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Basic Accounting Introduction

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THE BUSINESS CYCLE

Operating assets

Shareholders invest in a business. It uses the funds to buy resources with which to operate

Shareholders

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THE BUSINESS CYCLE

Profit Operating assets

Shareholders

The operating assets generate profits

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THE BUSINESS CYCLE

Operating assets

Profit

Shareholders Cash flow

The profit converts into cash

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THE BUSINESS CYCLE

The cash is either paid to shareholders or reinvested in the business to make it bigger and better

Profit Operating assets

Shareholders

Cash flow
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ACCOUNTING AND THE BUSINESS CYCLE

Measured by the Balance Sheet Operating assets

Measured by the Income Statement Profit

Shareholders

Measured by the Cash Flow Statement Cash flow

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THREE KEY STATEMENTS

Income Statement

Balance Sheet

Cash Flow Statement

Sales Costs For the period

Assets Liabilities At the period-end

Cash in Cash out For the period

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THREE KEY STATEMENTS

Income Statement

Balance Sheet

Cash Flow Statement

The Income Statement links to the Balance Sheet via Retained earnings!

The Cash Flow Statement links to the Balance Sheet via Cash!
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INCOME STATEMENT
Sales Costs Profit/(Loss) x (x) ____ x/(x)

When the product or service is delivered

The costs of delivering the sale What is Profit?

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INCOME STATEMENT A REMINDER

Cost of:
Sales Making/buying your product Cost of goods sold (COGS) Gross profit Sales, general and admin.(SG&A) Operating profit Interest cost Profit before taxes Tax cost Profit after tax/Net Income x (x) x (x) x (x) x (x) x

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INCOME STATEMENT A REMINDER

Cost of:
Sales Making/buying your product Cost of goods sold (COGS) Gross profit Supporting the business Sales, general and admin.(SG&A) Operating profit Interest cost Profit before taxes Tax cost Profit after tax/Net Income x (x) x (x) x (x) x (x) x

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INCOME STATEMENT A REMINDER

Cost of:
Sales Making/buying your product Cost of goods sold (COGS) Gross profit Supporting the business Financing the business Sales, general and admin.(SG&A) Operating profit Interest cost Profit before taxes Tax cost Profit after tax/Net Income x (x) x (x) x (x) x (x) x

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INCOME STATEMENT A REMINDER

Cost of:
Sales Making/buying your product Cost of goods sold (COGS) Gross profit Supporting the business Financing the business Sales, general and admin.(SG&A) Operating profit Interest cost Profit before taxes Paying the government Tax cost Profit after tax/Net Income x (x) x (x) x (x) x (x) x

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BALANCE SHEET Liabilities & Equity +

Current Assets

Assets +
Long term Assets

Liabilities

Shareholders Equity

Short Term Liabilities

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Long Term Liabilities

BALANCE SHEET

Long term Assets

Property (PP&E) Plant (PP&E) Equipment (PP&E) Investments

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BALANCE SHEET

+
Long term Assets Current Assets

Inventories Receivables Cash

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BALANCE SHEET

+
Long term Assets Current Assets

=
Liabilities

Payables Taxes Loans

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BALANCE SHEET

+
Long term Assets Current Assets

=
Liabilities

+
Shareholders Equity

Common stock Retained profit (cumulative)

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CASH FLOW STATEMENT

Cash in

Cash out

Cash flow for the period

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CASH FLOW STATEMENT

Cash in

Cash out

Cash flow for the period

Sales Share issues New loans

Costs Asset purchases Tax payments

Beginning cash +/Cash flow for the period = Ending cash

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CASH FLOW STATEMENT Cash flows are often organized into three types:
Operating cash flows Investing cash flows Financing cash flows

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SO HOW DOES IT ALL WORK? The Fundamental Accounting Equation

Assets = Liabilities and Equity

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SO HOW DOES IT ALL WORK? Joe invests $1000 in a business to buy and sell kitsch gifts Assets = Liabilities and Equity

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SO HOW DOES IT ALL WORK? Joe invests $1000 in a business to buy and sell kitsch gifts Assets = Liabilities and Equity Cash
1,000

Equity 1,000

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SO HOW DOES IT ALL WORK? Joe buys some heart shaped frying pans for Valentines Day presents. They cost $200 and he paid cash Assets = Liabilities and Equity Cash 200 Inventory 200
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SO HOW DOES IT ALL WORK? Joe borrows $1,500 from the bank Assets = Liabilities and Equity

Cash 1,500

Debt 1,500

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SO HOW DOES IT ALL WORK? Joe buys a computer for $1,100 Assets = Liabilities and Equity Cash 1,100 PP&E 1,100
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SO HOW DOES IT ALL WORK? Joe buys $300 of chilli fairy lights on credit Assets = Liabilities and Equity Inventory 300 Payables 300

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SO HOW DOES IT ALL WORK? Joe sells all of the frying pans for $800 in cash (remember they cost $200!) Assets = Liabilities and Equity Inventory 200 Cash 800
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Equity 600

SO HOW DOES IT ALL WORK? Joe pays himself $500 salary Assets = Liabilities and Equity

Cash 500

Equity 500

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SO WHAT DOES THE BALANCE SHEET LOOK LIKE NOW?

Cash (see slides 38 and39) Inventory PP&E Total Assets

1,500 300 1,100 2,900

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SO WHAT DOES THE BALANCE SHEET LOOK LIKE NOW? Cash (see slides 38 and 39) Inventory PP&E Total Assets Payables Debt Common Stock Retained Earnings (see slides 34 and 35) Total liabilities and shareholders equity
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1,500 300 1,100 2,900 300 1,500 1,000 100 2,900

WHAT DOES THE BALANCE SHEET TELL US?

It is a statement of the assets and liabilities at the end of the period (usually a year) Often it is referred to as a SNAPSHOT statement Readers of the Balance Sheet are particularly interested in two numbers, the earnings and the cash! The cash flow statement explains where the ending cash came from The income statement explains where the ending earnings came from

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SO WHAT DOES THE INCOME STATEMENT LOOK LIKE?

Sales Cost of goods sold Gross profit S,G&A Operating profit

800 200 600 500 100

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SO HOW DOES THIS FIT WITH THE BALANCE SHEET?

Beginning retained earnings Net income this period Ending retained earnings

0 100 100

Fits into the Balance Sheet

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SO WHAT DOES THE CASH FLOW STATEMENT LOOK LIKE ?

Cash from sales Cash paid to suppliers Cash paid to employees Operating cash flows

800 (200) (500) 100

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SO WHAT DOES THE CASH FLOW STATEMENT LOOK LIKE ?

Cash from sales Cash paid to suppliers Cash paid to employees Operating cash flows Equipment purchased Investing cash flows

800 (200) (500) 100 (1,100) (1,100)

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SO WHAT DOES THE CASH FLOW STATEMENT LOOK LIKE ? Cash from sales Cash paid to suppliers Cash paid to employees Operating cash flows Equipment purchased Investing cash flows Share issue New debt Financing cash flows Net cash flow
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800 (200) (500) 100 (1,100) (1,100) 1,000 1,500 2,500 1,500

SO HOW DOES THIS FIT WITH THE BALANCE SHEET?

Beginning cash Net cash flow this period Ending cash

0 1,500 1,500 Fits into the Balance Sheet

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