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

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

3. I
Theory of accounting

4. 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

5. 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

6. 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

7. 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

8. 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

9. II
The general idea

10. 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

11. 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

12. III
The statements

13. 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

14. 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

15. 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

16. 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

17. IV
What’s next?

18. 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

19. 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

20. Thank you