1. Basic Accounting Principles The Financial Statements

2. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: CONTACT: 0322-3385752 0322-3385752 0312-2302870 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN. R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

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4. Accounting Terms  Account A group of items having common characteristics A group of items having common characteristics  Types of Accounts Asset Liability Asset Liability Income Expense Income Expense Equity Equity

5. Chart of Accounts  Listing of all of the accounts used by a business

6. Asset Accounts  Items of Value  Characterized as current and non-current

7. Liability Accounts  Claims that others have against the assets  Have a known: Amount Amount Date to be paid Date to be paid Person to whom payment owed Person to whom payment owed  Also current and non current

8. Equity Accounts  Claims that the owner has against the assets  Sometimes called net worth  Difference between value of assets and liabilities

9. Income and Expense Accounts  Types of equity accounts  Simple accounting systems often only contain these accounts

10. Double vs Single Entry Accounting  Single – One account entry for each transaction  Double – Two account entries for each transaction One debit and one credit One debit and one credit  Hybrid systems May not match income with expenses May not match income with expenses May not distinguish cash, check, or credit May not distinguish cash, check, or credit

11. Basic Accounting Equation  Always maintained in double entry accounting  Assets will always equal liabilities plus equity

12. Transactions  Will be equal and offsetting  Two types: Income & Expenses Income & Expenses Transfers between accounts Transfers between accounts

13. Cash and Accrual Accounting  Refers to the timing of entries into the accounting system

14. Cash Based Records  Transactions are recorded when cash is received or paid out

15. Accrual Based Records  Transactions are recorded when they take place  Regardless of whether cash is involved

16. Accrual Adjusted Statements  Cash based records are kept throughout the year  Non-Cash adjustments are made to the cash based income statement at the end of the year

17. Account Valuation  Income Accounts Value received is recorded Value received is recorded  Expense Accounts Value paid is recorded Value paid is recorded  Liability Accounts Value is dollar amount owed Value is dollar amount owed

18. Account Valuation  Asset Accounts More difficult because they may not be traded routinely More difficult because they may not be traded routinely

19. Asset Valuation  Cost Basis  Market Value Basis

20. Cost Basis Asset Valuation  Original cost minus depreciation  Must establish a depreciation method

21. Market Basis Asset Valuation  Recorded as the price they could bring if sold, less selling expenses  Based on recent auctions, appraisals, etc.

22. Depreciation  Section II page 29, (FFSTF Guidelines)  Allocation of the expense that reflects the “using up” of capital assets employed by the business  Conceptually, this is done over the useful life of the asset in a “systematic and rational” manner

23. Depreciation  Allocation applied to original cost minus salvage value  Accelerated versus straight line methods Example of difference between management records and tax records Example of difference between management records and tax records  Can overstate or understate true income

24. Financial Reports  Balance Sheet  Income Statement  Statement of Cash Flows  Statement of Owner Equity

25. Balance Sheet  Represents a financial situation at a single point in time  Has a date on it  Broken down by: Type of Asset or liability Type of Asset or liability Time or life of the account type Time or life of the account type

26. Balance Sheet  Current Assets Cash and other assets that will be converted into cash during one operating cycle Cash and other assets that will be converted into cash during one operating cycle  Non-Current Assets Those not expected to be converted into cash in one operating cycle Those not expected to be converted into cash in one operating cycle

27. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: CONTACT: 0322-3385752 0322-3385752 0312-2302870 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN. R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

28. Balance Sheet  Current Liabilities Debts that will come due within one year from the balance sheet date Debts that will come due within one year from the balance sheet date  Non-Current Liabilities Those debts due more that one year from the balance sheet date Those debts due more that one year from the balance sheet date

29. Balance Sheet  Intermediate Assets and Liabilities  Long term Assets and Liabilities  Can use cost or market valuations or both  Supporting Schedules are very helpful  Will need a balance sheet for beginning and ending of accounting period

