L + OE

Retained (97) = Retained (96) + $18,000 = $93,900

Statement of Cash Flows Identify the sources and use of cash during year Operating Activities net income $18,000 from income statement depreciation expense $16,400 from balance sheet added back in because it is not an actual cash outlay

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