30. Income Statement  Summary of income and expenses  Represents a period of time between two balance sheets  Explains the change in equity between two balance sheets  Can be divided into enterprise reports  Can be cash or accrual

31. AssetsLiabilities Equity AssetsLiabilities Equity +/- Net Income +/- Valuation Changes - Family living withdrawals + Capital contributions Beginning Balance SheetEnding Balance Sheet

32. Income Statement  Will have more than one profit line  Definition of Profit Financial profit is the net return to business equity Financial profit is the net return to business equity

33. Accrual Adjusted Income Statement  Cash incomes and expenses must be adjusted by: Changes in non-cash assets Changes in non-cash assets Inventories Inventories Pre paid expenses Pre paid expenses Receivables Receivables Changes in non-cash liabilities Changes in non-cash liabilities Payables Payables Accrued interest Accrued interest

34. Statement of Cash Flows  Not the same as a cash flow plan (Budget)  Is a historical record of sources and uses of funds  Divisions of Statement: Cash from operating activities Cash from operating activities Cash from investing activities Cash from investing activities Cash from financing activities Cash from financing activities

35. Statement of Owner Equity  Explains the change in owners equity between two balances sheets  Changes due to : Net income Net income Change in inventory valuation Change in inventory valuation Family living withdrawals Family living withdrawals Capital contributions Capital contributions Capital distributions Capital distributions

36. Financial Analysis  All business owners should have a basic set of financial statements at their disposal and they should know how to analyze and interpret them.

37. Financial Analysis  Two Objectives Measure financial condition of the business Measure financial condition of the business Measure financial performance of the business Measure financial performance of the business

38. Financial Analysis  Horizontal Analysis  Vertical Analysis  Ratio Analysis

39. Horizontal Analysis  Looks at trends in performance and strength over time For example, percent change in net income from year to year For example, percent change in net income from year to year

40. Vertical Analysis  Looks at within year events rather than over time For example, interest expense as a percent of total expenses For example, interest expense as a percent of total expenses

41. Ratio Analysis  Allows for consistent comparison of a single business over time as well as comparison between businesses  Converts nominal dollar amounts to a common basis

42. Source of data for Ratio Analysis  Balance Sheet  Income Statement

43. Farm Financial Standards Council (Five Criteria)  Liquidity  Solvency  Profitability  Financial Efficiency  Repayment Capacity

44. Ratio Analysis  16 different ratios commonly used  Each has limitations  Proper interpretation is critical

45. Liquidity  Ability of a business to pay current liabilities as they come due

46. Liquidity  Current Ratio Current Assets/Current Liabilities Current Assets/Current Liabilities Less than one is bad Less than one is bad  Working capital Current assets minus current liabilities Current assets minus current liabilities Negative number is bad Negative number is bad

47. Solvency  Ability of the firm to repay all of its financial obligations

48. Solvency  Debt to Asset Ratio Total liabilities/total assets Total liabilities/total assets Greater than one bad Greater than one bad  Equity to Asset Ratio Total equity/total assets Total equity/total assets  Debt to Equity Ratio Leverage ratio Leverage ratio Less than one better Less than one better

49. Profitability  Rate of return on assets  Rate of return on equity  Operating profit margin ratio

50. Financial Efficiency  Measures the intensity with which a business uses its assets to generate gross revenues and the effectiveness of production

51. Financial Efficiency  Asset turnover ratio  Operating expense ratio  Depreciation ratio  Interest expense ratio  Net income from operations ratio

52. Repayment Capacity  Measures the borrower’s ability to repay term debts and capital leases rather than financial position or performance

53. Repayment Capacity  Term debt and capital lease coverage ratio  Capital replacement and term repayment margin

54. Cautions  Measures are only as good as the data used  Methods must be consistent between years and between operations Example – Asset valuation methods Example – Asset valuation methods  Measures ask the right questions but do not provide the answers

55. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: CONTACT: 0322-3385752 0322-3385752 0312-2302870 0312-2302870 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN. R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.